<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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
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
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
USLIFE INCOME FUND, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
n/a
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the 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:
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(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:
-----------------------------------------------------------------------
(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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<PAGE> 2
[USLIFE INCOME FUND INC. LETTERHEAD]
PRELIMINARY PROXY MATERIAL -- SUBJECT TO COMPLETION
August , 2000
Dear USLIFE Income Fund Shareholder:
We are pleased to invite you to attend the 2000 Annual Meeting of
Shareholders of USLIFE Income Fund, Inc. (the "Fund"), which will be held on
Tuesday, October 3, 2000 at 2:00 p.m. local time, at Meeting Room 1 of The
Variable Annuity Life Insurance Company, Plaza Level, The Woodson Tower, 2919
Allen Parkway, Houston, Texas 77019. The notice of the 2000 Annual Meeting and
Fund's Proxy Statement accompany this letter.
This year, in addition to voting on the election of three directors and the
ratification of the selection of independent auditors, shareholders are being
asked to consider and approve an amendment to the Fund's Articles of
Incorporation and related changes to certain of the Fund's fundamental
investment restrictions so that the Fund may issue shares of preferred stock and
other senior securities. The Fund believes that the flexibility to issue
preferred stock and other senior securities will enhance the Fund's ability to
achieve its investment objective of providing a high level of current income for
shareholders. THE FUND WILL ONLY ISSUE SENIOR SECURITIES IF THE BOARD OF
DIRECTORS BELIEVES THAT SUCH ISSUANCE IS LIKELY TO ENHANCE THE AMOUNT OF INCOME
PAYABLE TO THE HOLDERS OF THE FUND'S COMMON STOCK.
Your vote at this year's Annual Meeting is very important. Even if you
currently plan to attend the Annual Meeting in person, we ask you to sign, date
and return the enclosed BLUE proxy card as promptly as possible. A postage paid
return envelope is enclosed for your convenience.
Alternatively, you may vote your shares by calling a specially designated
telephone number (TOLL FREE 1-877-816-0835), by faxing your completed and signed
proxy card (both front and back sides) to our proxy solicitor (1-212-440-9009)
or via the Internet at http://proxy.georgeson.com. The telephone and Internet
voting procedures are designed to authenticate your vote and to confirm that
your voting instructions are followed. Specific instructions for shareholders of
record who wish to use telephone, fax or Internet voting procedures are set
forth on the enclosed BLUE proxy card.
We appreciate your attention and ask you to send in your proxy now, by
mail, by telephone, by fax or via the Internet. If you have any questions or
need assistance in voting your shares, please call our proxy solicitor,
Georgeson Shareholder Communications Inc., toll free at 1-800-223-2064.
Sincerely,
/s/ ALICE T. KANE
Alice T. Kane
Chairman and President
<PAGE> 3
PRELIMINARY PROXY MATERIAL -- SUBJECT TO COMPLETION
USLIFE INCOME FUND, INC.
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
OCTOBER 3, 2000
An Annual Meeting of Shareholders of USLIFE Income Fund, Inc. (the "Fund")
will be held in Meeting Room 1 of The Variable Annuity Life Insurance Company,
Plaza Level, The Woodson Tower, 2919 Allen Parkway, Houston, Texas 77019, on
Tuesday, October 3, 2000 at 2:00 p.m. local time for the following purposes:
1. To elect three directors to hold office until their successors are
elected and qualified.
2. To approve an amendment to the Fund's Articles of Incorporation, as
amended, to provide for the authorization and issuance of preferred
stock.
3. To approve an amendment to the Fund's fundamental investment restriction
regarding senior securities to provide that the Fund be permitted to
issue preferred stock and other senior securities.
4. To approve an amendment to the Fund's fundamental investment restriction
regarding borrowings to clarify that senior securities do not constitute
borrowings for purposes of such restriction.
5. To ratify the selection of Ernst & Young LLP as independent auditor of
the Fund for the fiscal year ending June 30, 2001.
6. To transact such other business as may properly come before the meeting.
The effectiveness of each of Proposals 2 and 3 is subject to, and
conditioned upon, the approval of the other. The effectiveness of Proposal 4
above is subject to, and conditioned upon, the effectiveness of Proposals 2 and
3; however, the effectiveness of Proposals 2 and 3 are not subject to, or
conditioned upon, the effectiveness of Proposal 4.
You will be entitled to vote at the meeting if you owned shares of the Fund
at the close of business on July 6, 2000. IF YOU ATTEND THE MEETING, YOU MAY
VOTE YOUR SHARES IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE SIGN, DATE AND RETURN THE ENCLOSED BLUE PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. SHAREHOLDERS OF RECORD MAY ALSO VOTE THEIR SHARES BY
TELEPHONE, BY FAX OR VIA THE INTERNET BY FOLLOWING THE INSTRUCTIONS THAT APPEAR
ON THE ENCLOSED BLUE PROXY CARD. IF YOU ATTEND THE MEETING AND PREFER TO VOTE IN
PERSON, YOU WILL BE ABLE TO DO SO AND YOUR VOTE AT THE MEETING WILL REVOKE ANY
PROXY YOU MAY SUBMIT. YOUR VOTE IS EXTREMELY IMPORTANT, NO MATTER HOW MANY OR
HOW FEW SHARES YOU OWN. PLEASE SEND IN YOUR BLUE PROXY CARD TODAY.
By Order of the Board of Directors
Nori L. Gabert
Secretary
August , 2000
2929 Allen Parkway
Houston, Texas 77019
<PAGE> 4
PRELIMINARY PROXY MATERIAL -- SUBJECT TO COMPLETION
USLIFE INCOME FUND, INC.
2929 ALLEN PARKWAY
HOUSTON, TX 77019
---------------------
PROXY STATEMENT
---------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by and on behalf of the Board of Directors (the "Board") of USLIFE
Income Fund, Inc. (the "Fund") for use at the Annual Meeting of the Fund's
shareholders on October 3, 2000 and at any adjournment or postponement thereof
(the "Meeting"). The Meeting will be held in Meeting Room 1 of The Variable
Annuity Life Insurance Company ("VALIC" or the "Adviser"), an indirect
wholly-owned subsidiary of American General Corporation, Plaza Level, The
Woodson Tower, 2919 Allen Parkway, Houston, Texas 77019 on Tuesday, October 3,
2000, at 2:00 p.m. local time.
The Fund's shareholders of record as of the close of business on July 6,
2000 (the "Record Date"), are entitled to notice of and to vote at the Meeting
on the following proposals:
1. To elect three directors to hold office until their successors are
elected and qualified.
2. To approve an amendment to the Fund's Articles of Incorporation, as
amended, to provide for the authorization and issuance of preferred
stock.
3. To approve an amendment to the Fund's fundamental investment restriction
regarding senior securities to provide that the Fund be permitted to
issue preferred stock and other senior securities.
4. To approve an amendment to the Fund's fundamental investment restriction
regarding borrowings to clarify that senior securities do not constitute
borrowings for purposes of such restriction.
5. To ratify the selection of Ernst & Young LLP as independent auditor of
the Fund for the fiscal year ending June 30, 2001.
6. To transact such other business as may properly come before the Meeting.
The effectiveness of each of Proposals 2 and 3 is subject to, and
conditioned upon, the approval of the other. The effectiveness of Proposal 4
above is subject to, and conditioned upon, the effectiveness of Proposals 2 and
3; however, the effectiveness of Proposals 2 and 3 are not subject to, or
conditioned upon, the effectiveness of Proposal 4.
A COPY OF THE MOST RECENT ANNUAL REPORT FOR THE FUND IS ENCLOSED HEREIN.
The Notice and Proxy Statement are being mailed to shareholders on or about
August 20, 2000.
Each full share outstanding on the Record Date is entitled to one vote with
respect to each matter voted upon by the shareholders of the Fund. As of the
Record Date, the Fund had 5,643,768 shares issued and outstanding.
<PAGE> 5
All costs associated with the Meeting, including the solicitation of
proxies, will be borne by the Fund. Proxies may be solicited, without additional
compensation, by directors, officers or employees of the Fund or VALIC, by mail,
telephone, fax, telegram, in person or otherwise. The Fund has retained the
services of Georgeson Shareholder Communications Inc. to assist in the
solicitation of proxies for a fee of $12,500 plus out-of-pocket expenses.
The individuals named as proxies on the enclosed BLUE proxy card will vote
in accordance with your directions as indicated thereon if your proxy is
received properly executed. If you properly execute your BLUE proxy card and
give no voting instructions, your shares will be voted FOR the approval of each
of the proposals described in this Proxy Statement. You may revoke your proxy at
any time prior to its exercise at the Meeting by written notice to the Fund, by
execution of a subsequent proxy or by voting in person at the Meeting.
A quorum, which is a majority of the Fund's issued and outstanding voting
shares as of the close of business on the Record Date represented in person or
by proxy, must be present for the transaction of business at the Meeting. In the
event that a quorum is not present at the Meeting or a quorum is present at the
Meeting but sufficient votes to approve each of the proposals are not received,
the persons named as proxies may propose one or more adjournments of such
Meeting to permit further solicitation of proxies with respect to such
proposals. Any such adjournments will require the affirmative vote of a majority
of those shares present at the Meeting or represented by proxy whether or not a
quorum is present. In such case, the persons named as proxies will vote those
proxies which they are entitled to vote for the proposals in favor of such an
adjournment, and will vote those proxies required to be voted against the
proposals against any such adjournment.
If a shareholder participates in the Fund's Automatic Dividend Investment
Plan ("Plan") and holds shares in his or her name in addition to the shares held
in custody for the shareholder pursuant to the Plan, the proxy to vote shares
registered in the shareholder's name will serve as instructions for voting
shares held in custody for the shareholder pursuant to the Plan. If a
shareholder does not send a proxy to vote the shares registered in his or her
name, the shares held for the shareholder's account in the Plan will not be
voted.
Broker non-votes are shares held in street name for which the broker
indicates that instructions have not been received from the beneficial owners or
other persons entitled to vote and the broker does not have discretionary voting
authority. Abstentions and broker non-votes will be counted as shares present
for purposes of determining whether a quorum is present and will have the same
effect as a vote against proposals 2, 3 and 4 but will not be counted as votes
cast for purposes of determining whether sufficient votes have been received to
approve proposals 1 and 5. Abstentions and broker non-votes will not be voted
for or against any adjournment; accordingly, abstentions and broker non-votes
effectively will be a vote against adjournment.
YOUR VOTE AT THE MEETING IS ESPECIALLY IMPORTANT, NO MATTER HOW MANY OR HOW
FEW SHARES YOU OWN. PLEASE SIGN AND DATE THE ENCLOSED BLUE PROXY CARD AND RETURN
IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE PROMPTLY. ALTERNATIVELY, SHAREHOLDERS
OF RECORD MAY VOTE BY TELEPHONE, BY FAX OR VIA THE INTERNET BY FOLLOWING THE
INSTRUCTIONS ON THE ENCLOSED BLUE PROXY CARD.
IMPORTANT: If your shares are held in the name of a brokerage firm, bank,
nominee or other institution, only it can sign a BLUE proxy card with respect to
your shares and only upon specific instructions
2
<PAGE> 6
from you. Please contact the person responsible for your account and give
instructions for a BLUE proxy card to be signed for your shares of the Fund's
stock.
If you have any questions or need assistance in voting your shares, please
call the firm assisting the Fund in the solicitation of proxies:
GEORGESON
SHAREHOLDER COMMUNICATIONS INC.
17 STATE STREET
NEW YORK, NEW YORK 10004
BANKS AND BROKERS CALL COLLECT: (212) 440-9800
ALL OTHERS CALL TOLL FREE: 1-800-223-2064
3
<PAGE> 7
PROPOSAL 1: ELECTION OF THREE DIRECTORS
A. BACKGROUND INFORMATION
The Board is divided into three classes of directors, each class serving
for three years. The term of one class expires each year and no term shall
continue for more than three years after the applicable election. This type of
classification may prevent replacement of a majority of the Directors for up to
a two-year period. The foregoing is subject to the provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), Maryland law, and the Bylaws
of the Fund (the "Bylaws").
If any of the nominees named below shall be unable or unwilling to stand
for election, it is the intention of the persons named in the accompanying form
of proxy to vote for the election of such other person or persons as shall be
determined by the Board in accordance with its judgment. The Fund however, has
no reason to believe that it will be necessary to designate a substitute
nominee.
The following tables set forth certain information regarding each nominee
and those directors whose current terms will not expire in 2000.
B. NOMINEE INFORMATION
<TABLE>
<CAPTION>
EXPIRATION
OF TERM IF
POSITIONS WITH BUSINESS EXPERIENCE ELECTED AS A
NAME AND BIRTH DATE FUND AND TERM DURING THE LAST FIVE YEARS DIRECTOR
------------------- -------------- -------------------------- ------------
<S> <C> <C> <C>
Dr. Timothy J. Ebner Director since 1998 Professor and Head, Department of 2003
07/15/49 Neuroscience, and Visscher Chair of
Physiology, University of Minnesota
(1998-Present). Formerly, Director,
Graduate Program in Neuroscience,
University of Minnesota (1995-1999);
Consultant to EMPI Inc. (manufacturer
of medical products) (1994-1995); and
Medtronic Inc. (manufacturer of medical
products) (1997-1998).(1)(2)
Dr. John Wm. Lancaster Director since 1997 Pastor Emeritus and Director of Planned 2003
12/15/23 Giving, First Presbyterian Church,
Houston, Texas (1996-Present).(1)
Dr. John E. Maupin, Jr. Director since 1998 President, Meharry Medical College, 2003
10/28/46 Nashville, Tennessee (1994-Present);
Nashville Advisory Board Member, First
American National Bank (1996-Present);
Director, Monarch Dental Corporation
(1997-Present) and LifePoint Hospitals,
Inc. (1998-Present).(1)(2)
</TABLE>
4
<PAGE> 8
C. OTHER DIRECTORS
<TABLE>
<CAPTION>
POSITIONS WITH BUSINESS EXPERIENCE EXPIRATION
NAME AND BIRTH DATE FUND AND TERM DURING THE LAST FIVE YEARS OF TERM
------------------- -------------- -------------------------- ------------
<S> <C> <C> <C>
Kent E. Barrett* Executive Vice President Executive Vice President and Chief 2001
09/20/56 and Director since 1999 Financial Officer, VALIC and American
General Annuity Insurance Company
(1999-Present); Formerly Executive Vice
President and Chief Financial Officer,
American General Life & Accident
Insurance Company ("AGLA") (1998-1999);
Senior Vice President -- Finance and
Treasurer, AGLA (1997-1998); Senior
Vice President -- Controller and
Treasurer, AGLA (1994-1997); Executive
Vice President of other investment
companies advised by VALIC.(1)
Dr. Judith L. Craven Director since 1998 Retired Administrator. Director, Compaq 2001
10/06/45 Computer Corporation (1992-Present),
Luby's Inc. (1998-Present), A.H. Belo
Corporation (journalism, TV and radio)
(1992-Present) and SYSCO Corporation
(marketing and distribution of food)
(1996-Present). Formerly, President,
United Way of Texas Gulf Coast
(1992-1998); Director, Houston Branch,
Federal Reserve Bank of Dallas
(1992-2000).(1)(2)
Dr. Norman Hackerman Director since 1997 Chairman -- Scientific Advisory Board 2001
03/02/12 for The Robert A. Welch Foundation
(1983-Present); Director,
Electrosource, Inc. (develops,
manufactures and markets energy storage
products); President Emeritus, Rice
University, Houston, Texas
(1985-Present).(1)
Ben H. Love Director since 1997 Retired. Formerly, Director, Mid- 2001
09/26/30 American (waste products) (1993-1997)
and Chief Executive, Boy Scouts of
America (1985-1993).(1)(2)
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
POSITIONS WITH BUSINESS EXPERIENCE EXPIRATION
NAME AND BIRTH DATE FUND AND TERM DURING THE LAST FIVE YEARS OF TERM
------------------- -------------- -------------------------- ------------
<S> <C> <C> <C>
Judge Gustavo E. Gonzales, Director since 1998 Municipal Court Judge, Dallas, Texas 2002
Jr. (1995-Present); Director, Downtown
07/27/40 Dallas YMCA Board (1996-Present) and
Dallas Easter Seals Society
(1997-2000). Formerly, private attorney
(litigation) (1980-1995); Director,
Dallas Easter Seals Society
(1997-2000).(1)(2)
Alice T. Kane* Chairman of the Board President of American General Fund 2002
01/16/48 since 2000 and President Group (1999-Present). Formerly,
and Director since 1999 Executive Vice President, American
General Investment Management, L.P.
("AGIM") (1998-1999); Executive Vice
President, New York Life Insurance
Company (1994-1998). President of other
investment companies advised by
VALIC.(1)(2)
Dr. F. Robert Paulsen Director since 1997 Dean and Professor Emeritus, University 2002
07/05/22 of Arizona, Tucson, Arizona
(1983-Present).(1)
</TABLE>
---------------
* Considered an "interested person" as defined in Section 2(a)(19) of the 1940
Act, specifically because of his or her capacity as an officer or director
of VALIC, or one of VALIC's affiliates. Any director who is not an
interested person of the Fund may be referred to hereafter as an
"Independent Director".
(1) A Director or Trustee of American General Series Portfolio Company ("AGSPC")
and American General Series Portfolio Company 3 ("AGSPC 3"), each an
open-end investment company for which VALIC serves as the investment
adviser.
(2) A Trustee of North American Funds ("NAF"), an open-end investment company
for which an affiliate of VALIC serves as investment adviser.
D. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Fund is required to identify any director or officer who failed to
timely file forms with the Securities and Exchange Commission (the "SEC") and
The New York Stock Exchange reporting their affiliation with the Fund, and
ownership and changes in ownership of the Fund's shares.
Each such person is required by SEC regulations to furnish the Fund with
copies of all such forms they file. Based on a review of these forms furnished
to the Fund, the Fund believes that during its last fiscal year, each such
person complied with the reporting requirements, except that the following
officers and directors of the Fund or the Adviser filed Form 3 late: Albert
Gutierrez, Alice Kane and Todd Spillane.
6
<PAGE> 10
E. BOARD OF DIRECTORS' COMMITTEES AND MEETINGS
The Board has appointed an Audit Committee and a Nominating Committee, but
has not appointed a Compensation Committee. The functions of the Nominating
Committee have been performed by four of the current Board members. Shareholders
may submit written recommendations to the Board regarding nominees for director,
although the Board expects to be able to identify an ample number of qualified
candidates. The Nominating Committee currently consists of Mr. Love (Chairman),
Dr. Craven, Judge Gonzales and Dr. Hackerman.
The Audit Committee selects, and recommends for approval by the Board and
the shareholders, the audit firm to be retained as independent auditor by the
Fund. The Audit Committee consults with the Fund's independent auditor regarding
the plan and scope of the audit, the adequacy of the Fund's internal accounting
procedures and controls and all matters relevant to the audit services provided
to the Fund. The Audit Committee also reviews the fees charged by the auditor
and the results of the audit. The Audit Committee currently consists of Dr.
Lancaster (Chairman), Dr. Hackerman, Dr. Maupin, Dr. Paulsen and Mr. Love.
During the fiscal year ended June 30, 2000, the Board met nine times at
special and regularly scheduled meetings. During the fiscal year ended June 30,
2000, the Audit Committee met two times, and the Nominating Committee met one
time. There are no incumbent members of the Board, other than Mr. Barrett, who,
during the last fiscal year of the Fund, attended fewer than 75% of the
aggregate meetings of the Board or its committees on which they serve.
F. EXECUTIVE COMPENSATION
Members of the Board receive an annual retainer of $2,000, $500 for each
Board meeting attended in person and $250 for each Board meeting conducted by
telephone. Audit Committee and Nominating Committee members receive an
additional $250 for each committee meeting attended. Committee chairs receive an
additional $250 for each committee meeting chaired. Directors who are officers
of the Fund are not compensated for their service on the Board.
During the fiscal year ended June 30, 2000, the Fund paid $50,000 to VALIC,
the investment adviser, in reimbursement of compensation and other expenses
attributable to the offices of the Fund's Secretary and Treasurer as provided
under the investment advisory agreement between the Fund and VALIC. In the
fiscal year ended June 30, 2000, the aggregate cash compensation earned by all
Directors and the three highest-paid officers of the Fund, exclusive of fees
paid for the services of the Secretary and Treasurer, was $53,859.
7
<PAGE> 11
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED AS TOTAL COMPENSATION FROM
COMPENSATION PART OF FUND FUND AND FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND EXPENSES PAID TO DIRECTORS(2)
------------------------ ------------ --------------------- -----------------------
<S> <C> <C> <C>
Kent E. Barrett, Director(1)............. $ 0 $0 $ 0
Dr. Judith L. Craven, Director........... 6,595 0 51,700
Dr. Timothy J. Ebner, Director........... 6,282 0 50,950
Judge Gustavo E. Gonzales, Jr.,
Director............................... 5,595 0 47,950
Dr. Norman Hackerman, Director........... 6,690 0 52,450
Alice T. Kane, Chairman(1)............... 0 0 0
Dr. John Wm. Lancaster, Director......... 6,690 0 52,200
Ben H. Love, Director.................... 6,754 0 52,950
Dr. John E. Maupin, Jr., Director........ 6,313 0 51,200
Dr. F. Robert Paulsen, Director.......... 6,377 0 51,700
Dr. R. Miller Upton, Director(3)......... 2,563 0 17,745
</TABLE>
---------------
(1) Mr. Barrett and Ms. Kane are affiliated persons of VALIC and are not
eligible for compensation or retirement benefits from the Fund.
(2) The Fund is part of a fund complex which also includes AGSPC, AGSPC 3 and
NAF.
(3) Dr. R. Miller Upton retired as a director as of December 3, 1999.
G. EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information concerning the executive
officers of the Fund other than those officers previously named as nominees or
directors above.
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION(S) WITH FUND AND TERM BUSINESS EXPERIENCE DURING THE LAST 5 YEARS
---------------------- ------------------------------------ -------------------------------------------
<S> <C> <C>
Peter V. Tuters Vice President and Senior Investment Executive Vice President, Trading and
04/18/52 Officer since 2000 and Senior Portfolio Management, AGIM (1998-Present).
Investment Officer since 1999 Formerly, Vice President and Chief
Investment Officer (1993-1998); Director
of the Fund (1993-1998); Senior Vice
President and Chief Investment Officer,
American General Corporation (1993-1998).
</TABLE>
8
<PAGE> 12
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION(S) WITH FUND AND TERM BUSINESS EXPERIENCE DURING THE LAST 5 YEARS
---------------------- ------------------------------------ -------------------------------------------
<S> <C> <C>
Pauletta P. Cohn Vice President since 1999 Deputy General Counsel and Assistant
06/06/48 Secretary of American General Corporation
(2000-Present); Associate General Counsel
and Assistant Secretary, American General
Life Companies (1998-Present); Senior
Attorney, American General Corporation
(1993-1998).
Nori L. Gabert Secretary since 2000 and Vice Associate General Counsel, American General
08/15/53 President since 1998 Financial Group (1997-Present); Vice
President and Secretary of AGSPC and AGSPC
3 (1998-Present). Formerly, Vice President
and Assistant Secretary of AGSPC
(1997-2000); Vice President and Assistant
Secretary of AGSPC 3 (1998-2000); Of
Counsel, Winstead Sechrest & Minick P.C.
(1997); Vice President and Associate General
Counsel of Van Kampen, Inc. (1981-1996).
Gregory R. Seward Treasurer since 1997 Vice President -- Variable Product
06/27/56 Accounting, AGIM (1998-Present);
Assistant Controller, VALIC (1991-1998);
Treasurer, AGSPC (1991-Present) and AGSPC 3
(1998-Present).
Kathryn A. Pearce Assistant Treasurer since 1997 Director -- Mutual Fund Administration,
02/05/47 AGIM (1999-Present); Associate
Director -- Fund Accounting, VALIC
(1996-1999); Assistant Controller, AGSPC
(2000-Present), and AGSPC 3 (1998-Present).
Formerly, Controller, AGSPC (1996-2000) and
AGSPC 3 (1998-2000); Supervisor -- Mutual
Fund Accounting, Van Kampen, Inc.
(1977-1996).
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION(S) WITH FUND AND TERM BUSINESS EXPERIENCE DURING THE LAST 5 YEARS
---------------------- ------------------------------------ -------------------------------------------
<S> <C> <C>
Jaime M. Sepulveda Assistant Treasurer since 1998 Director -- Variable Product Accounting and
01/09/52 Financial Reporting, AGIM (1998-Present);
Assistant Treasurer, AGSPC, AGSPC 2 and
AGSPC 3 (1998-Present). Formerly,
Accounting Manager, Metro Networks, Inc.
(1997-1998); Controller and Investment
Officer, Port of Houston Authority
(1994-1997).
Todd L. Spillane Chief Compliance Officer since 2000 Chief Compliance Officer, AGIM
12/20/58 (1999-Present). Formerly, Director of
Compliance, Nicholas Applegate Capital
Management (1994-1999).
Charles H. Clines Vice President and Tax Officer since Vice President and Tax Officer, Corporate
11/24/61 2000 Tax Department, American General
Corporation (2000-Present). Formerly,
Partner -- Financial Services Tax Practice,
KPMG, LLP (1985-1999).
Timothy T. Janszen Vice President since 2000 Vice President, Public High Yield Portfolio
04/01/64 Manager, AGIM (1999-Present). Formerly,
Director of Research, Pacholder Associates,
Inc. (1996-1999).
Gregory R. Kingston Assistant Treasurer since 1999 Vice President, Fund Accounting, AGIM
01/18/66 (1999-Present). Formerly, Assistant
Treasurer,
</TABLE>
The business address of each officer, other than Ms. Kane, is 2929 Allen
Parkway, Houston, Texas 77019. Ms. Kane's business address is 125 Maiden Lane,
New York, New York 10038.
REQUIRED VOTE
The election of Directors requires the affirmative vote of a majority of
the votes cast at the Meeting, provided a quorum is present.
10
<PAGE> 14
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FUND'S SHAREHOLDERS
VOTE "FOR" THE ELECTION OF ALL OF THE FUND'S NOMINEES TO THE BOARD.
INTRODUCTION TO PROPOSALS 2, 3 AND 4
The Board has unanimously determined that it is advisable that the Fund be
authorized to issue shares of preferred stock having such terms, conditions and
obligations for each such class or series as may be determined by the Board. The
purpose of authorizing the Fund to issue preferred stock is to enhance the
Fund's ability to achieve its investment objective of a high level of current
income for shareholders. In order to authorize the Fund to issue preferred
stock, it is necessary for the Fund to amend its Articles of Incorporation, as
amended (the "Articles of Incorporation"), and to make changes to certain of its
fundamental investment restrictions.
THE BOARD WILL ONLY AUTHORIZE THE ISSUANCE OF PREFERRED STOCK IF IT
BELIEVES THAT SUCH ISSUANCE IS LIKELY TO ENHANCE THE AMOUNT OF INCOME PAYABLE TO
THE HOLDERS OF THE FUND'S COMMON STOCK. The issuance of preferred stock is a
form of financial leverage that can work to the advantage of holders of shares
of the Fund's common stock. If the investment return to the Fund on the assets
purchased with the proceeds of a preferred stock issuance is greater than the
dividend rate on the preferred stock and the costs and expenses of the preferred
stock, the excess return will benefit the common shareholders by enhancing
common stock dividends and potentially the common stock net asset value and
share price.
The Fund is seeking approval to amend the Articles of Incorporation to
provide that the Fund be authorized to issue shares of preferred stock at this
time so that it will have the benefit of not having to seek shareholder approval
when and if it decides to issue the preferred stock. The proposed changes to
certain of the Fund's fundamental investment restrictions will allow the Fund to
issue senior securities both in the form of preferred stock and in the form of
debt securities to the full extent permitted by the 1940 Act. The Fund does not
currently intend to issue debt securities, but may do so in the future. Not
having to seek shareholder approval at the time the Fund determines to issue
preferred stock or debt securities will allow the Fund quickly and decisively to
pursue opportunities it believes will enhance performance for the common
shareholders. These opportunities might be lost if the Fund were required to go
through the time-consuming process of obtaining shareholder approval at that
time.
During the one year period ending on the first anniversary of the issuance
of any preferred stock, the Adviser will waive its rights to any investment
advisory fee attributable to the assets of the Fund representing the liquidation
preference of any preferred stock issued and the income of the Fund resulting
from the investment of the proceeds of any preferred stock issued.
ANTICIPATED TERMS OF THE PREFERRED STOCK
Any preferred stock authorized for issuance in the future by the Board will
have such terms and conditions as approved by the Board at that time, which
terms and conditions will be subject to market conditions, negotiations with
potential preferred investors and the requirements of the 1940 Act. However, the
Fund currently anticipates that, under current market conditions, in addition to
the terms required by the 1940 Act, the preferred stock would incorporate some
or all of the terms and conditions discussed below.
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Issue Size. Under current market conditions, the Fund may seek to raise an
amount up to approximately one-third of total net assets, after giving effect to
the receipt of preferred stock proceeds. At current net asset value levels, this
would mean one or more issuances of an aggregate size of up to approximately
$[24.7] million.
Offering. In order to avoid the high costs associated with a public
offering, the Fund would attempt to place the preferred stock privately with a
limited number of institutional investors. The Fund does not expect that such
investors would be affiliates of the Fund (other than affiliation resulting from
the investment) or that such investors would have any agreement or understanding
with respect to voting the preferred stock.
Dividend Rate. In today's interest rate environment, the Fund would seek to
lock-in a fixed rate at a spread over comparable duration treasury securities.
Optional Redemption. The Fund expects that the preferred stock would be
redeemable by the Fund at its option. Optional redemption would likely require
the payment of a premium, and it is possible that the Fund would not be
permitted to redeem the preferred stock at its option for some initial period.
Mandatory Redemption. The Fund would likely be required to redeem preferred
stock to the extent necessary to maintain various financial tests. The Fund
expects that it would be required to redeem the preferred stock at its stated
liquidation preference on a date specific approximately five-to-ten years after
the date of original issuance. Other mandatory redemption provisions, with or
without a premium, may be appropriate.
Credit Quality. The Fund expects that the preferred stock would be rated
investment grade or be unrated but have comparable credit quality. The Fund may
sell certain of its portfolio securities and agree to various financial and
operating constraints as a condition to obtaining and maintaining such a credit
rating. Such constraints might include maintaining a minimum average credit
quality rating for the Fund's portfolio securities, or similar provisions.
The 1940 Act requires that any preferred stock issued by the Fund contain
certain terms, which are discussed below.
ISSUANCES OF SENIOR SECURITIES -- 1940 ACT REQUIREMENTS
The 1940 Act permits a registered closed-end investment company such as the
Fund to issue senior securities, and to sell senior securities of which it is
the issuer, under certain circumstances as summarized below.
First, such issuance must be consistent with the fundamental investment
restrictions and any other fundamental policies of the investment company.
If the senior securities are stock ("preferred stock"), then the following
requirements must be met:
(a) the preferred stock must have an asset coverage (meaning the ratio
which the value of the total assets of the investment company, less all
liabilities and indebtedness not represented by senior securities, bears to
the aggregate amount of debt securities of such company plus the
involuntary liquidation preference of the preferred stock of such company)
of at least 200% immediately after such issuance or sale;
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(b) provision must be made to prohibit the declaration of any dividend
(other than a dividend payable in common stock) or the declaration of any
other distribution upon the common stock of the company, or the purchase of
any such common stock, unless, after giving effect to such action, the
preferred stock has an asset coverage of at least 200%;
(c) provision must be made to entitle the holders of the preferred
stock, voting as a class, to elect at least two directors at all times,
and, subject to the prior rights, if any, of the holders of any debt
securities outstanding, to elect a majority of the directors if at any time
dividends on the preferred stock are unpaid in an amount equal to two full
years' dividends, and to continue to be so represented until all dividends
in arrears are paid or otherwise provided for;
(d) provision must be made requiring approval by the vote of a
majority of the outstanding shares of the preferred stock (which, as
defined under the 1940 Act, means the lesser of (i) 67% of the shares
present at the meeting if a quorum is present or (ii) more than 50% of the
outstanding shares), voting as a class, of any plan of reorganization
adversely affecting the preferred stock; of any action to change the
classification of the investment company from a non-diversified to a
diversified company; of any action to change its classification from a
closed-end investment company to an open-end investment company; or of any
action to borrow money, issue senior securities, underwrite securities of
other persons, purchase or sell real estate or commodities or make loans to
other persons (all other than as authorized in such company's registration
statement under the 1940 Act), deviate from fundamental investment
restrictions or other fundamental policies or change the nature of the
business of such company so as to cease to be an investment company; and
(e) the class of stock must have complete priority over any other
class as to distribution of assets and payment of dividends, which
dividends must be cumulative.
If the class of senior securities represents an indebtedness ("debt
securities"), then the following requirements must be met:
(a) the debt securities must have an asset coverage (meaning the ratio
which the value of the total assets of the investment company, less all
liabilities and indebtedness not represented by senior securities, bears to
the aggregate amount of debt securities) of at least 300% immediately after
issuance or sale of the debt securities;
(b) provision must be made to prohibit the declaration of any dividend
(other than a stock dividend) or the declaration of any other distribution
upon any class of the capital stock of the investment company, or the
purchase of any capital stock by the company, unless, after giving effect
to such action, the debt securities have an asset coverage (at the time of
the declaration or purchase and after deducting the amount of such
dividend, distribution or purchase price) of at least 300%; and
(c) provision must be made either that:
(i) if on the last business day of each of 12 consecutive calendar
months the debt securities have an asset coverage of less than 100%, the
holders of the securities voting as a class will be entitled to elect at
least a majority of the members of the board of directors of the
investment company, until the debt securities have an asset coverage of
at least 110% on the last business day of three consecutive calendar
months, or
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(ii) if on the last business day of each of twenty-four consecutive
calendar months the debt securities have an asset coverage of less than
100%, an event of default shall be deemed to have occurred.
The 1940 Act limits a registered closed-end investment company such as the
Fund to one class of debt securities and to one class of senior stock, except
that (i) any such class may be issued in one or more series so long as no series
has a preference or priority over any other series upon the distribution of the
assets of the company or in respect of the payment of interest or dividends and
(ii) promissory notes or other evidences of indebtedness issued in consideration
of any loan, extension, or renewal thereof, made by a bank or other person and
privately arranged, and not intended to be publicly distributed, are not deemed
to be a separate class of debt securities. In addition, debt securities do not
include any promissory note or other evidence of indebtedness for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the investment company at the time the loan is made.
As of June 30, 2000, the Fund had total assets of $51,790,550 and total
liabilities of $1,199,625 and had no borrowings outstanding. Accordingly, as of
such date, consistent with the asset coverage requirements of the 1940 Act, the
Fund could issue senior securities representing shares of preferred stock and
debt securities having a combined involuntary liquidation preference and an
aggregate principal amount of debt not to exceed approximately $50,590,925. The
foregoing calculation assumes that the proceeds from the sale of the shares of
preferred stock and debt securities (which would become part of the total assets
of the Fund) are equal to the involuntary liquidation preference of the shares
of preferred stock and aggregate principal amount of the debt securities. As
stated under "Introduction to Proposals 2, 3 and 4 -- Anticipated Terms of the
Preferred Stock -- Issue Size," under current market conditions, and at the
Fund's current net asset value, the Fund does not currently intend to issue
preferred stock in one or more issuances of an aggregate size in excess of
$[24.7] million. In addition, as stated under "Introduction to Proposals 2, 3
and 4," the Fund does not currently intend to issue debt securities.
BENEFITS AND RISKS OF ISSUANCE OF SENIOR SECURITIES
A leveraged capital structure creates certain special benefits and risks
not associated with unleveraged funds having similar investment objectives and
policies. In addition, the issuance of preferred stock involves offering
expenses and other costs to the Fund (e.g., underwriting commissions, rating
agency fees and organization expenses), which expenses and costs will be borne
by the holders of common stock. If the Fund were to issue preferred stock or
debt securities and incur an obligation to pay dividends or interest, any
investment income or gains that the Fund earns from the proceeds of such
issuance which is in excess of the sum of dividends or interest due on the
senior securities and costs and expenses thereof will cause the net asset value
of the Fund's shares to increase to a greater extent than would otherwise be the
case. Conversely, if the return on the proceeds of such issuance fails to cover
the sum of dividends or interest due on the issued senior securities and costs
and expenses thereof, the net asset value of the Fund would be lower than would
otherwise be the case, resulting in a possible reduction of dividends paid by
the Fund to the holders of its shares of common stock. Successful use of
leveraging may depend on the Adviser's ability to predict correctly interest
rates and market movements, and there can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. The Fund
expects to invest the proceeds of any offering of senior securities primarily in
securities of issuers that have below investment grade credit quality. This
would have the effect of increasing the proportion of the Fund's assets that are
invested in such below investment grade
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securities. Such securities involve greater credit risk than higher grade
securities. Because any senior securities would be senior to the common stock in
terms of payment of interest or dividends and distribution of assets, any
increased risk associated with the larger portion of below investment grade
investments would be borne by the holders of common stock. The Fund intends to
issue preferred stock or senior debt securities only if the Board determines in
light of all relevant circumstances that to do so would be in the best interests
of the Fund and its shareholders.
The mandatory asset coverage requirements of the 1940 Act could also pose
certain risks for the holders of shares of common stock. If the Fund's asset
coverage for any preferred stock or debt security falls below the requirements
of the 1940 Act, the Fund would be unable to pay dividends on its common stock.
Furthermore, under adverse market conditions the Fund might have to sell
portfolio securities to service the preferred stock or debt securities at a time
when investment considerations would not favor such sales.
In addition to potential economic dilutive effects, the holders of shares
of common stock would realize voting dilution as a result of the issuance of
preferred stock since the preferred stock would be able to vote together with
the common stock on all general matters. Furthermore, the class voting
requirements for the preferred stock could make it more difficult for the Fund
to take certain actions that may, in the future, be proposed by the Board and/or
holders of shares of common stock, such as a merger, exchange of securities,
liquidation or alteration of the rights of a class of the Fund's securities if
such actions would be adverse to the preferred stock, or such as changing to an
open-end investment company or acting inconsistently with its fundamental
investment restrictions or other fundamental policies or ceasing to be an
investment company. Mandatory redemption requirements may make it more difficult
or costly for the Fund to take certain actions. Under the 1940 Act, an open-end
investment company may not issue any senior security (other than certain bank
borrowings) and, as a result, prior to converting to an open-end investment
company the Fund would likely be required to redeem or repurchase any senior
securities that it had issued.
The investment advisory fee payable to VALIC has two components, one based
on a percentage of the Fund's adjusted net assets and the other based on a
percentage of the Fund's net investment income, after interest expenses. Because
the liquidation preference of any preferred stock issued will not be a liability
of the Fund, issuance of preferred stock will result in an increase in the
Fund's adjusted net assets. Similarly, the Fund expects to earn additional net
investment income from the investment of the proceeds from any preferred stock
issued.
As a result, issuance of preferred stock will result in an increase in both
components of the investment advisory fee payable to VALIC by the Fund and
attributable to the holders of common stock; however, the investment advisory
fees as a percentage of the Fund's net assets would not change as a result of
the issuance of any preferred stock. Furthermore, during the one year period
ending on the first anniversary of the issuance of any preferred stock, VALIC
will waive its rights to any investment advisory fee attributable to the assets
of the Fund representing the liquidation preference of any preferred stock
issued and the income of the Fund resulting from the investment of the proceeds
of any preferred stock issued. Thereafter, VALIC has agreed that the second
component of the advisory fee may be computed by deducting the amount of
dividend payments made on any outstanding preferred stock for purposes of
determining the Fund's net investment income.
If the preferred stock issued by the Fund is convertible into shares of the
Fund's common stock, the net income per share of common stock and net asset
value per share of common stock may be reduced if these
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securities are so converted. Such income dilution would occur if the Fund was
able to realize income on the proceeds received from the preferred stock
issuance in excess of the dividend rate on the preferred stock. Such net asset
value dilution would occur if the preferred stock was converted at a time when
the net asset value per share of the Fund's common stock was greater than the
conversion price. New York Stock Exchange rules would in certain circumstances
require shareholder approval of the issuance of convertible preferred stock.
The staff of the SEC has taken the position that the 1940 Act prohibits a
registered closed-end investment company from issuing a convertible security,
the conversion feature of which predominates among such security's investment
characteristics. Accordingly, the Board will consider such position in
connection with its authorizing the issuance and sale of any convertible
security by the Fund, and the SEC staff would be given an opportunity to review
the attributes of any proposed convertible security before it is issued and sold
by the Fund.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General. Set forth below is a general description of certain federal income
tax consequences to the Fund and to the holders of shares of common stock of the
Fund with respect to the issuance by the Fund of the preferred stock. The
description assumes that the Fund will continue to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), as it did in its most recent fiscal year, so as to be relieved of
federal income tax on net investment income and net capital gains distributed to
shareholders. If the Fund were prohibited from paying dividends on its common
stock by the asset coverage requirements of the preferred stock described above,
its ability to meet the qualification requirements of the Code might be
impaired. The Fund expects, however, that to the extent possible it would
purchase or redeem shares of preferred stock to allow it to pay dividends
sufficient to eliminate an entity level tax. If the Fund failed to qualify for
taxation as a regulated investment company under the Code in any taxable year,
the Fund would be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net capital gains, would be taxable to shareholders as
ordinary income. In addition, the Fund could be required to recognize unrealized
gains, pay taxes and interest charges and make distributions before
re-qualifying for taxation as a regulated investment company.
Deduction for Dividends Paid by the Fund. As a regulated investment
company, the Fund is generally entitled to a deduction for dividends paid to its
shareholders out of its ordinary income. Under the Code, a distribution will not
qualify for the deduction for dividends paid unless the distribution is pro
rata, with no preferences to any share of the Fund as compared with other shares
of the same class, and with no preference to one class of shares as compared
with another class except to the extent that the former is entitled (without
reference to waivers of their rights by shareholders) to such preference. The
Fund intends to make distributions in a manner that will allow such
distributions to qualify for the dividends paid deduction.
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PROPOSAL 2: AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION,
AS AMENDED, TO PROVIDE FOR THE AUTHORIZATION
AND ISSUANCE OF PREFERRED STOCK
BACKGROUND
On March 2, 2000, the Board, by a unanimous vote, determined that it is
advisable that the Articles of Incorporation be amended to provide that the Fund
be authorized to issue shares of preferred stock and that such proposed
amendment to the Articles of Incorporation be submitted for consideration and
approval by the Fund's shareholders. On July 18, 2000, the Board unanimously
reaffirmed this determination.
The Articles of Incorporation currently authorize the Fund to issue ten
million shares of common stock. The proposed amendment to the Articles of
Incorporation, if approved, will authorize the Fund to issue five million shares
of preferred stock and will authorize the Board to issue all or any shares of
the preferred stock in one or more classes or series, and to fix the relevant
terms, conditions and obligations for each such class or series to the extent
permitted by law.
For a discussion of the potential benefits and risks of the Fund issuing
preferred stock, the requirements of the 1940 Act for any preferred stock and
certain potential terms and conditions of preferred stock that may be issued by
the Fund, see "Introduction to Proposals 2, 3 and 4 -- Benefits and Risks of
Issuance of Senior Securities" above.
If the shareholders approve the amendment, Article FIFTH of the Articles of
Incorporation will be amended to read in its entirety as follows:
The total number of shares of stock which the corporation shall have
authority to issue is fifteen million (15,000,000) shares, of which ten
million (10,000,000) shares shall be Common Stock, of the par value of
One Dollar ($1.00) each, and five million (5,000,000) shares shall be
Preferred Stock, of the par value of One Dollar ($1.00) each.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more
classes or series, and to fix for each such class or series such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption thereof, as shall be stated and expressed in the resolution
or resolutions adopted by the Board of Directors providing for the
issuance of such class or series and as may be permitted by the General
Corporation Law of Maryland and the Investment Company Act of 1940, as
amended.
The circumstances that the Board will consider before issuing shares of
preferred stock include not only the dividend rate on the preferred stock but
also such matters as the terms on which the Fund can redeem the preferred stock,
and the ability of the Fund to meet the asset coverage tests and other
requirements imposed by the 1940 Act and the rating agencies for such preferred
stock. The Board will only authorize the issuance of preferred stock if it
believes that such issuance is likely to enhance the amount of income payable to
the holders of the Fund's common stock.
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REQUIRED VOTE
The proposed amendment to the Articles of Incorporation requires the
affirmative vote of a majority of the shares of common stock outstanding and
entitled to vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FUND'S SHAREHOLDERS
VOTE "FOR" THE PROPOSAL TO AMEND THE FUND'S ARTICLES OF INCORPORATION, AS
AMENDED, TO PROVIDE FOR THE AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK.
PROPOSAL 3: AMENDMENT TO THE FUND'S INVESTMENT RESTRICTION REGARDING
THE ISSUANCE OF SENIOR SECURITIES
BACKGROUND
On March 2, 2000, the Board, by a unanimous vote, determined that it is
advisable that the Fund's fundamental investment restriction regarding senior
securities be amended to provide that the Fund be allowed to issue preferred
stock and other senior securities. On July 18, 2000, the Board unanimously
reaffirmed this determination. Fundamental investment restrictions may not be
changed without a vote of the shareholders of the Fund.
This proposed change to the fundamental investment restriction regarding
senior securities is designed to provide the Fund with greater opportunities to
enhance performance for the holders of shares of common stock of the Fund. The
proposed amendment would ensure that the Fund's fundamental policy concerning
senior securities affords it the maximum ability to adapt to economic, market
and regulatory conditions as they arise.
The Fund currently is generally prohibited from issuing senior securities.
The current restriction provides as follows:
The Fund will not issue any senior securities (as defined in the
Investment Company Act of 1940 as amended), except insofar as any
borrowing permitted under the Fund's investment restriction relating to
borrowing might be considered to be the issuance of senior securities.
The proposed amendment would replace the current restriction relating to
the issuance of senior securities, with the following:
The Fund will not issue any senior securities (as defined in the
Investment Company Act of 1940, as amended), except to the
extent permitted by applicable law.
Although the definition of "senior security" involves complex statutory and
regulatory concepts, a senior security is considered generally to be an
obligation of the Fund that has a claim to the assets or earnings of the Fund
that takes priority over the claims of the holders of common stock. The term
senior security does not, however, include any promissory note or other evidence
of indebtedness where such loan is for temporary purposes only and in an amount
not exceeding five percent of the value of the Fund's total assets at the time
the loan is made. Such loans are governed by the Fund's borrowing restriction
and are not subject to the requirements of senior securities discussed under
"Introduction to Proposals 2, 3 and 4".
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The 1940 Act generally prohibits closed-end investment companies such as
the Fund from issuing senior securities unless certain asset coverage tests and
other requirements are satisfied. For a discussion of the potential benefits and
risks of issuing senior securities, the requirements of the 1940 Act for any
senior securities and certain potential terms and conditions of preferred stock
that may be issued by the Fund, see "Introduction to Proposals 2, 3 and
4 -- Benefits and Risks of Issuance of Senior Securities" above.
Shareholders should note that the proposed investment restriction is stated
in terms of "to the extent permitted by applicable law." Applicable law can
change from time to time and may become more or less restrictive as a result.
The restriction has been drafted in this manner so that future changes in the
law would not require the Fund to seek shareholder approval to amend the
restriction to conform to applicable law then in effect.
The approval of this Proposal 3 (together with the approval of Proposal 2)
would enable the Fund to issue shares of preferred stock, the holders of which
would have priority over holders of shares of the Fund's common stock as to the
distribution of assets or payment of dividends. As discussed above under the
heading "Introduction to Proposals 2, 3 and 4 -- Anticipated Terms of the
Preferred Stock," the Board has considered certain preliminary matters relating
to a possible offering of preferred stock, and if the proposals being voted upon
at the Meeting are approved, the Board intends to consider more fully the
issuance of preferred stock, including the preferences, rights, powers and
restrictions thereof.
REQUIRED VOTE
The proposed change to the Fund's investment restriction regarding senior
securities as set forth in this proposal requires the affirmative vote of a
majority of the outstanding voting securities of the Fund which, as defined in
the 1940 Act, means the lesser of (a) 67% of the shares present at the Meeting
if a quorum is present or (b) more than 50% of the outstanding shares of the
Fund.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FUND'S SHAREHOLDERS
VOTE "FOR" THE PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING SENIOR SECURITIES.
PROPOSAL 4: AMENDMENT TO THE FUND'S INVESTMENT
RESTRICTION REGARDING BORROWINGS
On March 2, 2000, the Board, by a unanimous vote, determined that it is
advisable that the Fund's fundamental investment restriction regarding
borrowings be amended to clarify that senior securities not be deemed borrowings
for purposes of this restriction. On July 18, 2000, the Board unanimously
reaffirmed this determination. The Fund has a fundamental investment restriction
which limits its ability to borrow money. The proposed amendment to this
restriction would clarify that senior securities will not be deemed to be
borrowings for the purpose of this investment restriction. The issuance of
senior securities by the Fund would be governed by the Fund's fundamental
investment restrictions regarding senior securities, discussed above under
Proposal 3.
This proposed change to the fundamental investment restriction regarding
borrowings is designed to maximize the flexibility afforded the Fund by the
amendment to the Fund's investment restriction regarding senior securities
described in Proposal 3. By making clear that senior securities do not
constitute borrowings
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for purposes of the investment restriction regarding borrowings, the Fund would
have greater flexibility to use leverage to enhance performance for the holders
of shares of the Fund's common stock. The effect of this amendment would be that
most borrowings would be subject to the asset coverage restrictions for debt
securities discussed under "Introduction to Proposals 2, 3 and 4," rather than
the 25% limit of the borrowings restriction. The Board will only authorize the
issuance of debt securities if it believes that such issuance is likely to
enhance the amount of income payable to the holders of the Fund's common stock.
The current borrowing restriction provides that:
The Fund will not borrow money except (a) on an unsecured basis
in an amount not in excess of 25% of the value of the Fund's
total assets, after giving effect to the borrowings and, in
addition, (b) from banks for temporary or emergency purposes in
an amount not exceeding 5% of the value of its total assets.
The proposed amendment would replace the current borrowing restriction with
the following:
The Fund will not borrow money except (a) on an unsecured basis
in an amount not in excess of 25% of the value of its total
assets, after giving effect to the borrowings and, in addition,
(b) from banks for temporary or emergency purposes in an amount
not exceeding 5% of the value of its total assets; provided,
however, that the issuance of senior securities shall not be
deemed to be the borrowing of money for the purposes of this
restriction.
REQUIRED VOTE
The proposed change to the Fund's fundamental investment restriction
regarding borrowings as set forth in this proposal requires the affirmative vote
of a majority of the outstanding voting securities of the Fund which, as defined
in the 1940 Act, means the lesser of (a) 67% of the shares present at the
Meeting if a quorum is present or (b) more than 50% of the outstanding shares of
the Fund.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FUND'S SHAREHOLDERS
VOTE "FOR" THE PROPOSAL TO AMEND THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTION
REGARDING BORROWINGS.
PROPOSAL 5: RATIFICATION OF ERNST & YOUNG LLP
AS INDEPENDENT AUDITOR
The Board, including all of the Independent Directors, has selected Ernst &
Young LLP to serve as independent auditor of the Fund for the fiscal year ending
June 30, 2001, subject to ratification by the Fund's shareholders. Effective
April 18, 2000, Ernst & Young LLP replaced KPMG LLP, which served as the Fund's
independent auditors since 1972. KPMG LLP resigned effective April 18, 2000 as a
result of a possible lack of independence as determined by the proposed auditor
independence standards promulgated by the Independence Standards Board.
The reports issued by KPMG LLP on the Fund's financial statements for the
fiscal year ended June 30, 1999 and the report issued by Ernst & Young LLP on
the Fund's financial statements for the fiscal year ended June 30, 2000 did not
contain any adverse opinion or a disclaimer of opinion, or any qualification or
modification as to uncertainty, audit scope, or accounting principles.
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The decision to change the Fund's independent auditor to Ernst & Young LLP
was recommended by the Audit Committee and then unanimously approved by the
Board, including all of the Independent Directors.
During the Fund's two most recent fiscal years, the Fund had no
disagreements with KPMG LLP or Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of KPMG LLP or Ernst &
Young LLP, would have caused it to make reference to the subject matter of any
such disagreement in connection with its reports.
Ernst & Young LLP has no direct or material indirect financial interest in
the Fund. Representatives of Ernst & Young LLP will be present at the Meeting
and will have the opportunity, at their discretion, to make a statement and to
respond to appropriate shareholder questions.
The Audit Committee authorized all services performed by KPMG LLP and Ernst
& Young LLP on behalf of the Fund. In addition, the Audit Committee will review
the scope of services to be provided by Ernst & Young LLP annually and will
consider the effect, if any, that performance of any non-audit services might
have on audit independence.
REQUIRED VOTE
The ratification of the selection of independent auditors requires the
affirmative vote of a majority of the votes cast at the Meeting, provided a
quorum is present.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FUND'S SHAREHOLDERS
VOTE "FOR" ERNST & YOUNG LLP AS INDEPENDENT AUDITOR.
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INFORMATION ABOUT THE FUND
A. STRUCTURE AND INVESTMENT OBJECTIVES
The Fund is a closed-end, diversified management investment company
organized as a Maryland corporation on October 17, 1972. The Fund's shares are
listed for trading on The New York Stock Exchange.
The Fund's fundamental investment objective is to provide a high level of
current income for its shareholders. In pursuing its objective, the Fund invests
at least 50% of its total assets in straight debt securities which are rated at
the time of purchase within the four highest grades by Moody's Investors
Service, Inc. or Standard & Poor's Ratings Service, a division of the
McGraw-Hill Companies, Inc., or which are unrated but considered by the Fund's
management to be of comparable quality. The balance of the Fund's assets are
invested in other fixed income securities, including straight and convertible
debt securities, preferred stock and other securities with equity features. Of
the Fund's total assets, up to 30% may be invested in privately placed
securities which are not readily marketable. The Fund may not invest more than
20% of its net assets in foreign securities. The Fund may also borrow money to
obtain investment leverage. If Proposals 2, 3 and 4 are approved by the Fund's
shareholders, the Fund also would be able to obtain investment leverage through
the issuance of senior securities. The relative size of the Fund's investments
in any grade or type of securities will vary from time to time depending upon a
number of factors, including yields, market supplies and economic outlook. As of
June 30, 2000, approximately 55.4% of the Fund's assets were invested in fixed
income securities rated investment grade or considered by VALIC to be of
comparable quality, and 44.6% in below investment grade securities.
As discussed under "Introduction to Proposals 2, 3 and 4 -- Benefits and
Risks of Issuance of Senior Securities," the Fund expects that the proceeds from
any issuance of senior securities would be invested primarily in below
investment grade quality securities, which would have the effect of increasing
the proportion of the Fund's assets in below investment grade securities.
B. THE FUND'S INVESTMENT ADVISER
VALIC is a stock life insurance company and became the Fund's Adviser on
September 24, 1997. VALIC is wholly-owned by American General Life Insurance
Company, which is itself a wholly-owned subsidiary of AGC Life Insurance
Company, a wholly-owned subsidiary of American General Corporation. VALIC,
American General Corporation, AGC Life Insurance Company and American General
Life Insurance Company are located at 2929 Allen Parkway, Houston, Texas 77019.
VALIC receives from the Fund a monthly fee equal to the sum of: (i)
0.04167% of the Fund's adjusted net assets (month end net assets, less net
investment income for the month) and (ii) 2 1/2% of the Fund's net investment
income, minus interest on borrowed funds during the month. During the fiscal
year ended June 30, 2000, the Fund paid VALIC advisory fees of $357,889.
C. CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street") serves as custodian
for the Fund's portfolio, and ChaseMellon Shareholder Services ("ChaseMellon")
acts as transfer agent, dividend paying agent and registrar for the Fund's
shares. The principal business address of State Street is 225 Franklin Street,
Boston,
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Massachusetts 02110, and the principal business address of ChaseMellon is 450
West 33rd Street, New York, New York 10001.
D. OTHER
The Fund currently does not employ a principal underwriter or
administrator.
E. SHARE OWNERSHIP
As of the Record Date, no director or executive officer of the Fund owned,
directly or beneficially, any Fund shares. The persons who owned beneficially
more than 5% of the outstanding shares of the Fund as of the Record Date are set
forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OWNED
------------------- -------------------- -------
<S> <C> <C>
Ernest Horejsi Trust..................................... 767,200 13.59%
No. 1B*
122 South Phillips Avenue
Suite 220
Sioux Falls, South Dakota 57104
</TABLE>
---------------
* Based on information set forth in a Form 4 dated July 7, 2000 filed with the
SEC by Ernest Horejsi Trust No. 1B (the "Horejsi Trust") showing beneficial
ownership of shares as of June 30, 2000. The Trustees of the Horejsi Trust are
Badlands Trust Company, Susan Ciciora and Larry Dunlap.
GENERAL INFORMATION
OTHER MATTERS
No business other than to consider and vote upon the proposals set forth in
this Proxy Statement will be transacted at the Meeting except for possible
adjournments thereof. If any other matter should properly come before the
Meeting, it is intended that discretionary authority to vote the proxies shall
be exercised in respect thereof in accordance with the best judgment of the
proxy holders.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND MARYLAND LAW
Set forth below is a description of certain present provisions of the
Articles of Incorporation and Bylaws and Maryland law, which may be deemed to
have an anti-takeover effect.
Article Sixth of the Articles of Incorporation provides for a classified
board of directors, pursuant to which the Board is divided into three classes of
directors serving staggered three-year terms. There is no cumulative voting in
the election of directors.
Under the Bylaws, a minimum of three directors and a maximum of 20
directors constitute the entire Board. In addition, Section 3-804(b) of the
Maryland General Corporation Law provides that only the Board may set the size
of the Board. Furthermore, under the Bylaws, directors may only be removed for
cause and
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<PAGE> 27
then only by the affirmative vote of two-thirds of all outstanding shares. Under
the Bylaws, vacancies on the Board may generally be filled by the remaining
directors if immediately after filling such vacancy at least two-thirds of the
directors then holding office were elected by the Fund's shareholders. In
addition, the 1940 Act provides that if at any time less than a majority of the
Board consists of directors elected by the Fund's shareholders, a meeting of
shareholders shall be called and held within 60 days for the purpose of electing
directors to fill any existing vacancies.
Under the Bylaws, special meetings of shareholders may be called only by
the Chairman of the Board, a Vice Chairman of the Board, the President or the
Board, or by the Secretary upon the written request of the holders of not less
than a majority of all shares entitled to vote at the meeting. In addition, the
Bylaws also provide that any special meeting called at the request of the
shareholders must be held not less than thirty and not more than ninety days
after receipt of the request and that the Board may set the date, time and place
of such meeting.
Under the Bylaws, a shareholder must deliver notice to the corporation of
the shareholder's nominations of directors and other proposals not more than 120
days nor less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of shareholders; provided, that in the event that the
annual meeting is called for a date that is not within 25 days before or after
such anniversary date, or directors are to be elected at a special meeting, the
shareholder's notice must be received by the tenth day following the day notice
of the meeting is mailed to shareholders or public disclosure of the date is
made, whichever occurs first.
The Bylaws also provide that the Bylaws may only be amended by a majority
of the Board or by the vote of the holders of two-thirds of the Fund's shares of
stock.
Section 5 of Article Seventh of the Articles of Incorporation requires a
vote of at least 75% of the Fund's shareholders to approve any of the following:
(a) any proposal to convert from a closed-end investment company to an open-end
investment company; (b) any shareholder proposal as to specific investment
decisions made or to be made with respect to the Fund's assets; or (c) any
business combination.
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<PAGE> 28
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the Fund's proxy statement
in connection with the Fund's 2001 annual meeting of shareholders pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), must be received by the Fund at the Fund's principal executive offices by
, 2001. In order for proposals made outside of Rule 14a-8 under the
Exchange Act to be considered "timely" within the meaning of Rule 14a-4(c) under
the Exchange Act, such proposals must be received by the Fund at the Fund's
principal executive offices not later than July 5, 2001. Any shareholder who
wishes to submit a proposal for consideration at a meeting of shareholders
should send such proposal to the Fund at 2929 Allen Parkway, Houston, Texas
77019.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PLEASE SIGN, DATE AND RETURN THE ENCLOSED BLUE PROXY. A SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. ALTERNATIVELY,
SHAREHOLDERS OF RECORD MAY VOTE BY TELEPHONE, BY FAX OR VIA THE INTERNET BY
FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED BLUE PROXY CARD.
By order of the Board of Directors,
/s/Alice T. Kane
Chairman and President
August , 2000
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<PAGE> 29
IMPORTANT
If your shares are held in your own name, please sign, date and return the
enclosed BLUE proxy card today. You may also vote your shares by telephone or
via the Internet by following the instructions that appear on the enclosed BLUE
proxy card. If your shares are held in "Street-Name," only your broker or bank
can vote your shares and only upon receipt of your specific instructions. Please
return the enclosed BLUE proxy card to your broker or bank and contact the
person responsible for your account to ensure that a BLUE proxy card is voted on
your behalf.
If you have any questions or need assistance in voting your shares, please
call the firm assisting the Fund in the solicitation of proxies:
GEORGESON
SHAREHOLDER COMMUNICATIONS INC.
17 STATE STREET
NEW YORK, NEW YORK 10004
BANKS AND BROKERS CALL COLLECT: (212) 440-9800
ALL OTHERS CALL TOLL FREE: 1-800-223-2064
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<PAGE> 30
Please mark your
vote as indicated in [X]
this example
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS THAT THE FUND'S SHAREHOLDERS VOTE "FOR"
PROPOSALS 1, 2, 3, 4 AND 5
--------------------------------------------------------------------------------
FOR WITHHOLD
Proposal 1 - Election of the following three nominees [ ] [ ]
as Directors: Dr. Timothy J. Ebner, Dr. John Wm.
Lancaster and Dr. John E. Maupin, Jr.
YOU MAY WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE OR NOMINEES BY MARKING THE FOR BOX AND STRIKING
OUT THE NAME OF ANY SUCH NOMINEE.
FOR AGAINST ABSTAIN
Proposal 2 - Proposal to amend the Articles of [ ] [ ] [ ]
Incorporation to provide for the authorization and
issuance of preferred stock.
FOR AGAINST ABSTAIN
Proposal 3- Proposal to amend the Fund's fundamental [ ] [ ] [ ]
investment restriction regarding senior securities.
FOR AGAINST ABSTAIN
Proposal 4 - Proposal to amend the Fund's fundamental [ ] [ ] [ ]
investment restriction regarding borrowings.
FOR AGAINST ABSTAIN
Proposal 5 - Proposal to ratify the appointment of [ ] [ ] [ ]
Ernst & Young LLP as the independent auditor of the
Fund.
The effectiveness of Proposals 2 and 3 above is subject to, and conditioned
upon, the approval of the other. The effectiveness of Proposal 4 above is
subject to, and conditioned upon, the effectiveness of Proposals 2 and 3;
however, the effectiveness of Proposals 2 and 3 are not subject to, or
conditioned upon, the effectiveness of Proposal 4.
--------------------------------------------------------------------------------
In addition, in their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting. THIS PROXY WHEN PROPERLY
EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF
PROPOSALS 1, 2, 3, 4 AND 5.
Signature(s)__________________________________________Dated:______________, 2000
NOTE: Please sign as name appears herein. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
<PAGE> 31
PRELIMINARY PROXY MATERIAL - SUBJECT TO COMPLETION
INSTRUCTIONS FOR VOTING YOUR PROXY
USLIFE Income Fund, Inc. is now offering shareholders of record four alternative
ways of voting their proxies:
o BY TELEPHONE (using a touch-tone telephone)
o BY FAX (using facsimile)
o THROUGH THE INTERNET (using a browser)
o BY MAIL (traditional method)
Your telephone, fax or Internet vote authorizes the named proxies to vote your
shares in the same manner as if you had mailed your proxy card. We encourage you
to use these cost effective and convenient ways of voting, 24 hours a day, 7
days a week.
TELEPHONE VOTING
Available only until 5:00 p.m. Eastern Daylight Time October 2, 2000.
o On a touch tone telephone, call TOLL FREE 1-877-816-0835, 24 hours a day, 7
days a week
o You will be asked to enter ONLY the Control Number shown below
o Have your proxy card ready, then follow these instructions
o Your vote will be confirmed and cast as you directed
FAX VOTING
o Simply fax your completed and signed proxy card (both front and back sides)
to 1-212-440-9009
INTERNET VOTING
Available only until 5:00 p.m. Eastern Daylight Time on October 2, 2000.
o Visit the Internet voting Website at http:\\proxy.georgeson.com
o Enter the COMPANY NUMBER AND CONTROL NUMBER shown below and follow the
instructions on your screen
o You will incur only your usual Internet charges
VOTING BY MAIL
o Simply sign and date your proxy card and return it in the postage-paid
envelope
COMPANY NUMBER CONTROL NUMBER
TO VOTE BY MAIL, PLEASE DETACH PROXY CARD HERE
