BULL & BEAR U.S. GOVERNMENT SECURITIES FUND, INC.
__________, 1998
Dear Shareholder:
Enclosed is the proxy statement and proxy card for a Special Meeting of
Shareholders of Bull & Bear U.S. Government Securities Fund, Inc. After
reviewing the proxy statement, PLEASE TAKE THIS OPPORTUNITY TO SIGN AND RETURN
THE PROXY CARD. YOUR VOTE IS IMPORTANT. THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE IN FAVOR OF THE PROPOSALS.
About the Proposals
The Board of Directors believes that a portion of the Fund's assets may
be invested more effectively if the permissible investments are broadened. In a
rapidly changing market, it is important for the Fund to have the flexibility to
purchase a variety of instruments because while under certain market conditions
certain types of securities may be deemed most appropriate for purchase by the
Fund, under other market conditions other types of securities may be deemed
preferable. By expanding the universe of securities the Fund may purchase, the
Fund's management will be given the opportunity to adjust the Fund's portfolio
from time to time in such manner as it then deems appropriate. Accordingly, the
Board recommends that shareholders approve the proposed changes as described in
the proxy statement.
Upon shareholder approval of the proposed changes, the Board intends to
consider increasing the Fund's quarterly dividend distribution, in view of the
potential that the Fund's assets may be invested more effectively, to a managed
10% distribution policy. As you know, on December 11, 1997 the Fund adopted a
managed 8% distribution policy. The policy is intended to provide shareholders
with a stable cash flow and reduce the Fund's market price discount to its net
asset value per share. Quarterly distributions are paid primarily from ordinary
income and any net capital gains, with any balance representing return of
capital. The amount of the distribution may vary depending on the net asset
value per share at the time of declaration.
Your Vote is Important - Please Return the Proxy Card Promptly
Your vote is extremely important and you are urged to complete and
return promptly the proxy card in the enclosed envelope. If you have any
questions, please call our Investor Service Representatives at ______________,
who will be happy to assist you.
Sincerely,
The Board of Directors
PLEASE VOTE IMMEDIATELY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD.
Otherwise, the Fund may incur needless expense to solicit sufficient
votes for the meeting.
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BULL & BEAR U.S. GOVERNMENT SECURITIES FUND, INC.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
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To the Stockholders:
A Special Meeting of Stockholders of Bull & Bear U.S. Government
Securities Fund, Inc. (the "Fund") will be held at the offices of Stroock &
Stroock & Lavan LLP, 180 Maiden Lane, 34th Floor, New York, New York, on
________________, 1998 at 8:00 a.m., for the following purposes:
1. To change the Fund's investment objective and certain investment policies.
2. To amend the Fund's Articles of Incorporation to change the Fund's name.
3. To change the classification of the Fund from a diversified investment
company to a non-diversified investment company.
No other business may come before said meeting or any adjournment
thereof. Stockholders of record at the close of business on ________________,
1998 are entitled to receive notice of and to vote at the meeting.
By Order of the Board of Directors
Deborah Ann Sullivan
Secretary
New York, New York
________________, 1998
PLEASE VOTE NOW BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD.
Otherwise, your Fund may incur needless expense to solicit sufficient votes
for the meeting.
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BULL & BEAR U.S. GOVERNMENT SECURITIES FUND, INC.
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PROXY STATEMENT
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Special Meeting of Stockholders
to be held ___________, 1998
This Proxy Statement is furnished in connection with a solicitation of
proxies by the Board of Directors of Bull & Bear U.S. Government Securities
Fund, Inc. (the "Fund") to be used at the Special Meeting of Stockholders
("Meeting") of the Fund to be held on ________________, 1998 at 8:00 a.m. at the
offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, 34th Floor, New York,
New York, for the purposes set forth in the accompanying Notice of Special
Meeting of Stockholders. Stockholders of record at the close of business on
________________, 1998 ("Record Date") are entitled to be present and to vote on
matters at the Meeting. Stockholders are entitled to one vote for each Fund
share held and fractional votes for each fractional Fund share held.
Stockholders of the Fund will vote as a single class and will vote separately on
each proposal. Shares represented by executed and unrevoked proxies will be
voted in accordance with the specifications made thereon. If the enclosed form
of proxy is executed and returned, it nevertheless may be revoked by another
proxy or by letter or telegram directed to the Fund, which must indicate the
stockholder's name. To be effective, such revocation must be received prior to
the Meeting. In addition, any stockholder who attends the Meeting in person may
vote by ballot at the Meeting, thereby canceling any proxy previously given. As
of the Record Date, the Fund had ________________ shares of common stock issued
and outstanding.
It is estimated that proxy materials will be mailed to stockholders of
record on or about ________________, 1998. The Fund's principal executive
offices are located at 11 Hanover Square, New York, New York 10005. Copies of
the Fund's most recent Annual and Semi-Annual Reports are available without
charge upon written request to the Fund at 11 Hanover Square, New York, New York
10005, or by calling toll-free 1-888-847-4200. Bull & Bear Advisers, Inc. (the
"Investment Manager"), located at 11 Hanover Square, New York, New York 10005,
is the Fund's investment manager.
PROPOSAL 1: TO CHANGE THE FUND'S INVESTMENT OBJECTIVE AND CERTAIN INVESTMENT
POLICIES.
INTRODUCTION
The Fund currently seeks to achieve its investment objective of providing a
high level of current income, liquidity, and safety of principal by investing
primarily in securities backed by the full faith and credit of the United States
("U.S. Government Securities"). It currently is a fundamental policy of the Fund
to invest at least 65% of the value of its total assets in U.S. Government
Securities, including direct obligations of the United States (such as U.S.
Treasury bills, notes, and bonds) and certain agency securities, such as those
issued by the Government National Mortgage Association ("GNMA"). The Fund may
invest up to 35% of the value of its total assets in securities issued by
agencies and instrumentalities of the U.S. Government that may have different
levels of government backing but which are not backed by the full faith and
credit of the U.S. Government. In addition, the Fund may engage in various
investment techniques, such as leveraging, lending portfolio securities, writing
covered call options, and purchasing securities on a when-issued basis as
described in its Prospectus and Statement of Additional Information.
Management believes that a portion of the Fund's assets may be invested
more effectively if the permissible investments are broadened to include those
described below. In a rapidly changing market, it is important for the Fund to
have the flexibility to purchase a variety of instruments because while under
certain market conditions certain types of securities may be deemed most
appropriate for purchase by the Fund, under other market conditions other types
of securities may be deemed preferable. By expanding the universe of securities
the Fund may purchase, the Fund's management will be given the opportunity to
adjust the Fund's portfolio from time to time in such manner as it then deems
appropriate. The proposed securities in which the Fund would be permitted to
invest are described below and in Exhibit A to this Proxy Statement.
The Fund's management believes that the Fund will be able to preserve and
increase the "purchasing power" value of its shares (i.e., real total return)
over the long term by combining the Fund's portfolio of U.S. Government
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Securities with equity securities, convertible securites, and fixed income
securities, particularly those issued by companies involved in natural resources
and commodities. Issuers of these securities may include U.S. and foreign
entities, including small capitalization companies and private companies, and
such securities may be denominated in U.S. dollars or foreign currencies. Real
total return is a measure of the change in purchasing power of money invested in
a particular instrument after adjusting for inflation. The proposed changes to
the Fund's policies are designed to cause the net asset value of the Fund's
shares to rise at a rate equal to or greater than the rate of general price
inflation, thereby preserving the "purchasing power" value of the Fund's shares.
This Proposal involves changing the Fund's investment objective,
fundamental policies and investment restrictions. Pursuant to the requirements
of the 1940 Act, these changes also necessitate changing the Fund's name as
described under Proposal 2. Management also believes it appropriate to change
the Fund's investment objective, which currently is fundamental, which cannot be
changed without approval by the holders of a majority (as defined in the 1940
Act) of the Fund's outstanding shares, to non-fundamental, which may be changed
by vote of the Fund's Directors at any time without stockholder approval,
subject to compliance with applicable Securities and Exchange Commission
requirements.
The 1940 Act requires that a relatively limited number of investment
policies and restrictions be designated as fundamental policies which may not be
changed without stockholder approval. These policies relate to (a) the
classification and subclassification under the 1940 Act within which the Fund
may operate, (b) borrowing money, (c) issuing senior securities, (d) engaging in
the business of underwriting securities issued by other persons, (e)
concentrating investments in a particular industry or group of industries, (f)
purchasing and selling real estate or commodities, (g) making loans to others
persons, and (h) changing the nature of the business so as to cease to be an
investment company. When the Fund was formed, its Board designated a number of
other policies as fundamental, in large part in response to certain regulatory
requirements or business or industry conditions that no longer exist, and
adopted certain restrictions which now are believed to be unduly restrictive. In
addition, stockholders of the Fund are being asked in Proposal 3 to change the
Fund's classification from a diversified to a non-diversified investment
company, which would call for the deletion of the Fund's investment restriction
pertaining to diversification.
To enable the Fund to broaden its permissible investments as described
below, the Fund's Board, at a meeting held on , 1998, unanimously approved
changes in the Fund's investment objective, fundamental policies and investment
restrictions, and directed that this Proposal be submitted to stockholders for
their approval. If this Proposal is approved, it will increase the Fund's
ability to invest in equity securities and other types of non-fixed income
investments. Inasmuch as these types of investment often tend to be more
volatile than U.S. Government Securities and earn less income, stockholders
should consider that this could have the effect of increasing the volatility of
the net asset value and market price of the Fund's shares and result in the
Fund's shares trading at a greater discount to net asset value, with less
liquidity, and/or greater spreads and earn a lower yield than other closed-end
fund shares that invest primarily in U.S. Government Securities.
CHANGES TO INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
If the Proposal is approved, the Fund would change its investment objective
to preserving and increasing the purchasing power value of its shares over the
long term. To achieve this new investment objective, the Fund would invest at
least 50% of the value of its total assets in U.S. Government Securities,
obligations of other U.S. Government agencies or instrumentalities, including
inflation-indexed instruments, and money market instruments described below. The
Fund would invest the remainder of its total assets primarily in securities of
selected growth companies that, in the Investment Manager's opinion, will grow
faster than the economy as a whole, and securities issued by companies that
invest or deal in natural resources or commodities. The securities in which the
Fund would be permitted to invest also would include equity securities, such as
common stocks and preferred stocks, convertible securities, non-municipal debt
securities, mortgage-related securities, asset-backed securities, warrants, loan
participation interests, securities of other investment companies, and
securities issued by companies that invest or deal in natural resources or
commodities ("Additional Portfolio Securities"). Issuers of these securities may
include U.S. and foreign entities, including small capitalization companies and
private companies, and such securities may be denominated in U.S. dollars or
foreign currencies. The new objective and policies would be non-fundamental.
ADDITIONAL PORTFOLIO SECURITIES
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If this Proposal is approved, the Fund would be permitted to invest, except
where noted, up to 50% of the value of its total assets in the following
Additional Portfolio Securities. FOR A MORE DETAILED DISCUSSION OF THE
ADDITIONAL PORTFOLIO SECURITIES AND THEIR RELATED RISKS, SEE EXHIBIT A TO THIS
PROXY STATEMENT.
Equity Securities. The Fund would be permitted to invest in equity securities,
including common stocks, preferred stocks and securities that are convertible
into common stocks of domestic and foreign issuers ("convertible securities").
The Fund also would be permitted to invest in equity securities in the form of
depositary receipts, and in warrants to purchase equity securities.
Fixed-Income Securities. The Fund would be permitted to invest in fixed-income
securities, such as bonds, debentures, notes, mortgage-related securities, and
asset-backed securities of domestic and foreign issuers (collectively, "Fixed
Income Securities"). The issuers of these obligations may include domestic and
foreign corporations, partnerships or trusts, and governments or their political
subdivisions, agencies or instrumentalities. The Fund intends to invest less
than 50% of its total assets in convertible securities rated below investment
grade. These instruments may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated Fixed Income Securities. For a discussion of the risks related to
investing in convertible securities rated below investment grade, see the
Appendix to this Proxy Statement.
Money Market Instruments. The Fund would be permitted to invest in money market
instruments, which include U.S. Government securities, certificates of deposit,
time deposits, bankers' acceptances, short-term investment grade corporate bonds
and other short-term debt instruments, and repurchase agreements. The Fund
currently may invest in money market instruments under certain conditions as
described above.
Investment Company Securities. The Fund also would be permitted to invest in
securities of other investment companies which principally invest in securities
of the type in which the Fund invests and other securities. Under the 1940 Act,
purchasers of the securities of other investment companies, subject to certain
exceptions, are limited to a maximum of (i) 3% of the total voting stock of any
one investment company, (ii) 5% of the Fund's total assets with respect to any
one investment company and (ii) 10% of the Fund's total assets in the aggregate.
Investments in the securities of investment companies may involve duplication of
advisory fees and certain other expenses. Nonetheless, the Fund's Board believes
that these changes will provide the Fund greater flexibility to achieve its
proposed investment objective.
CORRESPONDING CHANGES IN INVESTMENT RESTRICTIONS
If this Proposal is approved by stockholders, the Fund's current Investment
Restrictions numbered 5 and 6 (proposed to be renumbered as Investment
Restrictions 4 and 5) will be revised to reflect the Fund's proposed investment
objective and management policies described in this Proxy Statement, and
generally to clarify the extent to which the Fund may invest in certain types of
securities or engage in various investment techniques. In addition, current
Investment Restriction No. 1, which pertains to the Fund's classification as a
"diversified" investment company, will be deleted if Proposal 4 is approved by
the Fund's stockholders. If Proposal 4 is not so approved, Investment
Restriction No. 1 will remain in effect and the remaining Investment
Restrictions will be renumbered.
Investment Restriction No. 5, proposed to be renumbered as Investment
Restriction No. 4, which prohibits the Fund from purchasing or selling
commodities or commodity futures contracts, except for financial and foreign
currency futures contracts and options thereon, and options and forward
contracts on foreign currencies, will be amended to to permit the Fund to
purchase and sell options, futures contracts, including those relating to
indices, and options on futures contracts or indices. The Fund currently has no
intention of engaging in futures and options transactions and, thus, a
non-fundamental policy will be adopted to prohibit the Fund from purchasing and
selling options, futures contracts, including those relating to indices, and
options on futures contracts or indices.
Investment Restriction No. 6, proposed to be renumbered as Investment
Restriction No. 5, which prohibits the Fund from purchasing or selling real
estate, but permits the Fund to invest in securities (excluding limited
partnership interests) secured by real estate or issued by companies which
invest in real estate, will be revised to clarify that the Fund may invest in
companies, limited partnerships, or other entities that deal in real estate and
REITs and to reserve for the Fund the freedom of action to hold and sell real
estate acquired as a result of the Fund's ownership of securities.
If approved by Fund stockholders, the Fund's Investment Restrictions would
read as follows (new language is underscored and language to be deleted is in
brackets):
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The Fund may not:
[1. Purchase the securities of any one issuer if, as a result, more
than 5% of the Fund's total assets would be invested in the
securities of such issuer, or the Fund would own or hold 10% or
more of the outstanding voting securities of that issuer, except
that up to 25% of the Fund's total assets may be invested without
regard to those limitations and provided that those limitations do
not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities.]
1[2]. Issue senior securities as defined in the 1940 Act (including
borrowing money) except as permitted by applicable law.
2[3]. Lend its assets, except as permitted by applicable law.
3[4]. Underwrite the securities of other issuers, except to the extent
that the Fund may be deemed to be an underwriter under the Federal
securities laws in connection with the disposition of the Fund's
authorized investments.
4[5]. Purchase or sell commodities [or commodity futures contracts,
although it may enter into (i) financial and foreign currency
futures contracts and options thereon, (ii) options on foreign
currencies, and (iii) forward contracts on foreign currencies],
except that the Fund may purchase and sell options, futures
contracts, including those relating to indices, and options on
futures contracts or indices, and currencies.
5[6]. Purchase or sell real estate, [provided that] but the Fund may
[invest in] purchase and sell securities [(excluding limited
partnership interests)] that are secured by real estate or
interests therein or issued by companies, limited
partnerships, or other entities which invest or deal in real
estate or interests therein or real estate investment trusts
and hold and sell real estate as a result of ownership of such
securities or instruments.
6[7]. Purchase a security if, as a result, 25% or more of the value of
the Fund's total assets would be invested in the securities of
issuers in a single industry, provided that this limitation does
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
VOTE REQUIRED AND THE BOARD'S RECOMMENDATION
Approval of this Proposal will be sought by one vote. Approval of this
Proposal requires the affirmative vote of (a) 67% of the Fund's voting
securities present at the Meeting, if the holders of more than 50% of the Fund's
outstanding voting securities are present in person or represented by proxy, or
(b) more than 50% of the Fund's outstanding voting securities, whichever is
less.
THE FUND'S BOARD OF DIRECTORS, INCLUDING THE "NON-INTERESTED" DIRECTORS,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 1 TO CHANGE THE FUND'S
INVESTMENT OBJECTIVE AND CERTAIN INVESTMENT POLICIES, AS
DESCRIBED IN THE PROPOSAL.
PROPOSAL 2: TO AMEND THE FUND'S ARTICLES OF INCORPORATION TO CHANGE THE
FUND'S NAME
As described above in Proposal 1, management of the Fund believes that it
is advisable for the Fund to change its investment objective and certain
management policies so as to have the flexibility to purchase a variety of
instruments under certain market conditions. To provide the Fund with such
investment flexibility, it is necessary under the 1940 Act to change, among
other things, the name of the Fund. That is because, under the 1940 Act, an
investment company with the words "government securities" in its name would be
required to invest at least 65% of its total assets in government securities. As
described in Proposal 1, management desires the flexibility to invest a smaller
percentage of the Fund's assets in those securities. Accordingly, the Fund's
Board has proposed an amendment to the Fund's Articles of Incorporation to
change the Fund's name. It is proposed that the Fund name be changed to
"xxxxxxxxxxx." The text of the amendment is set forth in Exhibit B hereto. If
shareholders do not approve Proposal 2, but do approve Proposal 1, the Fund
shall operate under a trade name and do business under the proposed name.
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Subject to stockholder approval, the Fund's Board of Directors approved the
name change at a meeting held on , 1998. The Directors of the Fund believe
that approval of the proposed amendment is in the best interests of the
Fund and its stockholders. Approval of this Proposal requires the affirmative
vote of a majority of the Fund's outstanding voting securities.
THE FUND'S BOARD OF DIRECTORS, INCLUDING THE "NON-INTERESTED" DIRECTORS,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 2 TO AMEND THE FUND'S ARTICLES
OF INCORPORATION TO CHANGE THE FUND'S NAME.
PROPOSAL 3: TO CHANGE THE CLASSIFICATION OF THE FUND FROM A DIVERSIFIED TO A
NON-DIVERSIFIED INVESTMENT COMPANY
The Fund currently is classified as a "diversified" investment company. A
diversified investment company is required by the 1940 Act generally to limit
its investment, with respect to 75% of its total assets, to not more than 5% of
such assets in the securities of a single issuer and to not more than 10% of the
outstanding voting securities of such issuer.
By approving the Proposal, stockholders would authorize the
reclassification of the Fund as a "non-diversified" investment company, which
means that the portion of the Fund's assets that may be invested in the
securities of a single issuer would not be limited by the 1940 Act. Management
of the Fund believes that changing the classification of the Fund from a
diversified to a non-diversified investment company would give the Investment
Manager more flexibility to focus the Fund's investments in investments that it
views as offering the best opportunities to achieve the Fund's investment
objective. If the Proposal is approved, a relatively high percentage of the
Fund's assets then could be invested in the securities of a limited number of
issuers and in more than 10% of the outstanding voting securities of issuers,
including small capitalization companies and private companies. Therefore, the
Fund's portfolio would be more sensitive to changes in the market value of a
single issuer and less liquid. The Fund, however, intends to continue to conduct
its operations so as to qualify as a "regulated investment company" for purposes
of the Internal Revenue Code of 1986, as amended ("Code"), which requires that,
at the end of each quarter of the taxable year, (i) at least 50% of the market
value of the Fund's total assets be invested in cash, U.S. Government
securities, the 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 (ii) not more than 25% of the value of its total
assets be invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies).
CORRESPONDING CHANGES IN INVESTMENT RESTRICTIONS
If this Proposal is approved by stockholders, the Fund's current Investment
Restriction numbered 1 will be deleted. This Investment Restriction is set forth
under "Proposal 1 -- Corresponding Changes in Investment Restrictions."
VOTE REQUIRED AND THE BOARD'S RECOMMENDATION
Approval of this Proposal requires the affirmative vote of (a) 67% of the
Fund's voting securities present at the Meeting, if the holders of more than 50%
of the Fund's outstanding voting securities are present in person or represented
by proxy or (b) more than 50% of the Fund's outstanding voting securities,
whichever is less.
THE FUND'S BOARD OF DIRECTORS, INCLUDING THE "NON-INTERESTED" DIRECTORS,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" PROPOSAL 3 TO CHANGE THE CLASSIFICATION
OF THE FUND FROM A DIVERSIFIED INVESTMENT COMPANY TO A NON-DIVERSIFIED
INVESTMENT COMPANY.
OTHER MATTERS
As of the Record Date, the Fund's Directors and officers, as a group,
beneficially owned less than 1% of the Fund's outstanding shares. To the
knowledge of the management of the Fund, as of the Record Date the following
owned 5% or more of the outstanding shares of the Fund: based on its June 9,
1998 filing on Schedule 13D, Karpus Management, Inc. d/b/a Karpus Investment
Management ("Karpus"), 14 Tobey Village Office Park, Pittsford, New
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York 14534, owned 119,250 shares or _________% of total outstanding shares. FOR
MORE INFORMATION REGARDING ALLEGATIONS MADE AGAINST KARPUS, SEE EXHIBIT C.
A quorum is constituted with respect to the Fund by the presence in person
or by proxy of the holders of a majority of the outstanding shares of the Fund
entitled to vote at the Meeting. In the event that a quorum is not present at
the Meeting, or if a quorum is present 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 Meeting to permit further solicitation of proxies. In
determining whether to adjourn the meeting the following factors may be
considered: the nature of the proposals that are the subject of the Meeting, the
percentage of votes actually cast, the percentage of negative votes actually
cast, the nature of any further solicitation, and the information to be provided
to stockholders with respect to the reasons for the solicitation. Any
adjournment will require the affirmative vote of a majority of those shares
affected by the adjournment that are represented at the meeting in person or by
proxy. A stockholder vote may be taken for one or more of the proposals in this
Proxy Statement prior to any adjournment if sufficient votes have been received
for approval. If a quorum is present, the persons named as proxies will vote
those proxies which they are entitled to vote "for" a Proposal in favor of any
adjournment, and will vote those proxies required to be voted "against" a
Proposal against any adjournment. The Fund will bear the cost of soliciting
proxies. In addition to the use of the mails, proxies may be solicited
personally, by telephone, or by other means, and the Fund may pay persons
holding its shares in their names or those of their nominees for their expenses
in sending soliciting materials to their principals. In addition, the Fund will
retain _________________ to solicit proxies on behalf of its Board for a fee
estimated at $_______________ plus expenses. If a proxy is properly executed and
returned accompanied by instructions to withhold authority to vote, represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
such person has not received instructions from the beneficial owner or other
person entitled to vote shares of the Fund on a particular matter with respect
to which the broker or nominee does not have discretionary power) or marked with
an abstention (collectively, "abstentions"), the Fund's shares represented
thereby will be considered to be present at the Meeting for purposes of
determining the existence of a quorum for the transaction of business. Under
Maryland law, abstentions do not constitute a vote "for" or "against" a matter
and will be disregarded in determining "votes cast" on an issue. Abstentions,
however, will have the effect of a "no" vote for the purpose of obtaining
requisite approval for Proposals 1, 2, and 3.
DISCRETIONARY AUTHORITY, SUBMISSION DEADLINES
Although no business may come before the Meeting or any adjournment thereof
other than that specified in the Notice of the Special Meeting of Stockholders,
shares represented by executed and unrevoked proxies will confer discretionary
authority to vote on matters which the Board of Directors of the Fund did not
know a reasonable time before the solicitation are to be presented at the
Meeting. The deadline for submitting shareholder proposals for inclusion in the
Fund's proxy statement and form of proxy for the Fund's next annual meeting was
________, 1998 and the date after which notice of a shareholder proposal
submitted outside the processes of 17 CFR Section 240.14a-8 is considered
untimely is ___________, 1998.
NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Fund, at its principal executive offices, to the
attention of Deborah Ann Sullivan, Secretary, whether other persons are the
beneficial owners of the shares for which proxies are being solicited and, if
so, the number of copies of this Proxy Statement and other soliciting material
you wish to receive in order to supply copies to the beneficial owners of
shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, STOCKHOLDERS WHO
DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO COMPLETE, SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Dated: ___________________, 1998
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EXHIBIT A
If Proposal 1 is approved, the Fund, except as noted, would be permitted to
invest up to 50% of its total assets in the portfolio securities described
below.
CERTAIN ADDITIONAL PORTFOLIO SECURITIES
COMMON AND PREFERRED STOCKS -- Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments and
on assets should the company be liquidated. After other claims are satisfied,
common stockholders participate in company profits on a pro-rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decrease in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred stocks
pay a dividend, the Fund may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend. Such investments
would be made primarily for their capital appreciation potential.
WARRANTS -- A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's capital
stock at a set price for a specified period of time.
CONVERTIBLE SECURITIES -- Convertible securities may be converted at either a
stated price or stated rate into underlying shares of common stock. Convertible
securities have characteristics similar to both fixed-income and equity
securities. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed-income securities, the market
value of convertible securities tends to decline as interest rates increase and,
conversely, tends to increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible securities tends to vary
with fluctuations in the market value of the underlying common stock. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
Convertible securities are investments that provide for a stable stream of
income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
Convertible securities generally are not investment grade, that is, not
rated within the four highest categories by a credit rating agency, such as S&P
or Moody's Investor Services, Inc. ("Moody's"). To the extent that such
convertible securities and other non-convertible debt securities, which are
acquired by the Fund, are rated lower than investment grade or are not rated,
there would be a greater risk as to the timely repayment of the principal of,
and timely payment of interest or dividends on, those securities. Securities
rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the
financial press as "junk bonds" and may include securities of issuers in
default. "Junk bonds" are considered by the rating agencies to be predominantly
speculative and may involve major risk exposures such as: (i) vulnerability to
economic downturns and changes in interest rates; (ii) sensitivity to adverse
economic changes and corporate developments; (iii) redemption or call provisions
which may be exercised at inopportune times; (iv) difficulty in accurately
valuing or disposing of such securities; (v) subordination to other debt of the
issuer; and (vi) junk bonds are generally unsecured.
As a non-fundamental policy, the Fund's investments in securities of
issuers in default will be limited to not more than 5% of the total assets of
the Fund. Further, the Fund will invest in securities of issuers in default only
when the Investment Manager believes that such issuers will emerge from
bankruptcy and the value of such securities
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will appreciate. By investing in securities of issuers in default the Fund bears
the risk that such issuers will not emerge from bankruptcy or that the value of
such securities will not appreciate. Securities rated BBB by S&P or Baa by
Moody's, in the opinion of the rating agencies, also have speculative
characteristics. Securities need not meet a minimum rating standard in order to
be acceptable for investment by the Fund.
In the absence of adequate anti-dilution provisions in a convertible
security, dilution in the value of the Fund's holding may occur in the event the
underlying stock is subdivided, additional securities are issued for below
market value, a stock dividend is declared, or the issuer enters into another
type of corporate transaction which has a similar effect. Every convertible
security may be valued, on a theoretical basis, as if it did not have a
conversion privilege. This theoretical value is determined by the yield it
provides in comparison with the yields of other securities of comparable
character and quality which do not have a conversion privilege. This theoretical
value, which may change with prevailing interest rates, the credit rating of the
issuer and other pertinent factors, often referred to as the "investment value,"
represents the security's theoretical price support level.
"Conversion value" is the amount a convertible security would be worth in
market value if it were to be exchanged for the underlying equity security
pursuant to its conversion privilege. Conversion value fluctuates directly with
the price of the underlying equity security, usually common stock. If, because
of low prices for the common stock, the conversion value is substantially below
the investment value, the price of the convertible security is governed
principally by the factors described in the preceding paragraph. If the
conversion value rises near or above its investment value, the price of the
convertible security generally will rise above its investment value and, in
addition, will sell at some premium over its conversion value. This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not realized,
this premium may not be recovered. In its selection of convertible securities
for the Fund, the Investment Manager will not emphasize either investment value
or conversion value, but will consider both in light of the Fund's overall
investment objective.
The Fund has no limit on the amount of its assets it may invest in
unregistered and otherwise illiquid convertible securities and other
investments. Unregistered securities are securities that cannot be sold publicly
in the United States without registration under the Securities Act of 1933, as
amended (the "1933 Act"). Unregistered securities generally can be resold only
in privately negotiated transactions with a limited number of purchasers or in a
public offering registered under the 1933 Act. Considerable delay could be
encountered in either event and, unless otherwise contractually provided for,
the Fund's proceeds upon sale may be reduced by the costs of registration or
underwriting discounts. The difficulties and delays associated with such
transactions could result in the Fund's inability to realize a favorable price
upon disposition of unregistered securities, and at times might make disposition
of such securities impossible. When unregistered convertible securities are
converted into common stock and the common stock is publicly traded (as is
typically the case), the common stock normally may be resold publicly under
certain volume and other restrictions beginning one year following the
acquisition of the unregistered convertible securities and without any
restrictions beginning two years after the acquisition of the unregistered
convertible securities. Securities freely salable among qualified institutional
investors under special rules adopted by the Securities and Exchange Commission
(the "SEC") may be treated as liquid if they satisfy institutional liquidity
standards established by the Board of Directors. The continued liquidity of such
securities is not as well assured as that of publicly traded securities.
REAL ESTATE INVESTMENT TRUSTS -- A real estate investment trust ("REIT") is a
corporation, or a business trust that would otherwise be taxed as a corporation,
which meets the definitional requirements of the Code. The Code permits a
qualifying REIT to deduct dividends paid, thereby effectively eliminating
corporate level Federal income tax and making the REIT a pass-through vehicle
for Federal income tax purposes. To meet the definitional requirements of the
Code, a REIT must, among other things, invest substantially all of its assets in
interests in real estate (including mortgages and other REITs) or cash and
government securities, derive most of its income from rents from real property
or interest on loans secured by mortgages on real property, and distribute to
shareholders annually a substantial portion of its otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
Equity REITs, which may include operating or finance companies, own real estate
directly and the value of, and income earned by, the REITs depends upon the
income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and
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by perceptions of management skill. They also are subject to heavy cash flow
dependency, defaults by borrowers or tenants, self-liquidation and the
possibility of failing to qualify for tax-free status under the Code or to
maintain exemption from the 1940 Act.
U.S. TREASURY SECURITIES -- U.S. Treasury securities include Treasury
Inflation-Protection Securities ("TIPS"), which are newly created securities
issued by the U.S. Treasury designed to provide investors a long term investment
vehicle that is not vulnerable to inflation. The interest rate paid by TIPS is
fixed, while the principal value rises or falls semi-annually based on changes
in a published Consumer Price Index. Thus, if inflation occurs, the principal
and interest payments on the TIPS are adjusted accordingly to protect investors
from inflationary loss. During a deflationary period, the principal and interest
payments decrease, although the TIPS' principal will not drop below its face
amount at maturity.
In exchange for the inflation protection, TIPS generally pay lower interest
rates than typical Treasury securities. Only if inflation occurs will TIPS offer
a higher real yield than a conventional Treasury bond of the same maturity. In
addition, it is not possible to predict with assurance how the market for TIPS
will develop; initially, the secondary market for these securities may not be as
active or liquid as the secondary market for conventional Treasury securities.
Principal appreciation and interest payments on TIPS will be taxed annually as
ordinary interest income for Federal income tax calculations. As a result, any
appreciation in principal must be counted as interest income in the year the
increase occurs, even though the investor will not receive such amounts until
the TIPS are sold or mature. Principal appreciation and interest payments will
be exempt from state and local income taxes.
MONEY MARKET INSTRUMENTS -- Money market instruments include the following:
U.S. Government Securities. Securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities include U.S. Treasury securities
that differ in their interest rates, maturities and times of issuance. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the Treasury; others
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. These securities bear fixed, floating or variable
rates of interest. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies and instrumentalities, no assurance can be
given that it will always do so since it is not so obligated by law.
Repurchase Agreements. In a repurchase agreement, a Fund buys, and the
seller agrees to repurchase, a security at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement thereby determines the
yield during the purchaser's holding period, while the seller's obligation to
repurchase is secured by the value of the underlying security. Repurchase
agreements could involve risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. The Fund may enter into
repurchase agreements with certain banks or non-bank dealers.
Bank Obligations. Bank obligations include certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. With respect to such securities
issued by foreign subsidiaries or foreign branches of domestic banks, and
domestic and foreign branches of foreign banks, the Fund may be subject to
additional investment risks that are different in some respects from those
incurred by a fund which invests only in debt obligations of U.S. domestic
issuers.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven days)
at a stated interest rate. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and the drawer to pay
the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations bearing fixed, floating or
variable interest rates.
Commercial Paper. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs. These instruments
include variable amount master demand notes, which are obligations that permit a
Fund to invest fluctuating amounts at varying rates of interest pursuant to
direct arrangements between the Fund, as lender, and the borrower. These notes
permit daily changes in the amounts borrowed. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations,
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although they are redeemable at face value, plus accrued interest, at any time.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand.
ZERO COUPON SECURITIES -- Zero coupon U.S. Treasury securities are Treasury
Notes and Bonds that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interests in such
stripped debt obligations and coupons. Zero coupon securities also are issued by
corporations and financial institutions which may constitute a proportionate
ownership of the issuer's pool of underlying U.S. Treasury securities. A zero
coupon security pays no interest to its holder during its life and is sold at a
discount to its face value at maturity. The market prices of zero coupon
securities generally are more volatile than the market prices of securities that
pay interest periodically and are likely to respond to a greater degree to
changes in interest rates than non-zero coupon securities having similar
maturities and credit qualities.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES -- These
are obligations issued or guaranteed by one or more foreign governments or any
of their political subdivisions, agencies or instrumentalities and may include
debt obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the World Bank), the European Coal and
Steel Community, the Asian Development Bank and the InterAmerican Development
Bank.
CORPORATE DEBT SECURITIES -- Corporate debt securities include bonds,
debentures, notes and other similar instruments, including convertible
securities issued by domestic and foreign entities. Debt securities may be
acquired with warrants attached. These securities also may include forms of
preferred or preference stock. The rate of interest on a corporate debt security
may be fixed, floating or variable, and may vary inversely with respect to a
reference rate. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies. Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are
adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate. The interest rate on floating rate debt instruments
("floaters") is a variable rate which is tied to another interest rate, such as
a money-market index or Treasury bill rate. The interest rate on a floater
resets periodically. Because of the interest rate reset feature, floaters
provide the Fund with a certain degree of protection against rises in interest
rates, although the Fund will participate in any declines in interest rates as
well. The interest rate on inverse floating rate debt instruments ("inverse
floaters") resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. An inverse floating rate security may
exhibit greater price volatility than a fixed rate obligation of similar credit
quality. See "Mortgage- Related Securities" below.
PARTICIPATION INTERESTS -- Participation interests are corporate obligations,
denominated in U.S. dollars or foreign currencies, that are originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting of
commercial banks, thrift institutions, insurance companies, finance companies or
other financial institutions, one or more of which administers the security on
behalf of the syndicate ("Agent Bank"). Co-Lenders may sell such securities to
third parties called "Participants." The Fund may invest in such securities
either by participating as a Co-Lender at origination or by acquiring an
interest in the security from a Co-Lender or a Participant (collectively,
"participation interests"). Co-Lenders and Participants interposed between the
Fund and the corporate borrower ("Borrower"), together with Agent Banks, are
referred to herein as "Intermediate Participants." The Fund will not act as an
Agent Bank, guarantor or sole negotiator with respect to securities that are the
subject of a participation interest. A participation interest gives the Fund an
undivided interest in the security in the proportion that the Fund's
participation interest bears to the total principal amount of the security.
These instruments may have fixed, floating or variable rates of interest. The
Fund also may purchase a participation interest in a portion of the rights of an
Intermediate Participant, which would not establish any direct relationship
between the Fund and the Borrower. In such cases, the Fund would be required to
rely on the Intermediate Participant that sold the participation interest not
only for the enforcement of the Fund's rights against the Borrower, but also for
the receipt and processing of payments due to the Fund under the security.
Because it may be necessary to assert through an Intermediate Participant such
rights as may exist against the Borrower, if the Borrower fails to pay principal
and interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would be involved if the Fund were to enforce
its rights directly against the Borrower. Moreover, under the terms of a
participation interest, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the
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Fund also may be subject to the risk that the Intermediate Participant may
become insolvent. Similar risks may arise with respect to the Agent Bank if, for
example, assets held by the Agent Bank for the benefit of the Fund were
determined by the appropriate regulatory authority or court to be subject to the
claims of the Agent Bank's creditors. In such case, the Fund might incur certain
costs and delays in realizing payment in connection with the participation
interest or suffer a loss of principal and/or interest. Further, in the event of
the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to
repay the loan may be subject to certain defenses that can be asserted by such
Borrower as a result of improper conduct by the Agent Bank or Intermediate
Participant. For certain participation interests, the Fund will have the right
to demand payment, on not more than seven days' notice, for all or any part of
the Fund's participation interest in the security, plus accrued interest. As to
these instruments, the Fund intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
or to maintain or improve the quality of its investment portfolio.
MORTGAGE-RELATED SECURITIES -- Mortgage-related securities are a form of
derivative collateralized by pools of commercial or residential mortgages. Pools
of mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. These securities may
include complex instruments such as collateralized mortgage obligations and
stripped mortgage-backed securities, mortgage pass-through securities, interests
in real estate mortgage investment conduits ("REMICs") or other kinds of
mortgage-backed securities, including those with fixed, floating and variable
interest rates, those with interest rates that change based on multiples of
changes in a specified index of interest rates and those with interest rates
that change inversely to changes in interest rates.
Government-Agency Securities -- Mortgage-related securities issued by GNMA
include GNMA Mortgage Pass- Through Certificates (also known as "Ginnie Maes")
which are guaranteed as to the timely payment of principal and interest by GNMA
and such guarantee is backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee.
Government-Related Securities -- Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the
United States created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Bank and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees
either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Private Entity Securities -- These mortgage-related securities are issued
by commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Fund or the
price of the Fund's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
Commercial Mortgage-Related Securities -- Commercial mortgage-related
securities generally are multi-class debt or pass-through certificates secured
by mortgage loans on commercial properties. These mortgage-related securities
generally are structured to provide protection to the senior classes investors
against potential losses on the underlying mortgage loans. This protection
generally is provided by having the holders of subordinated classes of
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securities ("Subordinated Securities") take the first loss if there are defaults
on the underlying commercial mortgage loans. Other protection, which may benefit
all of the classes or particular classes, may include issuer guarantees, reserve
funds, additional Subordinated Securities, cross-collateralization and
over-collateralization.
Subordinated Securities are issued or sponsored by commercial banks,
savings and loan institutions, mortgage bankers, private mortgage insurance
companies and other non-governmental issuers. Subordinated Securities have no
governmental guarantee, and are subordinated in some manner as to the payment of
principal and/or interest to the holders of more senior mortgage-related
securities arising out of the same pool of mortgages. The holders of
Subordinated Securities typically are compensated with a higher stated yield
than are the holders of more senior mortgage-related securities. On the other
hand, Subordinated Securities typically subject the holder to greater risk than
senior mortgage-related securities and tend to be rated in a lower rating
category, and frequently a substantially lower rating category, than the senior
mortgage-related securities issued in respect of the same pool of mortgage.
Subordinated Securities generally are likely to be more sensitive to changes in
prepayment and interest rates and the market for such securities may be less
liquid than is the case for traditional fixed-income securities and senior
mortgage-related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
Collateralized Mortgage Obligations ("CMOs") -- A CMO is a multi-class bond
backed by a pool of mortgage pass-through certificates or mortgage loans. CMOs
may be collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. The Fund also may
invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a
tranche of a CMO with a coupon rate that moves in the reverse direction to an
applicable index such a LIBOR. Accordingly, the coupon rate thereon will
increase as interest rates decrease. Inverse floating rate CMOs are typically
more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. A Fund's
ability to dispose of its positions in such securities will depend on the degree
of liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
Stripped Mortgage-Backed Securities -- Stripped mortgage-backed securities
are created by segregating the cash flows from underlying mortgage loans or
mortgage securities to create two or more new securities, each with a specified
percentage of the underlying security's principal or interest payments. Mortgage
securities may be partially stripped so that each investor class receives some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security, or IO, and all of the principal is distributed to
holders of another type of security known as a principal-only security, or PO.
Strips can be created in a pass-through structure or as tranches of a CMO. The
yields to maturity on IOs and POs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets
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experience less than anticipated prepayments of principal, the yield on POs
could be materially and adversely affected.
Adjustable-Rate Mortgage Loans ("ARMs") -- ARMs eligible for inclusion in a
mortgage pool generally will provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
Other Mortgage-Related Securities -- Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
ASSET-BACKED SECURITIES -- Asset-backed securities are a form of derivative. The
securitization techniques used for asset-backed securities are similar to those
used for mortgage-related securities. These securities include debt securities
and securities with debt-like characteristics. The collateral for these
securities has included home equity loans, automobile and credit card
receivables, boat loans, computer leases, airplane leases, mobile home loans,
recreational vehicle loans and hospital account receivables. The Fund may invest
in these and other types of asset- backed securities that may be developed in
the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
DEPOSITARY RECEIPTS -- American Depositary Receipts ("ADRs") are receipts
typically issued by a United States bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. European
Depositary Receipts ("EDRs"), which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by
non-United States banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs in registered form are designed
for use in the United States securities markets and EDRs and CDRs in bearer form
are designed for use in Europe. These securities may be purchased through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and the depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted.
ADDITIONAL INVESTMENT CONSIDERATIONS AND RISKS
EQUITY SECURITIES -- Equity securities fluctuate in value, often based on
factors unrelated to the value of the issuer of the securities, and such
fluctuations can be pronounced. Changes in the value of the Fund's investments
will result in changes in the value of its shares and thus the Fund's total
return to investors. The value of a Fund's investments in certain equity
securities may be affected by changes in the price of precious metals, such as
gold, platinum and silver. Precious metals have been subject to substantial
price fluctuations over short periods of time. The prices have been influenced
by industrial and commercial demand, investment and speculation, and monetary
and fiscal policies of central banks and governmental and international
agencies. Changes in political, social and economic conditions affecting the
countries which are major producers of precious metals also pose certain risks
to a Fund's investments.
FIXED-INCOME SECURITIES -- Even though interest bearing securities are
investments which promise a stable stream of income, the prices of such
securities generally are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The values of
fixed-income securities also may be affected by
A-7
<PAGE>
changes in the credit rating or financial condition of the issuer. Certain
securities purchased by a Fund, such as convertible securities rated below
investment grade by a nationally recognized statistical rating organization, may
be subject to such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated fixed income securities.
Once the rating of a portfolio security has been changed, the Fund will consider
all circumstances deemed relevant in determining whether to continue to hold the
security.
PRIVATE PLACEMENTS, PRIVATE COMPANIES -- The Fund may invest in securities that
are sold in private placement transactions between the issuers and their
purchasers and that are neither listed on an exchange nor traded in the
secondary market and private companies. In many cases, privately placed
securities will be subject to contractual or legal restrictions on transfer. As
a result of the absence of a public trading market, privately placed securities
may in turn be less liquid and more difficult to value than publicly traded
securities. Although privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales could, due to
illiquidity, be less than if such securities were more widely traded. In
addition, private companies (issuers whose securities are not publicly traded)
may not be subject to the disclosure and other investor protection requirements
that may be applicable if their securities were publicly traded. If any
privately placed securities held by the Fund are required to be registered under
the securities laws of one or more jurisdictions before being resold, the Fund
may be required to bear the expenses of registration.
SMALL CAPITALIZATION COMPANIES -- The Fund may invest in companies that are
small or thinly capitalized, and may have a limited operating history. As a
result, investment in these securities involves greater risks and may be
considered speculative. For example, such companies may have more limited
product lines, markets or financial resources than companies with larger
capitalizations, and may be more dependent on a small management group. In
addition, the securities of such companies may trade less frequently and in
smaller volume, and may be subject to more abrupt or erratic price movements,
than securities of large companies. The Fund's positions in securities of such
companies may be substantial in relation to the market of such securities.
Accordingly, it may be difficult for the Fund to dispose of securities of these
companies at prevailing market prices. Full development of these companies takes
time, and for this reason the Fund should be considered a long term investment
and not a vehicle for seeking short term profit. The securities of small or
thinly capitalized companies may also be more sensitive to market changes than
the securities of large companies. Such companies may not be well known to the
investing public and may not have institutional ownership. Such companies may
also be more vulnerable than larger companies to adverse business or economic
developments.
FOREIGN MARKETS, SECURITIES, AND CURRENCIES -- Foreign securities markets
generally are not as developed or efficient as those in the United States.
Securities of some foreign issuers are less liquid and more volatile than
securities of comparable U.S. issuers. Similarly, volume and liquidity in most
foreign securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States. Because evidences
of ownership of such securities usually are held outside the United States, the
Fund will be subject to additional risks which include possible adverse
political and economic developments, seizure or nationalization of foreign
deposits or adoption of governmental restrictions which might adversely affect
or restrict the payment of principal and interest on the foreign securities to
investors located outside the country of the issuer, whether from currency
blockage or otherwise. Since foreign securities often are purchased with and
payable in currencies of foreign countries, the value of these assets as
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations.
A-8
<PAGE>
EXHIBIT B
The Articles of Incorporation of Bull & Bear U.S. Government Securities
Fund, Inc. shall be amended by striking Article II and inserting in lieu
thereof the following:
ARTICLE II NAME
The name of the corporation (hereinafter called the "Corporation")
is xxxxxxxxxxx.
B-1
<PAGE>
EXHIBIT C
On February 4, 1998, special counsel to the Fund sent the following letter to
Karpus' legal counsel:
Via Facsimile and USPS
George W. Karpus, President
Karpus Investment Management
14-A Tobey Village Office Park
Pittsford, NY 14534
Re: Bull & Bear U.S. Government Securities Fund, Inc. ("BBG")
Dear Mr. Karpus:
We have been retained as special counsel to BBG in connection with your
recent request for a BBG shareholders list. We have reviewed the filings of
Karpus Investment Management ("KIM") with the Securities and Exchange Commission
("SEC") and materials furnished to us by our client. BBG is concerned that if it
were to release its shareholders list to you (or your agent(s)) without an
appropriate court order, such release could subject BBG to possible civil and
criminal liability for aiding and abetting violations of Sections 10(b) and 21A
and Rule 10b-5 promulgated thereunder. The foregoing filings and materials
reveal the following:
1. As of October 17, 1997, KIM was the record owner of 99,250 shares of
BBG Common Stock.
2. On October 23, 1997, in a non-public letter, KIM requested that BBG,
convert to an open-ended fund. The alleged reason was to enable BBG
shareholders to realize net asset value ("NAV") on resale rather than
the current discounted price.
3. Between October 23, 1997 and November 6, 1997, KIM, on behalf of its
clients, purchased an additional 37,950 shares of BBG Common Stock.
4. On November 8, 1997, KIM issued a proxy disclosing its proposed
opposition slate of directors' goal to convert BBG to an open-ended
fund.
5. Between November 6, 1997 and November 19, 1997, KIM purchased another
4,100 shares of BBG.
6. A shareholders meeting was held on November 20, 1997 to determine which
directors would be elected.
7. BBG's Common Stock traded at a high of 13 3/4 on November 20, 1997 as
the market anticipated a possible victory by the KIM slate. This
insurgent victory would have meant that, short term, BBG's Common Stock
would have traded at NAV, exceeding the discounted price at which BBG
Common Stock was then trading.
8. On November 24, 1997, CT Corp., as Inspector of Elections,
preliminarily reported that the incumbent slate had prevailed. The
preliminary CT Corp. report was sent by facsimile to BBG and KIM at
3:25 p.m. on November 24, 1997 and was not publicly disclosed.
9. On November 25, 1997, KIM appears to have made the following sales at the
following times:
o 12,500 shares @ 13* at 9:54 a.m.;
o 850 shares @ 12-7/8* at 11:45 a.m.;
o 3,250 shares @ 12-3/4* at 1:37 p.m., 2:18 p.m. and 2:28 p.m.
10. KIM knew when it made these sales that, as a result of its failed
attempt to seize control of BBG, that BBG shares would promptly decline
in price.
- --------
* Per KIM Schedule 13D, these entries on the Schedule 13D
do not match up with the AMEX Sales and Quotes Report.
C-1
<PAGE>
11. Prior to the November 25, 1997 sales, KIM had not sold any of its BBG
shares in the open market. The shares KIM sold represented
approximately 65% of the total trading volume in BBG's shares between
November 20, 1997 and December 8, 1997. The 16,600 shares KIM sold on
November 25, 1997, while in possession of material non-public
information, exceeded BBG's average daily volume (slightly less than
2,000 shares per day for that same period). Excluding KIM's 16,600
shares sale during that period, the average daily trading volume in BBG
was 700 shares.
12. At 3:15 pm on November 25, 1997, the Inspector of Elections, by
facsimile, transmitted its final report to BBG and KIM. It confirmed
the incumbent slate had received a plurality.
13. On November 28, 1997, BBG issued its press release making public that
the incumbent slate had prevailed.
14. On or about December 2, 1997, KIM issued its press release
acknowledging the incumbents prevailed.
15. After November 20, 1997, the price of BBG Common Stock declined from
its high of 13 3/4 to 12 11/16 on December 10, 1997.
16. On December 9, 1997, KIM filed its Schedule 13D disclosing the sale of
16,600 shares on November 25, 1997.
Absent a court order with suitable protections, BBG cannot furnish you
with a current list of its shareholders. BBG will not aid or abet any potential
violations of the securities law. BBG will comply with any order issued by a
court of competent jurisdiction, which has been apprised of the facts set forth
above. This letter is being furnished without prejudice to any other claim BBG
may have to an improper purpose for such request.
Very truly yours,
Charles J. Hecht
cc: Bull & Bear U.S. Government Securities Fund, Inc.
(via facsimile)
C-2
<PAGE>
On July 2, 1998, special counsel to the Fund sent the following letter to
Karpus' legal counsel:
Via Facsimile and USPS
Mark S. Airsohn, Esq.
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, NY 10017
Re: Bull & Bear U.S. Government Securities Fund, Inc. (the "Fund")
Dear Mr. Airsohn:
We are in receipt of the letter of Karpus Investment Management
("Karpus") letter to the Fund dated May 27, 1998. Our client, the Fund,
is pleased that Karpus confirms that "expenses of the Fund for the fiscal year
ending June 30, 1997 seemed reasonable and in line with the new policies."
To the extent the Fund incurred greater expenses in the next six month, Karpus
must bear the blame, as a result of costs incurred by the Fund in responding to
Karpus's proxy fight and Karpus' continued feuding with the Fund. Perhaps Fund
shareholders rejected Karpus' slate of directors
because Karpus "intends to seek reimbursement to itself and its advisory
clients of some or all of their costs of solicitation from the Fund."
Karpus was advised, in writing, and as set forth in the Fund's
Complaint filed in the United States District Court for the Southern District
of New York, that the Fund believes Karpus has engaged in activity violating
Sections 10(b) and Rule 10b-5 promulgated thereunder, as well as Section 16 of
the Securities Exchange Act of 1934.
The Fund believes Karpus has engaged in a concerted pattern of
activity which has damaged it and the trading market for its securities.
Karpus' use of non-public confidential information regarding the outcome of his
last, unsuccessful proxy fight damaged purchasers of Fund shares,
demonstrating total disregard for the Fund'sinterests, including the interest of
its shareholders, and compromised the integrity of the trading market for the
Fund's securities.
Accordingly, the Fund demands that Karpus pay immediately the short
swing profits realized by it as of February 4, 1998 in the amount of
$26,950.00, and any additional amounts determined to be due as a result of other
violations of Section 16, plus interest and costs from date of
sale to the date of payment, and to reimburse all the Fund's legal fees to
date to recover same.
Be advised that the Fund will not aid or abet any violations of the
securities law. The Fund perceives that Karpus' letter of May 27, 1998 may be
part of Karpus' continuing efforts to exploit the Fund and the trading market
for its securities, for its own purposes, to the disadvantage other investors
in the Fund's shares and the integrity of its trading market.
This letter is being furnished without prejudice to any other claim the Fund
may have against Karpus.
Very truly yours,
Charles J. Hecht
cc: Bull & Bear U.S. Government Securities Fund, Inc.
(via facsimile)
C-3
<PAGE>
BULL & BEAR U.S. GOVERNMENT SECURITIES FUND, INC.
The undersigned stockholder of Bull & Bear U.S. Government Securities
Fund, Inc. (the "Fund") hereby appoints Thomas B. Winmill and Deborah Ann
Sullivan and each of them, the attorneys and proxies of the undersigned, with
full power of substitution, to vote, as indicated herein, all of the shares of
the Fund standing in the name of the undersigned at the close of business on
________________, 1998 at the Special Meeting of Stockholders to be held at the
offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, 34th Floor, New York,
New York, at 8:00 a.m. on ________________, 1998, and at any and all
adjournments thereof, with all of the powers the undersigned possesses and
especially (but without limiting the general authorization and power hereby
given) to vote as indicated on the Proposals, as more fully described in the
proxy statement for the Meeting.
Please mark boxes in blue or black ink.
1. To change the Fund's investment objective and certain investment policies.
|_| FOR |_| AGAINST |_| ABSTAIN
2. To amend the Fund's Articles of Incorporation to change the Fund's name.
|_| FOR |_| AGAINST |_| ABSTAIN
3. To change the classification of the Fund from a diversified investment
company to a non-diversified investment company.
|_| FOR |_| AGAINST |_| ABSTAIN
<PAGE>
THIS PROXY IS SOLICITED BY THE FUND'S BOARD AND WILL BE VOTED FOR THE ABOVE
PROPOSALS UNLESS OTHERWISE INDICATED.
Signature(s) should be exactly as name or names appearing on this form. If
shares are held jointly, each holder should sign. If signing is by attorney,
executor, administrator, trustee or guardian, please give full title.
Dated: , 1998
-------------------------
Signature(s)
-------------------------
Signature(s)
Sign, Date and Return this Proxy Card
Promptly Using the Enclosed Envelope.
