SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
PROSPECT STREET INCOME SHARES INC.
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(Name of Registrant as Specified in Its Charter)
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(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:
_________________________
(2) Aggregate number of securities to which transaction applies:
________________________
(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):
_________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:_________________________
(5) Total fee paid:__________________________________________________________
[ ] Fee previously paid 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.:____________
(3) Filing party:______________________________________
(4) Date filed:_______________________________________
PROSPECT STREET(R) INCOME SHARES INC.
TWO GALLERIA TOWER
13455 NOEL ROAD
SUITE 1300
DALLAS, TEXAS 75240
April __, 2002
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of Prospect Street(R) Income Shares Inc. (the "Fund") to be
held at The University Club of Dallas, at 13350 Dallas Parkway, Suite 4000,
Dallas, Texas 75240, on Friday, May 17, 2002, at 10:00 a.m. In addition to
voting on the proposals described in the Notice of Annual Meeting of
Stockholders, you will have an opportunity to hear a report on the Fund and to
discuss other matters of interest to you as a stockholder.
We hope that you will be able to attend the Annual Meeting. Whether or not
you plan to attend, please complete, date, sign and mail the enclosed proxy card
to assure that your shares are represented at the Annual Meeting.
Sincerely,
/s/ JAMES D. DONDERO
James D. Dondero
President
PROSPECT STREET(R) INCOME SHARES INC.
TWO GALLERIA TOWER
13455 NOEL ROAD
SUITE 1300
DALLAS, TEXAS 75240
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 17, 2002
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The Annual Meeting of Stockholders (the "Annual Meeting") of Prospect
Street(R) Income Shares Inc., a Maryland corporation (the "Fund"), will be held
at The University Club of Dallas, at 13350 Dallas Parkway, Suite 4000, Dallas,
Texas 75240, on Friday, May 17, 2002, at 10:00 a.m., for the following purposes:
PROPOSAL 1: To elect one Director of the Fund to serve for a three-year
term expiring at the 2005 annual meeting and until his
successor is duly elected and qualifies;
PROPOSAL 2: To amend the Fund's Articles of Incorporation to provide for
a "supermajority" vote of the Board of Directors and the
stockholders to change certain key aspects of the Fund;
PROPOSAL 3: To amend the Fund's Articles of Incorporation to remove
stockholder appraisal rights; and
PROPOSAL 4: To transact such other business as may properly come before
the Annual Meeting and any adjournment thereof.
The close of business on April 5, 2002 has been fixed as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting and any adjournment thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE FUND.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE COMPLETE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE ANNUAL MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Board of Directors
/s/ R. JOSEPH DOUGHERTY
R. Joseph Dougherty
Secretary
April __, 2002
Dallas, Texas
PROSPECT STREET(R) INCOME SHARES INC.
TWO GALLERIA TOWER
13455 NOEL ROAD
SUITE 1300
DALLAS, TEXAS 75240
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
MAY 17, 2002
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This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Prospect Street(R) Income Shares
Inc., a Maryland corporation (the "Fund"), for use at the Fund's Annual Meeting
of Stockholders (the "Annual Meeting") to be held at The University Club of
Dallas, at 13350 Dallas Parkway, Suite 4000, Dallas, Texas 75240, on Friday, May
17, 2002, at 10:00 a.m., and at any and all adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting dated April __,
2002. The Fund is a closed-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act").
This Proxy Statement and the accompanying Notice of Annual Meeting and
forms of proxy were sent to stockholders on or about April __, 2002. The Board
of Directors has fixed the close of business on April 5, 2002 as the record date
(the "Record Date") for the determination of stockholders entitled to notice of
and to vote at the Annual Meeting. As of the Record Date, __________ shares of
the Fund's Common Stock and ______ shares of the Fund's Auction Rate Cumulative
Preferred Shares ("Preferred Shares") were issued and outstanding. Stockholders
are entitled to one vote for each Fund share held and a fractional vote for each
fractional Fund share held.
If the accompanying form of proxy is properly executed and returned in time
to be voted at the Annual Meeting, the shares covered thereby will be voted in
accordance with the instructions marked thereon. Executed and returned proxies
that are unmarked will be voted FOR all the proposals and in the discretion of
the persons named as proxies in connection with any other matters which may
properly come before the Annual Meeting or any adjournment thereof. The Board of
Directors does not know of any matter to be considered at the Annual Meeting
other than the matters referred to in this Proxy Statement. A stockholder may
revoke his or her proxy by appearing at the Annual Meeting and voting in person,
by giving written notice of such revocation to the Secretary of the Fund, or by
returning a later-dated proxy before the Annual Meeting.
If a majority of the aggregate number of the votes entitled to be cast (a
"Quorum") is not present at the Annual Meeting, or if a Quorum is present but
sufficient votes to approve a proposal are not received, the persons named as
proxies may propose one or more adjournments of the Annual Meeting to permit
further solicitation of proxies. In determining whether to adjourn the Annual
Meeting, the following factors may be considered: the nature of the proposal,
the votes actually cast as a percentage of votes entitled to be cast, the
negative votes actually cast as a percentage of votes entitled to be 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 that are
represented at the Annual Meeting in person or by proxy.
Shares represented by properly executed proxies with respect to which a
vote is withheld, an abstention is indicated, or a broker does not vote (a
"broker non-vote") will be treated as shares that are present and entitled to
vote for purposes of determining a Quorum, but will not constitute a vote "for"
or "against" a proposal. However, because Proposal 2 and Proposal 3 require the
affirmative vote of a majority of the total outstanding shares of Common Stock
and Preferred Shares (voting together as a single class) and the affirmative
vote of a majority of the outstanding Preferred Shares (voting as a separate
class), a vote that is withheld, an abstention, or a broker non-vote will have
the same effect as a vote "against" these proposals.
In addition to soliciting proxies by mail, employees of the Fund's
investment adviser may solicit proxies by telephone or in person. The Fund has
also retained [Corporate Investor Communications, Inc. ("CIC")] to assist with
the solicitation. Pursuant to the contract between the Fund and CIC, CIC will
develop a communications strategy, distribute proxy materials, and solicit voted
proxies from banks, brokers, nominees and intermediaries and may also facilitate
contact with registered stockholders to help promote participation in the Annual
Meeting. The Fund has certain indemnification obligations to CIC in the
contract, which is terminable by the Fund on seven days' notice. The fee to CIC
is estimated to be [$10,000], plus reimbursement for out-of-pocket expenses. The
costs of proxy solicitation and expenses incurred in connection with preparing
this Proxy Statement and its enclosures will be paid by the Fund.
THE INVESTMENT ADVISER
Highland Capital Management, L.P. (the "Adviser"), with its principal
office at 13455 Noel Road, Suite 1300, Dallas, Texas 75240, serves as the
investment adviser to the Fund.
PROPOSAL 1
ELECTION OF DIRECTORS
The holders of the Fund's Common Stock and Preferred Shares (voting
together as a single class) are being asked to elect James D. Dondero as a
Director of the Fund, to serve as described below and until his successor is
duly elected and qualifies. The nominee is currently serving as a Director of
the Fund and has agreed to continue to serve as a Director if elected. If the
nominee is not available for election at the time of the Annual Meeting, the
persons named as proxies will vote for such substitute nominee as the Board of
Directors may recommend.
At a meeting held on March 15, 2002, the Board of Directors elected,
pursuant to Section 3-803 of the Maryland General Corporation Law (the "MGCL"),
to establish a classified or "staggered" Board of Directors divided into three
classes: Class I, Class II and Class III. The term of office of the Class I
Director will continue until the third annual meeting of the Fund's stockholders
held after this Annual Meeting and until his successor is duly elected and
qualifies. The term of office of the Class II Directors will continue until the
first annual meeting of the Fund's stockholders held after this Annual Meeting
and until their successors are duly elected and qualify. The term of office of
the Class III Directors will continue until the second annual meeting of the
Fund's stockholders held after this Annual Meeting and until their successors
are duly elected and qualify. At each annual meeting of the Fund's stockholders
after this Annual Meeting, the successors to the class of Directors whose term
expires at that meeting will be elected to hold office for a term continuing
until the annual meeting of the Fund's stockholders held in the third year
following the year of their election and until their successors are duly elected
and qualify. The effect of this structure may make it more difficult for
stockholders to change a majority of the Directors because it would take two
annual meetings to replace the majority of Directors. The Board has designated
Mr. Dondero as a Class I Director (if elected at the Annual Meeting), Messrs.
Timothy K. Hui and Scott F. Kavanaugh as Class II Directors, and Messrs. James
F. Leary and Bryan A. Ward as Class III Directors. Messrs. Hui and Ward are
designated to be elected by holders of the Fund's Preferred Shares, and Messrs.
Kavanaugh and Leary are designated to be elected by holders of the Fund's Common
Stock.
During any period (a "Voting Period") in which the Fund has not paid
dividends on the Preferred Shares in an amount equal to two full years
dividends, the holders of Preferred Shares, voting as a separate class, are
entitled to elect (in addition to the two Directors named above) the smallest
number of additional Directors as is necessary to assure that a majority of the
Directors has been elected by the holders of Preferred Shares. If the Fund has
not so paid dividends, the terms of office of all persons who are Directors of
the Fund at the time of the commencement of a Voting Period will continue,
notwithstanding the election by the holders of the Preferred Shares of the
number of Directors that such holders are entitled to elect. The additional
Directors elected by the holders of the Preferred Shares, together with the
incumbent Directors, will constitute the duly elected Board of Directors of the
Fund. When all dividends in arrears on the Preferred Shares have been paid or
provided for, the terms of office of the additional Directors elected by the
holders of the Preferred Shares will terminate.
INFORMATION ABOUT THE NOMINEE FOR DIRECTOR AND CONTINUING DIRECTORS
Set forth below is the name and certain biographical and other information
for the nominee for Director and the Continuing Directors,* as reported by them
to the Fund:
CLASS I - NOMINEE FOR DIRECTOR WITH TERM EXPIRING IN 2005 (INTERESTED DIRECTOR)
PRINCIPAL OCCUPATION(S)
DURING THE PAST
NAME (AGE) AND ADDRESS POSITION(S) HELD WITH THE FUND FIVE YEARS
JAMES D. DONDERO (38)** President and Director since Since March 1993, President and
Two Galleria Tower July 2001 Chief Investment Officer of the
13455 Noel Road, Suite 1300 Adviser
Dallas, Texas 75240
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* Each Director and officer of the Fund serves in the same capacity with
respect to Prospect Street(R) High Income Portfolio Inc. ("Prospect Street
High Income Portfolio"), another registered investment company advised by
the Adviser.
** Mr. Dondero is deemed to be an "interested person" of the Fund under the
1940 Act because of his position with the Adviser.
CLASS II - CONTINUING DIRECTORS WITH TERMS EXPIRING IN 2003 (NON-INTERESTED DIRECTORS)
PRINCIPAL OCCUPATION(S)
DURING THE PAST
FIVE YEARS AND OTHER
NAME (AGE) AND ADDRESS POSITION(S) HELD WITH THE FUND DIRECTORSHIPS HELD
TIMOTHY K. HUI (53) Director since July 2001 Since September 1998, Director of Learning
(Preferred Shares Designee) Resources of the Philadelphia Biblical
48 Willow Greene Drive University; prior to September 1998,
Churchville, Pennsylvania 18966 Managing Partner of Hui & Malik, L.L.P.
(law firm)
SCOTT F. KAVANAUGH (41) Director since July 2001 Since January 2000, Executive Vice
(Common Stock Designee) President, Treasurer and Board Member of
One Venture, Suite 300 Commercial Capital Bank and, since April
E. Irvine, California 92618 1998, Managing Principal and Chief
Operating Officer of Financial Institutional
Partners Mortgage Company and the Managing
Principal and President of Financial
Institutional Partners, LLC (investment banking);
prior to April 1998, Managing Partner and
Director of Trade of Great Pacific Securities,
Inc. (investment banking)
CLASS III - CONTINUING DIRECTORS WITH TERMS EXPIRING IN 2004 (NON-INTERESTED DIRECTORS)
PRINCIPAL OCCUPATION(S)
DURING THE PAST
FIVE YEARS AND OTHER
NAME (AGE) AND ADDRESS POSITION(S) HELD WITH THE FUND DIRECTORSHIPS HELD
BRYAN A. WARD (43) Director since November 2001 Since 1999, Special Projects Advisor,
(Preferred Shares Designee) Contractor, Information Technology
901 Main Street consultant of Accenture, LLP; prior to 1999,
Dallas, Texas 75202 Vice President of Operations and founding
management team member of Quaris, Inc.
(online energy exchange and marketplace)
JAMES F. LEARY (71) Director since July 2001 Since January 1999, Managing Director of
(Common Stock Designee) Benefit Capital Southwest, Inc. (financial
2006 Peakwood Drive consulting); prior to January 1999, Vice
Garland, Texas 75044 Chairman, Finance and a Director of Search
Financial Services, Inc.; board member of
Associated Materials, Inc. (building product
manufacturer), Capstone funds (a family of
mutual funds consisting of nine investment
portfolios) and MESBIC Ventures, Inc.
(minority enterprise SBIC)
* * *
In addition to Mr. Dondero, the Fund's other executive officers are Mark K.
Okada and R. Joseph Dougherty. Set forth below is the name and certain
biographical and other information for Messrs. Okada and Dougherty as reported
by them to the Fund.
PRINCIPAL OCCUPATION(S)
DURING THE PAST
NAME (AGE) POSITION(S) HELD WITH THE FUND FIVE YEARS
MARK K. OKADA (38) Executive Vice President since Since 1993, Executive Vice President of
July 2001 the Adviser
R. JOSEPH DOUGHERTY (31) Senior Vice President, Since 1998, Portfolio Manager with the
Secretary and Treasurer since Adviser; prior to 1998, Investment
July 2001 Analyst with Sandera Capital Management
The address of Messrs. Okada and Dougherty is Two Galleria Tower, 13455
Noel Road, Suite 1300, Dallas, Texas 75240.
BENEFICIAL OWNERSHIP OF SHARES OF THE FUND AND PROSPECT STREET HIGH INCOME
PORTFOLIO
Set forth in the table below is the dollar range of Common Stock of the
Fund and the aggregate range of Common Stock of the Fund and Prospect Street
High Income Portfolio beneficially owned by each Director.
AGGREGATE DOLLAR RANGE OF COMMON
DOLLAR RANGE OF COMMON STOCK OF THE STOCK OF THE FUND AND PROSPECT STREET HIGH
DIRECTOR FUND* INCOME PORTFOLIO
James D. Dondero [ ] [Over $100,000]
Timothy K. Hui [ ] [$1 - $10,000]
Scott F. Kavanaugh [ ] [$10,001 - $50,000]
James F. Leary [ ] [$1 - $10,000]
Bryan A. Ward [-0-] [-0-]
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* Valued as of __________ __, 2002. Except as otherwise indicated, each
person has sole voting and investment power.
As of __________ __, 2002, Directors and officers of the Fund, as a group,
owned less than 1% of the Fund's outstanding Common Stock and did not own any
Preferred Shares.
During the fiscal year ended December 31, 2001, the Directors of the Fund
that are identified in the table set forth under "Remuneration of Directors and
Executive Officers" below met [two] times. [During that time, these Directors
attended all of the meetings of the Board held during the time they were
Directors.] The Board of Directors has two committees, the Audit Committee and
the Nominating Committee. Pursuant to the Audit Committee Charter adopted by the
Board (a copy of which is attached to this Proxy Statement as Appendix A), the
Audit Committee is responsible for conferring with the Fund's independent
auditors, reviewing the scope of and procedures for the year-end audit,
reviewing annual financial statements, and recommending the selection of the
Fund's independent auditors. In addition, the Audit Committee may address
questions arising with respect to the valuation of certain securities in the
Fund's portfolio. The Audit Committee currently is comprised of Messrs. Hui,
Kavanaugh, Leary and Ward, representing all of the Board members who are not
"interested persons" of the Fund under the 1940 Act. The Audit Committee members
are also "independent" under the listing standards of the New York Stock
Exchange. This Audit Committee met once in the fiscal year ended 2001, and each
Audit Committee member [was in attendance]. The report of the Audit Committee
for the fiscal year ended December 31, 2001 is attached as Appendix B to this
Proxy Statement. The Nominating Committee is currently comprised of all of the
Board members who are not "interested persons," and its function is to canvass,
recruit, interview, solicit and nominate for Director persons who would be not
be "interested persons" of the Fund under the 1940 Act. The Nominating Committee
does not consider nominees recommended by Fund stockholders. The Nominating
Committee met [once] in fiscal 2001, and each Nominating Committee member [was
in attendance].
REMUNERATION OF DIRECTORS AND EXECUTIVE OFFICERS
The executive officers of the Fund and those of its Directors who are
"interested persons" of the Fund do not receive any direct remuneration from the
Fund. Those Directors who are not interested persons are compensated at the rate
of $10,000 annually, plus $2,000 per Board of Directors' meeting attended in
person, or $1,000 per Directors' meeting attended by telephone, and are
reimbursed for actual out-of-pocket expenses relating to attendance at such
meetings. In addition, the members of the Fund's Audit Committee receive $1,000
for each Audit Committee meeting attended, together with actual out-of-pocket
expenses relating to attendance at such meetings.
The following table summarizes the compensation paid by the Fund to its
current Directors and the aggregate compensation paid by the Fund and Prospect
Street High Income Portfolio to these Directors during the year ended December
31, 2001.
AGGREGATE COMPENSATION FROM
THE FUND AND PROSPECT STREET HIGH INCOME
DIRECTOR COMPENSATION FROM THE FUND PORTFOLIO
James D. Dondero* -0- -0-
Timothy K. Hui $[ ] $29,167
Scott F. Kavanaugh $[ ] $29,167
James F. Leary $[ ] $29,167
Bryan A. Ward $[ ] $4,667
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* "Interested person" of the Fund under the 1940 Act.
SHARE OWNERSHIP AND CERTAIN BENEFICIAL OWNERS
To the Fund's knowledge, no person owned beneficially 5% or more of the
outstanding shares of Common Stock or Preferred Shares of the Fund as of the
Record Date, other than Cede & Co., which held of record _____% of the
outstanding shares of Common Stock and _____% of the outstanding Preferred
Shares. The Adviser beneficially owned _______ shares of Common Stock, or _____%
of the outstanding shares of Common Stock, as of the Record Date and did not own
any Preferred Shares.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
To the Fund's knowledge, all of its officers, Directors and holders of more
than 10% of its Common Stock complied with all filing requirements under Section
16(a) of the Securities Exchange Act of 1934, as amended, during the fiscal year
ended December 31, 2001, except for [Form 3 for Mr. Ward and the Adviser?]. In
making this disclosure, the Fund has relied solely on representations of its
current Directors, officers, and more than 10% holders and on copies of reports
that have been filed with the Securities and Exchange Commission.
REQUIRED VOTE
The election of the nominee for Director requires the affirmative vote of
the holders of a plurality of votes cast for the Common Stock and Preferred
Shares (voting together as a single class).
THE BOARD OF DIRECTORS, INCLUDING ALL OF THE NON-INTERESTED DIRECTORS,
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE NOMINEE FOR DIRECTOR.
PROPOSAL 2
APPROVAL OF AN AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION
This proposal involves an important amendment (the "Supermajority
Amendment") to the Fund's Articles of Incorporation (as amended or supplemented
to date, the "Articles of Incorporation"). The Fund believes that the most basic
characteristics of investment companies, such as their status as an open-end or
closed-end company, their investment objective and their investment
restrictions, policies and decisions, their continued existence, and any
contemplated business combinations, should be changed only with widespread
stockholder approval. With this principle in mind, this proposal would implement
mechanisms to protect stockholders from having their reasonable expectations
about the nature of the Fund and its operations nullified by the actions of a
single stockholder or group of stockholders.
The Supermajority Amendment would provide for the "supermajority" voting
described below to effect any of the following actions: (1) any amendment to the
Articles of Incorporation to make the Fund's shares "redeemable securities" or
to convert the Fund from a "closed-end company" to an "open-end company" (as
such terms are defined in the 1940 Act); (2) any stockholder proposal regarding
the Fund's investment objective or specific investment restrictions, policies or
decisions made or to be made with respect to the Fund's assets; (3) any proposal
as to the voluntary liquidation or dissolution of the Fund or any amendment to
the Articles of Incorporation to terminate the existence of the Fund; and (4) a
merger, consolidation, share exchange, the sale of all or substantially all of
the Fund's assets, or a similar business reorganization or combination.
If the Supermajority Amendment is approved by stockholders, the actions
described above will require the affirmative vote of at least 80% of the holders
of the Common Stock and Preferred Shares (voting together as a single class) and
by vote of at least 80% of the holders of the Preferred Shares (voting as a
separate class) and at least 80% of the entire Board of Directors, unless such
action had been approved, adopted or authorized by the affirmative vote of at
least 80% of the total number of Continuing Directors (as defined below). In
addition, further amendment of the Supermajority Amendment will also require the
supermajority voting described above to help prevent a simple majority of Fund
stockholders from taking control of the Board and then reducing the vote
required to implement these changes. "Continuing Directors" are those Directors
who have been Directors of the Fund since the effective date of the
Supermajority Amendment or who subsequently become Directors and whose election
is approved by a majority of the Continuing Directors then on the Board.
If one of these actions had been approved, adopted or authorized by the
affirmative vote of at least 80% of the total number of Continuing Directors, in
which case (A) for item (2) above, approval would require the affirmative vote
of the lesser of (a) 67% or more of the voting securities present or represented
by proxy, if the holders of more than 50% of outstanding voting securities are
present or represented by proxy, or (b) more than 50% of the outstanding voting
securities and (B) for items (1), (3) and (4) above, the affirmative vote of at
least a majority of the Fund's outstanding securities entitled to vote on the
matter, subject, in the case of both (A) and (B), to the Preferred Shares voting
both together with the Common Stock as a single class and as a separate class.
The Fund's By-Laws were amended and restated in full by the Board of
Directors at a meeting on March 15, 2002. At that meeting, the Board elected,
pursuant to Section 3-802 of the MGCL, to be subject to and include in its
By-Laws certain provisions permitted by the MGCL to deter attempts to obtain
control of the Fund as follows: (1) stockholders may require the Fund's
Secretary to call a special meeting of stockholders only on the request of the
stockholders entitled to cast at least a majority of all the votes entitled to
be cast at the meeting and only if the request states the matters proposed to be
acted upon and the requesting stockholders bear the costs of the Fund's
notification of each stockholder entitled to notice of the meeting; (2) the
number of Directors shall be fixed from time to time only by vote of the Board
of Directors; (3) the stockholders of the Fund may remove any Director only by
the affirmative vote of at least two-thirds (2/3) of all the votes entitled to
be cast by the stockholders generally in the election of Directors, and a
Director may not be removed without cause; and (4) each vacancy in the Board may
be filled by the affirmative vote of a majority of the remaining members in
office (even if less than a quorum) and the Director may hold office for the
full term of the class of Directors in which the vacancy occurred and until a
successor is elected and qualifies.
The effect of the Supermajority Amendment also would be to assure that any
proposal to modify certain key aspects of the Fund has widespread support of the
Board of Directors and stockholders before it could be implemented. These
provisions may have the effect of discouraging business combinations or attempts
to acquire control of the Fund, which attempts could have the effect of
increasing the expenses of the Fund and interfering with the normal operation of
the Fund. These provisions also make the removal of management more difficult.
They also promote continuity and stability, and they enhance the Fund's ability
to continue to pursue long-term strategies that are consistent with its
investment objective. However, these provisions could have the effect of
depriving stockholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund. In addition, holders of a minority of the total shares
outstanding and entitled to vote may have a veto power over matters which
management and/or a majority of the stockholders may believe is desirable and
beneficial. Specifically, because holders of the Preferred Shares will elect at
least two Directors (or a majority if the Fund does not pay dividends on the
Preferred Shares in an amount equal to two full years' dividends, as described
above) and will vote with the holders of Common Stockholders for an additional
Director, holders of Preferred Shares constituting a small percentage of total
shares outstanding may essentially have a veto power over matters supported by
the holders of Common Stock.
The Board of Directors has approved and recommends that stockholders
approve the Supermajority Amendment. A copy of the proposed Supermajority
Amendment, as approved by the Fund's Board, is set forth in Appendix C to this
Proxy Statement. The Board believes that the Supermajority Amendment is in the
best interests of the Fund and its stockholders.
Because the Board has determined that this Proposal 2 may involve an
amendment to the Articles of Incorporation that alters the contract rights of
the holders of Preferred Shares in a manner that would trigger the Appraisal
Rights (as defined below) provisions of the MGCL, holders of Preferred Shares
will be entitled to Appraisal Rights if they choose to exercise them. See
section entitled "Information on Appraisal Rights" below.
REQUIRED VOTE AND BOARD RECOMMENDATION
Approval of the foregoing proposal requires the affirmative vote of a
majority of the outstanding shares of Common Stock and Preferred Shares (voting
together as a single class) and the affirmative vote of a majority of the
outstanding Preferred Shares (voting as a separate class).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE ARTICLES OF INCORPORATION.
PROPOSAL 3
APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION TO REMOVE
STOCKHOLDER APPRAISAL RIGHTS
This proposal involves an amendment (the "Appraisal Amendment") to the
Articles of Incorporation that would explicitly provide that stockholders do not
have Appraisal Rights. This proposal would allow the Fund to take certain
actions without invoking the possibility that holders of Preferred Shares could
demand and receive the fair value of their stock from the Fund ("Appraisal
Rights") under Title 3 Subtitle 2 of the MGCL. Unless an exception applies or
the Articles of Incorporation provide otherwise (such as by adoption of the
Appraisal Amendment), Section 3-202 of the MGCL mandates Appraisal Rights in the
case of certain actions, including consolidations or mergers, share exchanges, a
transfer of assets, and changes to the Articles of Incorporation which alter
stockholders' contract rights. A stockholder's Appraisal Rights are invoked when
the Fund engages in certain activities defined in MGCL Section 3-202 and the
stockholder objects in proper form to those activities. Because Common Stock is
publicly traded on the New York Stock Exchange and may be readily disposed of at
market value, holders of Common Stock do not currently have Appraisal Rights.
The foregoing is only a summary of Appraisal Rights provisions in the MGCL.
Appendix D contains the complete text of Title 3 Subtitle 2 of the MGCL.
The proposed Appraisal Amendment to the Fund's Articles of Incorporation
will give the Fund additional flexibility to conduct its operations in the best
interest of the Fund and its stockholders without the additional expense and
added delay imposed by Appraisal Rights. Of course, any future amendments to the
Articles of Incorporation (or other actions that may have granted Appraisal
Rights under Title 3 Subtitle 2 of the MGCL) will continue to require
stockholder and Board approval to the extent required by law and the Fund's
Articles of Incorporation.
The Fund's Board has approved and recommends that stockholders approve the
Appraisal Amendment. A copy of the proposed Appraisal Amendment, as approved by
the Fund's Board, is set forth in Appendix C to this Proxy Statement. The Board
believes that the Appraisal Amendment is in the best interests of the Fund and
its stockholders.
Because the Board has determined that this Proposal 3 may involve an
amendment to the Articles of Incorporation that alters the contract rights of
the holders of Preferred Shares in a manner that would trigger the Appraisal
Rights provisions of the MGCL, holders of Preferred Shares will be entitled to
Appraisal Rights if they choose to exercise them. See the section entitled
"Information on Appraisal Rights" below.
REQUIRED VOTE AND BOARD RECOMMENDATION
Approval of the foregoing proposal requires the affirmative vote of a
majority of the outstanding shares of Common Stock and Preferred Shares (voting
together as a single class) and the affirmative vote of a majority of the
outstanding Preferred Shares (voting as a separate class).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE ARTICLES OF INCORPORATION.
INDEPENDENT PUBLIC AUDITORS
The 1940 Act requires that the Fund's independent auditors be selected by a
majority of those Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund. One of the purposes of the Audit Committee is to
recommend to the Fund's Board the selection, retention or termination of
independent auditors for the Fund. At a meeting held on December 7, 2001, the
Fund's Audit Committee recommended and the Fund's Board, including a majority of
those Directors who are not "interested persons" of the Fund (as defined in the
1940 Act), approved the selection of Deloitte & Touche LLP as the Fund's
independent accountants for the fiscal year ending December 31, 2002. [Deloitte
& Touche, a major international accounting firm, has acted as independent
auditors of the Fund since _______________]. A representative of Deloitte &
Touche will not be present at the Annual Meeting, but will be available by
telephone and will have an opportunity to make a statement (if the
representative so desires) and to respond to appropriate questions. After
reviewing the Fund's audited financial statements for the fiscal year ended
December 31, 2001, the Fund's Audit Committee recommended to the Fund's Board
that such statements be included in the Fund's Annual Report to Stockholders. A
copy of the Audit Committee's report is attached as Appendix B to this Proxy
Statement.
AUDIT FEES. For the fiscal year ended December 31, 2001, Deloitte & Touche
billed the Fund $______, for services rendered for the audit of the Fund's
annual financial statements.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION. For the fiscal
year ended December 31, 2001, Deloitte & Touche did not bill the Fund, the
Adviser, or any entity controlling, controlled by or under common control with
the Adviser for financial information systems design or implementation services.
ALL OTHER FEES. For the fiscal year ended December 31, 2001, Deloitte &
Touche billed the Fund did not bill the Fund, the Adviser, or any entity
controlling, controlled by or under common control with the Adviser for services
other than the audit services described above.
INFORMATION ON APPRAISAL RIGHTS
In respect of Proposal 2 or Proposal 3 (each, the "Proposal"), a holder of
Preferred Shares is entitled to demand and receive payment of the "fair value"
of his or her shares in cash, if he or she:
o prior to or at the Annual Meeting, files with the Fund a written objection
to the Proposal;
o does not vote in favor of the Proposal; and
o within 20 days after Articles of Amendment implementing the Proposal have
been accepted for record by the Maryland State Department of Assessments
and Taxation (the "SDAT"), makes a written demand on the Fund for payment
for his or her shares (a "Payment Demand") stating the number of shares and
class for which payment is demanded.
A written objection to the Proposal may be delivered to the Fund at the
Annual Meeting, or if sent prior thereto should be sent to the Fund at Two
Galleria Tower, 13455 Noel Road, Suite 1300, Dallas, Texas 75240[, Attn: R.
Joseph Dougherty]. A subsequent Payment Demand should be sent to the same
address. Any holder of Preferred Shares who fails to comply with the above
requirements will be bound by the terms of the Proposal. Under the MGCL, "fair
value" is determined as of the close of business on the day of the Annual
Meeting. Fair value does not include any appreciation or depreciation that
results, directly or indirectly, from the Proposal.
The Fund will promptly deliver or send by certified mail, return receipt
requested, to each holder of Preferred Shares who has properly filed a written
objection to a Proposal and not voted in its favor, written notice of the date
of acceptance of the Articles of Amendment by the SDAT. This notice may include
a written offer by the Fund to pay the objecting stockholder what the Fund
considers to be the "fair value" of his or her Preferred Shares. Within 50 days
after the acceptance of the Articles of Amendment by SDAT, the Fund or any
stockholder who has made a Payment Demand but has not received payment for his
or her shares may petition a court of equity in Baltimore City, Maryland for an
appraisal to determine the "fair value" of such shares. If the court finds that
the stockholder is entitled to appraisal of his or her stock, the court will
appoint three disinterested appraisers to determine the "fair value" of such
shares on terms and conditions the court considers proper.
The appraisers will, within 60 days after appointment (or such longer
period as the court may direct), file with the court and mail to each party
their report stating their conclusion as to the "fair value" of the shares.
Within 15 days after the filing of the report, any party may object to the
report and request a hearing. The court will, upon motion of any party, enter an
order either confirming, modifying or rejecting the report and, if confirmed or
modified, enter judgment directing the time within which payment must be made.
If the appraisers' report is rejected, the court may determine the "fair value"
of the shares of the Fund stockholder requesting appraisal or may remit the
proceeding to the same or other appraisers. Any judgment entered pursuant to a
court proceeding will include interest from the date of the Annual Meeting
unless the court finds that the stockholder's refusal to accept a written offer
to purchase the stock previously made by the Fund was arbitrary and vexatious or
not in good faith. The costs of the proceeding (not including attorneys' fees)
will be determined by the court and will be assessed against the Fund or, under
certain circumstances, the stockholder, or both.
At any time after the filing of a petition for appraisal, the court may
require a stockholder who has filed such petition to submit his or her
certificates (if shares are held in certificated form) representing shares to
the clerk of the court for notation of the pendency of the appraisal
proceedings. In order to receive payment, whether by agreement with the Fund or
pursuant to a judgment, the stockholder must surrender any stock certificates
endorsed in blank and in proper form for transfer. A stockholder who has made a
Payment Demand shall cease to have any rights as a stockholder, except the right
to receive the payment of the "fair value" of the shares. The rights of a
stockholder who has made a Payment Demand may be restored only upon: the
withdrawal, with the consent of the Fund, of the Payment Demand; the failure
both of the stockholder and the Fund to file a petition for appraisal within the
time required; the determination of the court that the stockholder is not
entitled to an appraisal; or the abandonment or rescission of the Proposal.
See Appendix D for the full text of Title 3 Subtitle 2 of the MGCL.
ANNUAL REPORT
COPIES OF THE FUND'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001 ARE AVAILABLE UPON REQUEST, WITHOUT CHARGE, BY WRITING TO
THE FUND AT TWO GALLERIA TOWER, 13455 NOEL ROAD, SUITE 1300, DALLAS,
TEXAS 75240, OR BY CALLING 1-877-532-2834.
OTHER MATTERS TO COME BEFORE THE ANNUAL MEETING
The Directors do not intend to present any other business at the Annual
Meeting nor are they aware that any stockholder intends to do so. If, however,
any other matters are properly brought before the Annual Meeting, the persons
named in the accompanying proxy will vote thereon in accordance with their
judgment.
STOCKHOLDER PROPOSALS
Any proposals of stockholders that are intended to be presented at the
Fund's 2003 Annual Meeting of Stockholders must be received at the Fund's
principal executive offices no later than [December 15, 2002] and must comply
with all other legal requirements in order to be included in the Fund's proxy
statement and forms of proxy for that meeting. The date after which notice of a
stockholder proposal submitted is considered untimely and persons holding
proxies will have discretionary voting authority over such proposals, except as
otherwise provided under applicable law, is [February 28, 2003].
By Order of the Board of Directors
/s/ JAMES D. DONDERO
James D. Dondero
President
Dallas, Texas
April __, 2002
APPENDIX A
PROSPECT STREET INCOME SHARES INC.
AUDIT COMMITTEE CHARTER
The Audit Committee shall consist of at least three members and shall be
composed entirely of independent directors, all of whom shall be financially
literate as determined by the Fund's Board in its business judgment, with at
least one member having accounting or related financial management expertise as
determined by the Fund's Board in its business judgment.
The purposes of the Audit Committee are:
o to oversee the Fund's accounting and financial reporting policies and
practices, its internal controls and, as appropriate, the internal
controls of certain service providers;
o to oversee the quality and objectivity of the Fund's financial
statements and the independent audit thereof; and
o to act as a liaison between the Fund's independent auditors and the
full Board of Directors.
The function of the Audit Committee is oversight. The Fund's management is
responsible for (1) the preparation, presentation and integrity of the Fund's
financial statements, (2) the maintenance of appropriate accounting and
financial reporting principles and policies and (3) the maintenance of internal
controls and procedures designed to assure compliance with accounting standards
and applicable laws and regulations. The auditors are responsible for planning
and carrying out a proper audit and reviews. In fulfilling their
responsibilities hereunder, it is recognized that members of the Audit Committee
are not full-time employees of the Fund and are not, and do not represent
themselves to be, accountants or auditors by profession or experts in the fields
of accounting or auditing. As such, it is not the duty or responsibility of the
Audit Committee or its members to conduct "field work" or other types of
auditing or accounting reviews or procedures. Each member of the Audit Committee
shall be entitled to rely on (i) the integrity of those persons and
organizations within and outside the Fund from which it receives information and
(ii) the accuracy of the financial and other information provided to the Audit
Committee by such persons and organizations absent actual knowledge to the
contrary (which shall be promptly reported to the Fund's Board). In addition,
the evaluation of the Fund's financial statements by the Audit Committee is not
of the same quality as audits performed by the independent auditors, nor does
the Audit Committee's evaluation substitute for the responsibilities of the
Fund's management for preparing, or the independent auditors for auditing, the
financial statements.
To carry out its purposes, the Audit Committee shall have the following duties
and powers:
o to recommend the selection, retention or termination of auditors and,
in connection therewith, to evaluate the independence of the auditors,
including whether the auditors provide any consulting services to the
Fund's investment adviser (it being understood that the auditors are
ultimately accountable to the Audit Committee and the Fund's Board and
that the Audit Committee and the Fund's Board shall have the ultimate
authority and responsibility to select, evaluate, retain and terminate
auditors, subject to any required stockholder vote);
o to ensure receipt of a formal written statement from the auditors on a
periodic basis specifically delineating all relationships between the
auditors and the Fund; to discuss with the auditors any disclosed
relationships or services that may impact the auditors' objectivity
and independence; and to recommend that the Fund's Board take
appropriate action in response to the auditors' report to satisfy
itself of the auditors' independence;
o to meet with the Fund's independent auditors, including private
meetings, as necessary (a) to review the arrangements for and scope of
the annual audit and any special audits; (b) to discuss any matters of
concern relating to the Fund's financial statements, including any
adjustments to such statements recommended by the auditors, or other
results of said audit(s); and (c) to consider the auditors' comments
with respect to the Fund's financial policies, procedures and internal
accounting controls and management's responses thereto;
o to consider the effect upon the Fund of any changes in accounting
principles or practices proposed by management or the auditors;
o to review the fees charged by the auditors for audit and non-audit
services;
o to investigate improprieties or suspected improprieties in Fund
operations; and
o to report its activities to the full Board on a periodic basis and to
make such recommendations with respect to the above and other matters
as the Audit Committee may deem necessary or appropriate.
The Audit Committee shall meet on a regular basis (typically, twice annually)
and is empowered to hold special meetings as circumstances require.
The Audit Committee shall regularly meet (typically, concurrently with the
regular Committee meetings) with the Fund's management.
The Audit Committee shall have the resources and authority appropriate to
discharge its responsibilities, including the authority to retain special
counsel and other experts or consultants at the expense of the Fund.
The Audit Committee shall review the adequacy of this Charter at least annually
and recommend any changes to the full Board. The Board also shall review and
approve this Charter at least annually.
With respect to any subsequent changes to the composition of the Audit
Committee, and otherwise approximately once each year, the Fund shall provide
the New York Stock Exchange written confirmation regarding:
o any determination that the Fund's Board has made regarding the
independence of directors pursuant to the New York Stock Exchange's
governance standards or applicable law;
o the financial literacy of the Audit Committee members;
o the determination that at least one of the Audit Committee members has
accounting or related financial management expertise; and
o the annual review and reassessment of the adequacy of the Audit
Committee Charter.
Adopted: Effective July 27, 2000, as amended September 7, 2001
APPENDIX B
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Fund's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the Audit
Committee reviewed the audited financial statements in the Annual Report with
management including a discussion of the quality, not just the acceptability, of
the accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Fund's
accounting principles and such other matters as are required to be discussed
with the Audit Committee under generally accepted auditing standards. In
addition, the Audit Committee has discussed with the independent auditors the
auditors' independence from management and the Fund including the matters in the
written disclosures required by the Independence Standards Board.
The Audit Committee discussed with the Fund's independent auditors the
overall scope and plans for the audits. The Audit Committee meets with the
independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Fund's internal
controls, and the overall quality of the Fund's financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report to
Stockholders for the year ended December 31, 2001. The Audit Committee and the
Board have also approved the Fund's independent auditors.
Scott F. Kavanaugh, Audit Committee Chair
Timothy K. Hui, Audit Committee Member
James F. Leary, Audit Committee Member
Bryan A. Ward, Audit Committee Member
March 2002
APPENDIX C
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PROSPECT STREET(R)INCOME SHARES INC.
-----------------------
PROSPECT STREET(R)INCOME SHARES INC., a corporation organized and existing
under the laws of the State of Maryland (the "Corporation"), hereby certifies as
follows:
FIRST: The Articles of Incorporation of the Corporation are hereby amended
by deleting in its entirety Article EIGHTH and inserting in lieu thereof the
following:
EIGHTH: Voting Rights.
1. The Corporation reserves the right from time to time to make any
amendments of the Charter which may now or hereafter be authorized by
law, including any amendments changing the terms or contract rights,
as expressly set forth in the Charter, of any of its outstanding stock
by classification, reclassification or otherwise; provided, however,
that (1) any amendment to the Charter to make the Corporation's shares
"redeemable securities" or to convert the Corporation from a
"closed-end company" to an "open-end company" (as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act")); (2) any stockholder proposal regarding the Corporation's
investment objective or specific investment restrictions, policies or
decisions made or to be made with respect to the Corporation's assets;
(3) any proposal as to the voluntary liquidation or dissolution of the
Corporation or any amendment to the Charter to terminate the existence
of the Corporation; (4) a merger, consolidation, share exchange, sale
of all or substantially all of the Corporation's assets, or a similar
business reorganization or combination; or (5) any amendment to this
Article EIGHTH of the Charter, must be authorized by (a) not less than
80% of the aggregate votes entitled to be cast thereon (by vote of the
holders of the outstanding securities voting together as a single
class and by vote of the holders of any preferred stock outstanding
voting as a separate class) and (b) at least 80% of the entire Board
of Directors, unless (c) such action had been approved, adopted or
authorized by the affirmative vote of at least 80% of the total number
of Continuing Directors (as defined below), in which case (i) for item
(2) above, approval would require the affirmative vote of the lesser
of (I) 67% or more of the voting securities present or represented by
proxy, if the holders of more than 50% of outstanding voting
securities are present or represented by proxy, and (II) more than 50%
of the outstanding voting securities and (ii) for items (1), (3), (4)
and (5) above, the affirmative vote of at least a majority of the
Fund's outstanding securities entitled to vote on the matter, subject,
in the case of both (I) and (II), to the preferred stock voting both
with the Common Stock as a single class and as a separate class, as
described above. "Continuing Directors" are those Directors who have
been Directors of the Corporation since May 31, 2002 or who
subsequently become Directors and whose election is approved by a
majority of the Continuing Directors then on the Board of Directors.
2. Except as set forth in Section 1 above, and notwithstanding any
provision of law requiring the authorization of any action by a
proportion greater than a majority of the total number of outstanding
shares of all classes or series of capital stock or of the total
number of outstanding shares of any class or series of capital stock
entitled to vote as a separate class or series, such action shall be
valid and effective if authorized by the affirmative vote of the
holders of a majority of the total number of outstanding shares of all
classes or series outstanding and entitled to vote thereon or of the
class or series entitled to vote thereon as a separate class or
series, as the case may be, except as otherwise provided in the
Charter. The holders of the Corporation's common stock and the holders
of the Corporation's preferred stock shall vote as separate classes to
the extent otherwise required under Maryland law or the 1940 Act or
the Charter of the Corporation.
SECOND: The Articles of Incorporation of the Corporation are hereby amended
by adding Article THIRTEENTH as follows:
THIRTEENTH: Appraisal Rights.
Stockholders of the Corporation are not entitled to exercise
rights of an objecting stockholder under Title 3 Subtitle 2 of the
Maryland General Corporation Law or any successor provision.
THIRD: This amendment does not increase the authorized stock of the
Corporation.
FOURTH: The foregoing amendment to the Charter of the Corporation has been
advised by the Board of Directors and approved by the stockholders of the
Corporation.
IN WITNESS WHEREOF, PROSPECT STREET INCOME SHARES INC. has caused these
Articles of Amendment to be signed in its name and on its behalf by its
President and witnessed by its Secretary as of this ___ day of __________, 2002.
PROSPECT STREET
INCOME SHARES INC.
By: ____________________________________
[Name]
President
WITNESS:
_______________________
[Name]
Secretary
THE UNDERSIGNED, President of PROSPECT STREET INCOME SHARES INC., who
executed on behalf of the Corporation the foregoing Articles of Amendment,
acknowledges the Articles of Amendment to be the corporate act of the
Corporation and hereby certifies to the best of his knowledge, information, and
belief that the matters and facts set forth herein with respect to the
authorization and approval thereof are true in all material respects under the
penalties of perjury.
--------------------------------
President
APPENDIX D
TITLE 3 SUBTITLE 2 OF THE MARYLAND GENERAL CORPORATION LAW--RIGHTS OF
OBJECTING SHAREHOLDERS
3-201 DEFINITION.--(a) In this subtitle, except as provided in subsection (b) of
this section, "successor" includes a corporation which amends its charter in a
way which alters the contract rights, as expressly set forth in the charter, of
any outstanding stock, unless the right to do so is reserved by the charter of
the corporation.
(b) When used with reference to a share exchange, "successor" means the
corporation the stock of which was acquired in the share exchange.
3-202 RIGHT TO FAIR VALUE OF STOCK.--(a) Except as provided in subsection (c) of
this section, a stockholder of a Maryland corporation has the right to demand
and receive payment of the fair value of the stockholder's stock from the
successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under Section 3-105(e) of this title;
(4) corporation amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholders rights,
unless the right to do so is reserved by the charter of the
corporation; or
(5) The transaction is governed by Section 3-602 of this title or exempted
by Section 3-603(b) of this title.
(b) (1) Fair value is determined as of the close of business:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, on the day notice is given or waived under Section
3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value may
not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its
proposal.
(3) In any transaction governed by Section 3-602 of this title or exempted
by Section 3-603(b) of this title, fair value shall be value
determined in accordance with the requirements of Section 3-603(b) of
this title.
(c) Unless the transaction is governed by Section 3-602 of this title or is
exempted by Section 3-603(b) of this title, a stockholder may not demand
the fair value of the stockholder's stock and is bound by the terms of the
transaction if:
(1) The stock is listed on a national securities exchange, is designated
as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc., or is
designated for trading on the NASDAQ small cap market:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, on the date notice is given or waived under Section
3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction
objected to;
(2) The stock is that of the successor in a merger; unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the
right to do so; or
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the
successor or cash, scrip, or other rights or interests arising
out of provisions for the treatment of fractional shares of stock
in the successor;
(3) The stock is not entitled to be voted on the transaction or the
stockholder did not own the shares of stock on the record date for
determining stockholders entitled to vote on the transaction;
(4) The charter provides that the holders of the stock are not entitled to
exercise the rights of an objecting stockholder under this subtitle;
or
(5) The stock is that of an open-end investment company registered with
the Securities and Exchange Commission under the Investment Company
Act of 1940 and the value placed on the stock in the transaction is
its net asset value.
3-203 PROCEDURE BY STOCKHOLDER.--(a) A stockholder of a corporation who desires
to receive payment of the fair value of the stockholder's stock under this
subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under Section 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent
corporation, within 30 days after notice is given or waived under
Section 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered
or, in the case of action taken under Section 2-505(b) of this
article, within 10 days after the corporation gives the notice
required by Section 2-505(b) of this article;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for the
stockholder's stock, stating the number and class of shares for which
the stockholder demands payment.
(b) A stockholder who fails to comply with this section is bound by the terms
of the consolidation, merger, share exchange, transfer of assets, or
charter amendment.
3-204 EFFECT OF DEMAND ON DIVIDEND AND OTHER RIGHTS.--A stockholder who demands
payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under
Section 3-202 of this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that stock,
except the right to receive payment of its fair value.
3-205 WITHDRAWAL OF DEMAND.--A demand for payment may be withdrawn only with the
consent of the successor.
3-206 RESTORATION OF DIVIDEND AND OTHER RIGHTS.--(a) The rights of a stockholder
who demands payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief; or
(4) The transaction objected to is abandoned or rescinded.
(b) The restoration of a stockholder's rights entitles him to receive the
dividends, distributions, and other rights he would have received if he had
not demanded payment for his stock. However, the restoration does not
prejudice any corporate proceedings taken before the restoration.
3-207 PROCEDURE BY SUCCESSOR.--(a) (1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each
offer shall be accompanied by the following information relating to
the corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before the
date of the offer;
(ii) A profit and loss statement for the 12 months ending on the date
of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) The successor shall deliver the notice and offer to each objecting
stockholder personally or mail them to him by registered mail at the
address he gives the successor in writing, or, if none, at his address as
it appears on the records of the corporation which issued the stock.
3-208 PETITION FOR APPRAISAL; CONSOLIDATION OF PROCEEDINGS; JOINDER OF
OBJECTORS.--(a) Within 50 days after the Department accepts the articles for
record, the successor or an objecting stockholder who has not received payment
for his stock may petition a court of equity in the county where the principal
office of the successor is located or, if it does not have a principal office in
this State, where the resident agent of the successor is located, for an
appraisal to determine the fair value of the stock.
(b) (1) If more than one appraisal proceeding is instituted, the court shall
direct the consolidation of all the proceedings on terms and
conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
3-209 CERTIFICATE MAY BE NOTED.--(a) At any time after a petition for appraisal
is filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) If any stock represented by a certificate which bears a notation is
subsequently transferred, the new certificate issued for the stock shall
bear a similar notation and the name of the original objecting stockholder.
The transferee of this stock does not acquire rights of any character with
respect to the stock other than the rights of the original objecting
stockholder.
3-210 APPRAISAL OF FAIR VALUE.--(a) If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Within 60 days after their appointment, unless the court sets a longer
time, the appraisers shall determine the fair value of the stock as of the
appropriate date and file a report stating the conclusion of the majority
as to the fair value of the stock.
(c) The report shall state the reasons for the conclusion and shall include a
transcript of all testimony and exhibits offered.
(d) (1) On the same day that the report is filed, the appraisers shall mail a
copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it
and request a hearing.
3-211 CONSIDERATION BY COURT OF APPRAISERS' REPORT.--(a) The court shall
consider the report and, on motion of any party to the proceeding, enter an
order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) (1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair
value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
(c) (1) Except as provided in paragraph (2) of this subsection, a judgment for
the stockholder shall award the value of the stock and interest from
the date as to which fair value is to be determined under Section
3-202 of this subtitle, and
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under Section 3-207
of this subtitle was arbitrary and vexatious or not in good faith. In
making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(d) (1) The costs of the proceedings, including reasonable compensation and
expenses of the appraisers, shall be set by the court and assessed
against the successor. However, the court may direct the costs to be
apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for
the stock made under Section 3-207 of this subtitle was arbitrary and
vexatious or not in good faith. In making this finding, the court
shall consider:
(i) The price which the successor offered for the stock;
(ii) the financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable fees
and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under Section
3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) The judgment is final and conclusive on all parties and has the same force
and effect as other decrees in equity. The judgment constitutes a lien on
the assets of the successor with priority over any mortgage or other lien
attaching on or after the effective date of the consolidation, merger,
transfer, or charter amendment.
3-212 SURRENDER OF STOCK.--The successor is not required to pay for the stock of
an objecting stockholder or to pay a judgment rendered against it in a
proceeding for an appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
3-213 RIGHTS OF SUCCESSOR WITH RESPECT TO STOCK.--(a) A successor which acquires
the stock of an objecting stockholder is entitled to any dividends or
distributions payable to holders of record of that stock on a record date after
the close of business on the day as at which fair value is to be determined
under Section 3-202 of this subtitle.
(b) After acquiring the stock of an objecting stockholder, a successor in a
transfer of assets may exercise all the rights of an owner of the stock.
(c) Unless the articles provide otherwise stock in the successor of a
consolidation, merger, or share exchange otherwise deliverable in exchange
for the stock of an objecting stockholder has the status of authorized but
unissued stock of the successor. However, a proceeding for reduction of the
capital of the successor is not necessary to retire the stock or to reduce
the capital of the successor represented by the stock.
-----------------------------------------------
PROSPECT STREET INCOME SHARES INC.
-----------------------------------------------
Common Stock
Mark box at right if an address or comment has been noted on the reverse side of
this card. /__/
CONTROL NUMBER:
Please be sure to sign and date this proxy. Date: ______________
_____________________________________________________________________________
Stockholder sign here Co-owner sign here
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE
1. With respect to the proposal to elect Mr. James D. Dondero as a Director.
For /_/ Withhold Authority /_/
2. With respect to the proposal to amend the Fund's Articles of Incorporation to
provide for a "supermajority" vote of the Board of Directors and the
stockholders to change certain key aspects of the Fund.
For /_/ Against /_/ Abstain /_/
3. With respect to the proposal to amend the Fund's Articles of Incorporation to
remove stockholder appraisal rights.
For /_/ Against /_/ Abstain /_/
4. In their discretion, on such other matters as may properly come before the
meeting and any adjournment thereof.
RECORD DATE SHARES:
PROSPECT STREET INCOME SHARES INC.
ANNUAL MEETING OF STOCKHOLDERS - MAY 17, 2002
COMMON STOCK PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
The undersigned holder of Common Stock of Prospect Street Income Shares Inc., a
Maryland corporation (the "Fund"), hereby appoints Mark K. Okada and R. Joseph
Dougherty, and each of them, with full power of substitution and revocation, as
proxies to represent the undersigned at the Annual Meeting of Stockholders of
the Fund to be held at The University Club of Dallas, at 13350 Dallas Parkway,
Suite 4000, Dallas, Texas 75240, on Friday, May 17, 2002, at 10:00 a.m., and at
any and all adjournments thereof, and thereat to vote all shares of Common Stock
of the Fund which the undersigned would be entitled to vote, with all powers the
undersigned would possess if personally present, in accordance with the
instructions on this proxy.
THIS PROXY IS SOLICITED BY THE FUND'S BOARD OF DIRECTORS AND WILL BE VOTED FOR
THE PROPOSALS UNLESS OTHERWISE INDICATED. BY SIGNING THIS PROXY CARD, RECEIPT OF
THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND PROXY STATEMENT IS ACKNOWLEDGED.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.
Please sign exactly as name or names appear on this proxy. If stock is held
jointly, each holder should sign. If signing as attorney, trustee,
executor, administrator, custodian, guardian or corporate officer, please
give full title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
_______________________________ ________________________________
_______________________________ ________________________________
-----------------------------------------------
PROSPECT STREET INCOME SHARES INC.
-----------------------------------------------
Preferred Shares
Mark box at right if an address or comment has been noted on the reverse side of
this card. /__/
CONTROL NUMBER:
Please be sure to sign and date this proxy. Date: ______________
_____________________________________________________________________________
Stockholder sign here Co-owner sign here
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE
1. With respect to the proposal to elect Mr. James D. Dondero as a Director:
For /_/ Withhold Authority /_/
2. With respect to the proposal to amend the Fund's Articles of Incorporation to
provide for a "supermajority" vote of the Board of Directors and the
stockholders to change certain key aspects of the Fund.
For /_/ Against /_/ Abstain /_/
3. With respect to the proposal to amend the Fund's Articles of Incorporation to
remove stockholder appraisal rights.
For /_/ Against /_/ Abstain /_/
4. In their discretion, on such other matters as may properly come before the
meeting and any adjournment thereof.
RECORD DATE SHARES:
PROSPECT STREET INCOME SHARES INC.
ANNUAL MEETING OF STOCKHOLDERS - MAY 17, 2002
PREFERRED SHARES PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
The undersigned holder of Preferred Shares of Prospect Street Income Shares
Inc., a Maryland corporation (the "Fund"), hereby appoints Mark K. Okada and R.
Joseph Dougherty, and each of them, with full power of substitution and
revocation, as proxies to represent the undersigned at the Annual Meeting of
Stockholders of the Fund to be held at The University Club of Dallas, at 13350
Dallas Parkway, Suite 4000, Dallas, Texas 75240, on Friday, May 17, 2002, at
10:00 a.m., and at any and all adjournments thereof, and thereat to vote all
Preferred Shares of the Fund which the undersigned would be entitled to vote,
with all powers the undersigned would possess if personally present, in
accordance with the instructions on this proxy.
THIS PROXY IS SOLICITED BY THE FUND'S BOARD OF DIRECTORS AND WILL BE VOTED FOR
THE PROPOSALS UNLESS OTHERWISE INDICATED. BY SIGNING THIS PROXY CARD, RECEIPT OF
THE ACCOMPANYING NOTICE OF ANNUAL MEETING AND PROXY STATEMENT IS ACKNOWLEDGED.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE
ENCLOSED ENVELOPE.
Please sign exactly as name or names appear on this proxy. If stock is held
jointly, each holder should sign. If signing as attorney, trustee,
executor, administrator, custodian, guardian or corporate officer, please
give full title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
_______________________________ ________________________________
_______________________________ ________________________________