As filed with the Securities and Exchange Commission on October 2, 2003
Securities Act File No. 333-106081
Investment Company Act File No. 811-4700
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM N-2
________________________
[X] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 3
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940
[X] Amendment No. 34
(Check Appropriate Box or Boxes)
________________________
THE GABELLI EQUITY TRUST INC.
(Exact Name of Registrant as Specified in Charter)
________________________
One Corporate Center
Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100 (Name and Address of Agent for Service)
________________________
Copies to:
Richard T. Prins, Esq. James McKee, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, The Gabelli Global Simpson Thacher &
Meagher & Flom LLP Equity Trust Inc. Bartlett LLP
Four Times Square One Corporate Center 425 Lexington Avenue
New York, New York 10036 Rye, New York 10580-1422 New York, New York 10017
(212) 735-3000 (914) 921-5100 (212) 455-2000
________________________
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, as amended, other than securities offered in connection with a
dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective
(check appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is [ ].
________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==========================================================================================================
Proposed
Proposed Maximum
Maximum Aggregate
Amount Being Offering Price Offering Amount of
Title of Securities Registered Per Share Price Registration Fee (1)
------------------- ---------- --------- --------- ----------------
___% Series D Cumulative 3,000,000 Shares $25 $75,000,000 $5,945.50
Preferred Stock
Series E Auction Rate Cumulative 2,000 Shares $25,000 $50,000,000 $3,815.00
Preferred Stock
(1) $322 previously paid
________________________
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
==========================================================================================================
ii
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
-------------------------------------------------------------------------------------------------------------------
PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page............................................. Outside FrontCover Page;
Inside Front Cover Page
3. Fee Table and Synopsis............................. Not Applicable
4. Financial Highlights............................... Financial Highlights
5. Plan of Distribution............................... Outside Front Cover Page; Summary;
Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Use of Proceeds; Investment Objectives and
Policies
8. General Description of the
Registrant....................................... Outside Front Cover Page; Summary; The Fund;
Investment Objectives and Policies; Risk Factors
& Special Considerations; How the Fund
Manages Risk; Description of Series D Preferred
and Series E Auction Rate Preferred; Anti-
takeover Provisions of the Charter and By-Laws
9. Management......................................... Outside Front Cover Page; Summary;
Management of the Fund; Custodian, Transfer
Agent, Auction Agent and Dividend-Disbursing
Agent
10. Capital Stock, Long-Term Debt,
and Other Securities............................. Outside Front Cover Page; Summary; Investment
Objectives and Policies; Description of Series D
Preferred and Series E Auction Rate Preferred;
Description of Capital Stock and Other Securities;
Taxation; Anti-takeover Provisions of the Charter
and By-Laws
iii
11. Defaults and Arrears on Senior
Securities....................................... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement
of Additional Information........................ Table of Contents of the Statement of Additional
Information
PART B Location in Statement of
Additional Information
-------------------------------------------------------------------------------------------------------------------
14. Cover Page......................................... Outside Front Cover Page
15. Table of Contents.................................. Outside Front Cover Page
16. General Information and History.................... The Fund
17. Investment Objectives and
Policies......................................... Investment Objectives and Policies;
Investment Restrictions
18. Management......................................... Management of the Fund
19. Control Persons and Principal
Holders of Securities............................ Management of the Fund; Beneficial Owners
20. Investment Advisory and Other
Services......................................... Management of the Fund
21. Brokerage Allocation and Other
Practices........................................ Portfolio Transactions
22. Tax Status......................................... Taxation
23. Financial Statements............................... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
iv
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 1, 2003
PROSPECTUS $125,000,000 [GABELLI LOGO]
The Gabelli
Equity Trust Inc.
3,000,000 Shares, [__]% Series D Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
2,000 Shares, Series E Auction Rate Cumulative Preferred Stock
(Liquidation Preference $25,000 per Share)
The Gabelli Equity Trust Inc., or the Fund, is a closed-end,
non-diversified management investment company that has a primary investment
objective of long-term growth of capital and a secondary investment objective
of income. The Fund's investments are selected by its Investment Adviser,
Gabelli Funds, LLC. The Fund invests primarily in equity securities including
common stock, preferred stock, convertible or exchangeable securities and
warrants and rights to purchase such securities. We cannot assure you that the
Fund's objectives will be achieved.
This prospectus describes shares of the Fund's [__]% Series D
Cumulative Preferred Stock (the "Series D Preferred"), liquidation preference
$25 per share. Dividends on shares of the Series D Preferred are cumulative
from such original issue date at the annual rate of [__]% of the liquidation
preference of $25 per share and are payable on March 26, June 26, September 26
and December 26 in each year, commencing on [__], 2003.
This prospectus also describes shares of the Fund's Series E Auction
Rate Cumulative Preferred Stock (the "Series E Auction Rate Preferred"),
liquidation preference $25,000 per share. The dividend rate for the Series E
Auction Rate Preferred will vary from dividend period to dividend period. The
annual dividend rate for the initial dividend period for the Series E Auction
Rate Preferred will be [__]% of the liquidation preference of $25,000 per
share. The initial dividend period is from the date of issuance through [__],
2003. For subsequent dividend periods, the Series E Auction Rate Preferred
will pay dividends based on a rate set at auction, usually held weekly.
The Fund offers by this prospectus, in the aggregate, $125 million
of preferred stock of either Series D Preferred, or Series E Auction Rate
Preferred, or a combination of both series.
Investing in our Series D Preferred or Series E Auction Rate
Preferred involves risks. See "Risk Factors and Special Considerations"
beginning on page 31.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
Series E
Series D Auction Rate
Preferred Preferred
Per Share Total Per Share Total
--------- ----- --------- -----
Public Offering Price(1) $ 25.00 $ $ 25,000 $
Underwriting Discount(2) $ $ $ $
Proceeds to the Fund
(before expenses)(3) $ $ $ $
(1) Plus accumulated dividends, if any, from [__] , 2003.
(2) The Fund and the Investment Adviser have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(3) Offering expenses payable by the Fund are estimated at $ [__].
_________________
Citigroup Merrill Lynch & Co.
Gabelli & Company, Inc.
[__], 2003
v
(Continued from previous page)
The shares of Series D Preferred and/or Series E Auction Rate
Preferred being offered by this prospectus are being offered by the
underwriters listed in this prospectus, subject to prior sale, when, as and if
accepted by them and subject to certain conditions. The Fund expects that
delivery of any shares of Series D Preferred or Series E Auction Rate
Preferred will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC") on or about [__], 2003.
Application will be made to list the Series D Preferred on the New
York Stock Exchange. If offered, trading of the Series D Preferred on the New
York Stock Exchange is expected to commence within 30 days of the date of this
prospectus. Prior to this offering, there has been no public market for the
Series D Preferred. See "Underwriting."
The Series E Auction Rate Preferred will not be listed on an
exchange. Investors may only buy or sell Series E Auction Rate Preferred
through an order placed at an auction with or through a broker-dealer in
accordance with the procedures specified in this prospectus or in a secondary
market maintained by certain broker-dealers should those broker-dealers decide
to maintain a secondary market. Broker-dealers are not required to maintain a
secondary market in the Series E Auction Rate Preferred and a secondary market
may not provide you with liquidity.
The net proceeds of the offering, which are expected to be [__], will
be invested in accordance with the Fund's investment objectives and policies.
See "Investment Objectives and Policies" beginning on page 26.
The Fund expects that dividends paid on the Series D Preferred and
Series E Auction Rate Preferred will consist of (i) long- term capital gain
(gain from the sale of a capital asset held longer than 12 months), (ii)
qualified dividend income (income from domestic and certain foreign
corporations), and (iii) investment company taxable income (other than
qualified dividend income, including short-term capital gain and interest
income and non-qualified dividend income). For individuals, the maximum
federal income tax rate on long-term capital gains is currently 15%, on
qualified dividend income is 15%, and on other types of income is 35%. These
tax rates are scheduled to apply through 2008. Over the past three years,
approximately 89% of the Fund's distributions to stockholders consisted of
long-term capital gain and, of the remaining 11% distributed to stockholders,
68% would have, under the current tax provisions, constituted qualified
dividend income taxable at the 15% rate. Over the last one year, approximately
93% of the Fund's distributions to stockholders consisted of long-term capital
gain and, of the remaining 7% distributed to stockholders, approximately 99%
would have, under the current tax provisions, constituted qualified dividend
income taxable at the 15% rate.We cannot assure you, however, as to what
percentage of the dividends paid on the Series D Preferred or Series E Auction
Rate Preferred will consist of long-term capital gains and qualified dividend
income, which are currently taxed at lower rates for individuals than ordinary
income. For a more detailed discussion, see "Taxation."
Neither the Series D Preferred nor the Series E Auction Rate
Preferred may be issued unless it is rated "Aaa" by Moody's. In addition, the
Series E Auction Rate Preferred may not be issued unless it is also rated
"AAA" by S&P. In order to keep these ratings, the Fund will be required to
maintain a minimum discounted asset coverage with respect to its outstanding
Series D Preferred and Series E Auction Rate Preferred under guidelines
established by each of Moody's and S&P. See "Description of the Series D
Preferred and Series E Auction Rate Preferred -- Rating Agency Guidelines."
The Fund is also required to maintain a minimum asset coverage by the
Investment Company Act of 1940, as amended. If the Fund fails to maintain any
of these minimum asset coverage requirements, the Fund can at its option (and
in certain circumstances must) require, in accordance with its Charter and the
requirements of the Investment Company Act of 1940, as amended, that some or
all of its outstanding preferred stock, including the Series D Preferred
and/or Series E Auction Rate Preferred, be redeemed. Otherwise, prior to [__],
2008 the Series D Preferred will be redeemable at the option of the Fund only
to the extent necessary for the Fund to continue to qualify for tax treatment
as a regulated investment company. Subject to certain notice and other
requirements (including those set forth in Section 23(c) of the Investment
Company Act of 1940, as amended), the Fund at its option may redeem (i) the
Series D Preferred beginning on [__], 2008 and (ii) the Series E Auction Rate
Preferred following the initial dividend period (so long as the Fund has not
designated a non-call period). In the event the Fund redeems the Series D
Preferred, such redemption will be for cash at a redemption price equal to $25
per share plus accumulated but unpaid dividends (whether or not earned or
declared) to the date of redemption. In the event the Fund redeems the Series
E Auction Rate Preferred, such redemptions will be for cash, generally at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared), though in limited circumstances
the Fund's Board of Directors may also declare a redemption premium. See
"Description of Series D Preferred and Series E Auction Rate Preferred -
Redemption."
This prospectus concisely sets forth important information about the
Fund that you should know before deciding whether to invest in Series D
Preferred or Series E Auction Rate Preferred. You should read this prospectus
and retain it for future reference.
The Fund has also filed with the Securities and Exchange Commission a
Statement of Additional Information, dated [__], 2003, which contains
additional information about the Fund. The Statement of Additional Information
is incorporated by reference in its entirety into this prospectus. You can
review the table of contents of the Statement of Additional Information on
page [__] of this prospectus. You may request a free copy of the Statement of
Additional Information by writing to the Fund at its address at One Corporate
Center, Rye, New York 10580-1422 or calling the Fund toll-free at (800)
422-3554. You may also obtain the Statement of Additional Information as well
as reports, proxy and information statements and other information regarding
registrants, including the Fund, that file electronically with the Securities
and Exchange Commission on the Securities and Exchange Commission's web site
(http://www.sec.gov).
vi
Certain persons participating in the offering of the Series D
Preferred, in the event any is offered, may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Series D
Preferred, including the entry of stabilizing bids, syndicate covering
transactions or the imposition of penalty bids. For a description of these
activities, see "Underwriting."
vii
You should rely only on the information contained in or incorporated
by reference into this prospectus. Neither the Fund nor the underwriters have
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. Neither the Fund nor the underwriters are making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
TABLE OF CONTENTS
Page
----
Summary................................................................ 2
Financial Highlights................................................... 20
Use of Proceeds........................................................ 23
The Fund............................................................... 25
Capitalization......................................................... 26
Investment Objectives and Policies..................................... 31
Risk Factors and Special Considerations................................ 37
How the Fund Manages Risk.............................................. 38
Management of the Fund................................................. 41
Portfolio Transactions................................................. 41
Dividends and Distributions............................................ 41
Description of Series D Preferred and Series E Auction Rate Preferred.. 43
The Auction of Series E Auction Rate Preferred......................... 54
Description of Capital Stock and Other Securities...................... 57
Taxation............................................................... 59
Anti-takeover Provisions of the Charter and By-Laws.................... 61
Custodian, Transfer Agent, Auction Agent and
Dividend-Disbursing Agent..................................... 63
Underwriting........................................................... 64
Legal Matters.......................................................... 66
Experts................................................................ 66
Additional Information................................................. 67
Special Note Regarding Forward-Looking Statements...................... 67
Table of Contents of SAI............................................... 68
Appendix A............................................................. A-1
viii
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SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and the Statement of Additional Information,
dated [__], 2003 (the "SAI").
The Fund................................ The Fund is a closed-end, non-diversified, management investment
company that has been in operation since August 21, 1986. The Fund
was incorporated in Maryland on May 20, 1986. The Fund's
outstanding shares of common stock, par value $.001 per share, are
listed and traded on the New York Stock Exchange ("NYSE"). As of
September 15, 2003, the sum of the net assets of the Fund plus the
liquidation value of the Fund's outstanding preferred stock ($295
million) was approximately $1,253 million. As of September 15, 2003,
the Fund had outstanding 136,014,878 shares of common stock,
6,600,000 shares of the 7.20% Tax Advantaged Series B Cumulative
Preferred Stock (the "Series B Preferred") and 5,200 shares of the
Series C Auction Rate Cumulative Preferred Stock (the "Series C
Auction Rate Preferred"). The Fund completed its redemption of 100%
of its outstanding 7.25% Tax Advantaged Cumulative Preferred Stock
(the "Series A Preferred") on June 17, 2003. The Series B Preferred
and the Series C Auction Rate Preferred have the same seniority with
respect to dividends and liquidation preference.
The Offering............................ The Fund offers by this prospectus, in the aggregate, $125 million
of preferred stock of either Series D Preferred or Series E Auction
Rate Preferred, or a combination of both such series. The Series D
Preferred and/or Series E Auction Rate Preferred are being offered
by Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Gabelli & Company, Inc., as underwriters.
Upon issuance, the Series D Preferred and the Series E Auction Rate
Preferred will have equal seniority with respect to dividends and
liquidation preference to the Fund's other outstanding preferred
stock. See "Description of the Series D Preferred and Series E
Auction Rate Preferred."
Series D Preferred. The Fund is offering 3,000,000 shares of Series D
Preferred, par value $.001 per share, liquidation preference of $25
per share, at a purchase price of $25 per share plus dividends, if
any, that have accumulated from the commencement date of the dividend
period during which such Series D Preferred is issued. Dividends on
the shares of Series D Preferred will accumulate from the date on
which such shares are issued. Application has been made to list the
Series D Preferred on the NYSE and it is anticipated that trading of
the Series D Preferred on the NYSE will commence within 30 days from
the date of issuance.
Series E Auction Rate Preferred. The Fund is offering 2,000 shares of
Series E Auction Rate Preferred, par value $.001 per share,
liquidation preference $25,000 per share, at a purchase price of
$25,000 per share, plus dividends, if any, that have accumulated from
the commencement date of the dividend period during which such Series
E Auction Rate
Preferred is issued.
The Series E Auction Rate Preferred will not be listed on an
exchange. Instead, investors may buy or sell Series E Auction Rate
Preferred in an auction by submitting orders to broker-dealers that
have entered into an agreement with the auction agent and the Fund.
Generally, investors in Series D Preferred or Series E Auction Rate
Preferred will not receive certificates representing ownership of
their shares. The securities depository (The Depository Trust Company
("DTC") or any successor) or its nominee for the account of an
investor's broker-dealer will maintain record ownership of the
preferred stock in book-entry form. An investor's broker-dealer, in
turn, will maintain records of that investor's beneficial ownership
of preferred stock.
Investment Objectives
and Methodology......................... Investment Objectives. The Fund's primary investment objective is
long-term growth of capital, primarily through investment in a portfolio
of equity securities including common stock, preferred stock,
convertible or exchangeable securities and warrants and rights to
purchase such securities. Income is a secondary objective of the Fund.
No assurance can be given that the Fund will achieve its investment
objectives. See "Investment Objectives and Policies."
Investment Methodology. In selecting securities for the Fund, the
Investment Adviser normally will consider the following factors,
among others: (i) the Investment Adviser's own evaluations of the
private market value, cash flow, earnings per share and other
fundamental aspects of the underlying assets and business of the
company; (ii) the potential for capital appreciation of the
securities; (iii) the interest or dividend income generated by the
securities; (iv) the prices of the securities relative to other
comparable securities; (v) whether the securities are entitled to the
benefits of call protection or other protective covenants (e.g.,
events of acceleration or events of default for failure to comply
with certain financial ratios or to satisfy other financial covenants
or benchmarks); (vi) the existence of any anti-dilution protections
or guarantees of the security; and (vii) the diversification of the
portfolio of the Fund as to issuers. The Investment Adviser's
investment philosophy with respect to equity securities seeks to
identify securities of companies that are selling in the public
market at a discount to their private market value, which the
Investment Adviser defines as the value informed purchasers are
willing to pay to acquire assets with similar characteristics. The
Investment Adviser also normally evaluates the issuer's free cash
flow and long-term earnings trends. Finally, the Investment Adviser
looks for a catalyst - something in the company's industry or
indigenous to the company or country itself that will surface
additional value.
2
Portfolio Contents. Although under normal market conditions at least
80% of the Fund's total assets will consist of equity securities,
when a temporary defensive posture is believed by the Investment
Adviser to be warranted, the Fund may without limitation hold cash or
invest its assets in money market instruments and repurchase
agreements in respect of those instruments. The Fund may also invest
up to 10% of the market value of its total assets during temporary
defensive periods in shares of money market mutual funds that invest
primarily in U.S. government securities and repurchase agreements in
respect of those securities, which, in the absence of applicable
exemptive relief are not affiliated with the Investment Adviser. Such
actions on the part of the Fund may adversely affect its ability to
achieve its secondary investment objective of income.
The Fund may invest up to 10% of its total assets in fixed-income
securities issued by U.S. and foreign corporations, governments and
agencies that are rated below investment grade by primary rating
services such as Standard & Poor's Ratings Services ("S&P") and
Moody's Investors Service, Inc. ("Moody's"). These high-yield,
higher-risk securities are commonly known as "junk bonds." These debt
securities are predominantly speculative and involve major risk
exposure to adverse conditions.
The Fund may invest up to 35% of its total assets in foreign
securities. Among the foreign securities in which the Fund may invest
are those issued by companies located in developing countries, which
are countries in the initial stages of their industrialization
cycles. Investing in the equity and debt markets of developing
countries involves exposure to economic structures that are generally
less diverse and less mature, and to political systems that can be
expected to have less stability, than those of developed countries.
The markets of developing countries historically have been more
volatile than the markets of the more mature economies of developed
countries, but often have provided higher rates of return to
investors. The Fund may also invest in debt securities of foreign
governments.
Dividends and Distributions............. Series D Preferred. Dividends on the Series D Preferred, at the annual
rate of [__]% of its $25 per share liquidation preference, are
cumulative from the Series D Preferred's original issue date and are
payable, when, as and if declared by the Board of Directors of the
Fund, out of funds legally available therefor, quarterly on March 26,
June 26, September 26 and December 26 in each year, commencing on
[__], 2003.
Series E Auction Rate Preferred. The holders of Series E Auction Rate
Preferred are entitled to receive cash dividends, stated at annual
rates of its $25,000 per share liquidation preference, that will vary
from dividend period to dividend period. The table below shows the
dividend rate, the dividend payment date and the number of days for
the initial dividend period on the Series E Auction Rate Preferred.
3
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
---- --------------- ---------------
Series E [__]% [__], 2003 [__]
Auction Rate
Preferred.........
For subsequent dividend periods, the Series E Auction Rate Preferred
will pay dividends based on a rate set at auctions, normally held
weekly. In most instances dividends are payable weekly on the first
business day following the end of the dividend period. If the day on
which dividends otherwise would be paid is not a business day, then
dividends will be paid on the first business day that falls after the
end of the dividend period. The Fund may, subject to certain
conditions, designate special dividend periods of more (or less) than
seven days. The dividend payment date for any such special dividend
period will be set out in the notice designating the special dividend
period. Dividends on shares of Series E Auction Rate Preferred will
be cumulative from the date such shares are issued and will be paid
out of legally available funds.
In no event will the dividend rate set at auction for the Series E
Auction Rate Preferred exceed the then-maximum rate. The maximum rate
means (i) in the case of a dividend period of 184 days or less, the
applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such auction determined as set forth in the
following chart based on the lower of the credit ratings assigned to
the Series E Auction Rate Preferred by Moody's and S&P or (ii) in the
case of a dividend period of longer than 184 days, the applicable
percentage of the Treasury Index Rate.
Moody's S&P Applicable
Credit Rating Credit Rating Percentage
AA3 or higher AA- or higher 150%
A3 to A1 A- to A+ 175%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
See "Description of the Series D Preferred and Series E Auction Rate
Preferred -- Dividends on the Series E Auction Rate Preferred --
Maximum Rate." For example, calculated as of March 31, 2003 and June
30, 2003, respectively, the maximum rate for the Series E Auction
Rate Preferred (assuming a rating of "Aaa" or above by Moody's and
"AAA" or above by S&P) would have been approximately 1.82% and 1.53%
for dividend periods of 90 days, and approximately 2.48% and
4
1.92% for dividend periods of two years.* There is no minimum
applicable rate with respect to any dividend period.
Any designation of a special dividend period will be effective only
if, among other things, proper notice has been given, the auction
immediately preceding the special dividend period was not a failed
auction and the Fund has confirmed that it has assets with an
aggregate discounted value at least equal to the Basic Maintenance
Amount (as defined in the applicable rating agency guidelines). See
"Description of the Series D Preferred and Series E Auction Rate
Preferred -- Dividends on the Series E Auction Rate Preferred" and
"The Auction of Series E Auction Rate Preferred."
Preferred Stock Dividends. Under current law, all preferred stock of
the Fund must have the same seniority as to the payment of dividends.
Accordingly, no full dividend will be declared or paid on any series
of preferred stock of the Fund for any dividend period, or part
thereof, unless full cumulative dividends due through the most recent
dividend payment dates therefor for all series of outstanding
preferred stock of the Fund are declared and paid. If full cumulative
dividends due have not been declared and paid on all outstanding
shares of preferred stock of the Fund ranking on a parity with the
Series D Preferred and/or Series E Auction Rate Preferred as to the
payment of dividends, any dividends being paid on the shares of such
preferred stock (including any outstanding Series D Preferred and
Series E Auction Rate Preferred) will be paid as nearly pro rata as
possible in proportion to the respective amounts of dividends
accumulated but unpaid on each such series of preferred stock on the
relevant dividend payment date.
In the event that for any calendar year the total distributions on
shares of the Fund's preferred stock exceed the Fund's investment
company taxable income (as that term is defined in the Internal
Revenue Code of 1986, as amended (the "Code"), determined without
regard to the deduction for dividends paid) and net capital gain
(i.e., the excess of its net realized long-term capital gain over its
net realized short-term capital loss) allocable to those shares, the
excess distributions will generally be treated as a tax-free return
of capital (to the extent of the stockholder's tax basis in his or
her shares). The amount treated as a tax-free return of capital will
reduce a stockholder's adjusted basis in his or her shares of
preferred stock, thereby increasing the stockholder's potential gain
or reducing his or her potential loss on the sale of the shares.
Common Stock. In order to allow its common stockholders to realize a
predictable, but not assured, level of cash flow and some liquidity
periodically on their investment without having to sell shares, the
Fund has adopted a policy, which may be modified at any time by its
Board -------- * Dividend periods presented for illustrative purposes
only. Actual dividend periods may be of greater or lesser duration.
___________________
* Dividend periods presented for illustrative purposes only.
Actual dividend periods may be of greater or lesser duration.
5
of Directors, of paying distributions on its common stock of at least
10% of average quarter-end assets attributable to common stock. For
the fiscal year ending December 31, 2002, the Fund made distributions
of $0.95 per share of common stock, none of which constituted a
return of capital. The Fund has made quarterly distributions with
respect to its shares of common stock since 1987. A portion of the
returns during nine fiscal years since then have constituted a return
of capital.
Auction Procedures..................... You may buy, sell or hold Series E Auction Rate Preferred in the
auction. The following is a brief summary of the auction procedures,
which are described in more detail elsewhere in this prospectus and in
the SAI. These auction procedures are complicated, and there are
exceptions to these procedures. Many of the terms in this section have
a special meaning as set forth in this prospectus or the SAI.
The auctions determine the dividend rate for the Series E Auction
Rate Preferred, but each dividend rate will not be higher than the
then- maximum rate. See "Description of the Series D Preferred and
Series E Auction Rate Preferred -- Dividends on the Series E Auction
Rate Preferred."
If you own shares of Series E Auction Rate Preferred, you may
instruct your broker-dealer to enter one of three kinds of orders in
the auction with respect to your shares: sell, bid and hold.
If you enter a sell order, you indicate that you want to sell Series
E Auction Rate Preferred at $25,000 per share, no matter what the
next dividend period's rate will be.
If you enter a bid (or "hold at a rate") order, which must specify a
dividend rate, you indicate that you want to sell Series E Auction
Rate Preferred only if the next dividend period's rate is less than
the rate you specify.
If you enter a hold order, you indicate that you want to continue to
own Series E Auction Rate Preferred, no matter what the next dividend
period's rate will be.
You may enter different types of orders for different portions of
your Series E Auction Rate Preferred. You may also enter an order to
buy additional Series E Auction Rate Preferred. All orders must be
for whole shares. All orders you submit are irrevocable. There is a
fixed number of Series E Auction Rate Preferred shares, and the
dividend rate likely will vary from auction to auction depending on
the number of bidders, the number of shares the bidders seek to buy,
the rating of the Series E Auction Rate Preferred and general
economic conditions including then current interest rates. If you own
Series E Auction Rate Preferred and submit a bid for them higher than
the then-maximum rate, your bid will be treated as a sell order. If
you do not enter an order for a dividend period of 28 days or less,
the broker-dealer will assume that you want to continue to hold
Series E Auction Rate
6
Preferred. If you fail to submit an order and the dividend period is
longer than 28 days, the broker-dealer will treat your failure to
submit a bid as a sell order.
If you do not then own Series E Auction Rate Preferred, or want to
buy more shares, you may instruct a broker-dealer to enter a bid
order to buy shares in an auction at $25,000 per share at or above
the dividend rate you specify. If you bid for shares you do not
already own at a rate higher than the then-maximum rate, your bid
will not be considered.
Broker-dealers will submit orders from existing and potential holders
of Series E Auction Rate Preferred to the auction agent. Neither the
Fund nor the auction agent will be responsible for a broker-dealer's
failure to submit orders from existing or potential holders of Series
E Auction Rate Preferred. A broker-dealer's failure to submit orders
for Series E Auction Rate Preferred held by it or its customers will
be treated in the same manner as a holder's failure to submit an
order to the broker-dealer. A broker-dealer may submit orders to the
auction agent for its own account. The Fund may not submit an order
in any auction.
After each auction for the Series E Auction Rate Preferred the
auction agent will pay to each broker-dealer, from funds provided by
the Fund, a service charge equal to, in the case of any auction
immediately preceding a dividend period of less than one year, the
product of (i) a fraction, the numerator of which is the number of
days in such dividend period and the denominator of which is 365,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the aggregate
number of Series E Auction Rate Preferred shares placed by such
broker-dealer at such auction or, in the case of any auction
immediately preceding a dividend period of one year or longer, a
percentage of the purchase price of the Series E Auction Rate
Preferred placed by the broker-dealers at the auction agreed to by
the Fund and the broker-dealers.
If the number of Series E Auction Rate Preferred shares subject to
bid orders by potential holders with a dividend rate equal to or
lower than the then-maximum rate is at least equal to the number of
Series E Auction Rate Preferred shares subject to sell orders, then
the dividend rate for the next dividend period will be the lowest
rate submitted which, taking into account that rate and all lower
rates submitted in order from existing and potential holders, would
result in existing and potential holders owning all the Series E
Auction Rate Preferred available for purchase in the auction.
If the number of Series E Auction Rate Preferred shares subject to
bid orders by potential holders with a dividend rate equal to or
lower than the then-maximum rate is less than the number of Series E
Auction Rate Preferred shares subject to sell orders, then the
auction is considered to be a failed auction and the dividend rate
will be the maximum rate. In that event, existing holders that have
submitted sell orders (or are treated as having submitted sell
orders) may not be able
7
to sell any or all of the Series E Auction Rate Preferred for which
they submitted sell orders.
The auction agent will not consider a bid above the then-maximum
rate. The purpose of the maximum rate is to place an upper limit
on dividends with respect to the Series E Auction Rate Preferred
and in so doing to help protect the earnings available to pay
dividends on the common stock and the other series of preferred
stock, and to serve as the dividend rate in the event of a
failed auction (that is, an auction where there are more shares
of Series E Auction Rate Preferred offered for sale than there
are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for
all outstanding Series E Auction Rate Preferred, the auction is
considered an "all hold" auction and the dividend rate for the
next dividend period will be the "all hold rate," which is 80%
of the "AA" Financial Composite Commercial Paper Rate.
The auction procedures include a pro rata allocation of Series E
Auction Rate Preferred shares for purchase and sale. This
allocation process may result in an existing holder selling, or
a potential holder buying, fewer shares than the number of
Series E Auction Rate Preferred shares in its order. If this
happens, broker-dealers that have designated themselves as
existing holders or potential holders in respect of customer
orders will be required to make appropriate pro rata allocations
among their respective customers.
Settlement of purchases and sales will be made on the next
business day (which also is a dividend payment date) after the
auction date through DTC. Purchasers will pay for their Series E
Auction Rate Preferred through broker-dealers in same-day funds
to DTC against delivery to the broker-dealers. DTC will make
payment to the sellers' broker-dealers in accordance with its
normal procedures, which require broker-dealers to make payment
against delivery in same-day funds. As used in this prospectus,
a business day is a day on which the NYSE is open for trading,
and which is not a Saturday, Sunday or any other day on which
banks in New York City are authorized or obligated by law to
close.
The first auction for Series E Auction Rate Preferred will be
held on [__], 2003, the business day preceding the dividend
payment date for the initial dividend period. Thereafter, except
during special dividend periods, auctions for Series E Auction
Rate Preferred normally will be held every Thursday (or the next
preceding business day if Thursday is a holiday), and each
subsequent dividend period for the Series E Auction Rate
Preferred normally will begin on the following Friday.
If an auction is not held because an unforeseen event or
unforeseen events cause a day that otherwise would have been an
auction date not
8
to be a business day, then the length of the then-current
dividend period will be extended by seven days (or a multiple
thereof if necessary because of such unforeseen event or
events), the applicable rate for such period will be the
applicable rate for the then-current dividend period so extended
and the dividend payment date for such dividend period will be
the first business day immediately succeeding the end of such
period. See "The Auction of Series E Auction Rate Preferred."
Tax Treatment of Preferred
Stock Dividends......................... The Fund expects that dividends paid on the Series D Preferred
and Series E Auction Rate Preferred will consist of (i)
long-term capital gain (gain from the sale of a capital
asset held longer than 12 months), (ii) qualified dividend
income (income from domestic and certain foreign
corporations), and (iii) investment company taxable income
(other than qualified dividend income), including interest
income, short-term capital gain and income from certain
hedging and interest rate transactions. For individuals,
the maximum federal income tax rate on long-term capital
gain is currently 15%, on qualified dividend income is 15%,
and on other types of income is 35%. These tax rates are
scheduled to apply through 2008. Over the past three years,
approximately 89% of the Fund's distributions to
stockholders consisted of long-term capital gain and, of
the remaining 11% distributed to stockholders, 68% would
have, under the current tax provisions, constituted
qualified dividend income taxable at the 15% rate. Over the
last one year, approximately 93% of the Fund's
distributions to stockholders consisted of long-term
capital gain and, of the remaining 7% distributed to
stockholders, approximately 99% would have, under the
current tax provisions, constituted qualified dividend
income taxable at the 15% rate. We cannot assure you,
however, as to what percentage of the dividends paid on the
Series D Preferred or Series E Auction Rate Preferred will
consist of long-term capital gains and qualified dividend
income, which are taxed at lower rates for individuals than
ordinary income. For a more detailed discussion, see
"Taxation."
Rating and Asset
Coverage Requirements................... Series D Preferred. Before it can be issued, the Series D Preferred
must receive a rating of "Aaa" from Moody's. The Fund's Articles
Supplementary setting forth the rights and preferences of the Series D
Preferred contain certain tests that the Fund must satisfy to obtain and
maintain a rating of "Aaa" from Moody's on the Series D Preferred.
See "Description of the Series D Preferred and Series E Auction Rate
Preferred-- Rating Agency Guidelines."
Series E Auction Rate Preferred. Before it can be issued, the Series
E Auction Rate Preferred must receive both a rating of "Aaa" from
Moody's and a rating of "AAA" from S&P. As with the Series D
Preferred, the Articles Supplementary of the Fund setting forth the
rights and preferences of the Series E Auction Rate Preferred contain
certain tests that the Fund must satisfy to obtain and maintain a
rating of "Aaa" from Moody's and "AAA" from S&P. See "Description of
the Series D Preferred and Series E Auction Rate Preferred -- Rating
Agency Guidelines."
Asset Coverage Requirements. Under the asset coverage tests to which
each of the Series D Preferred and/or Series E Auction Rate Preferred
is subject, the Fund is required to maintain (i) assets having in the
aggregate a discounted value greater than or equal to a Basic
Maintenance Amount (as defined under "Description of the Series D
Preferred and Series E Auction Rate Preferred -- Rating Agency
Guidelines") for each such series calculated pursuant to the applicable
9
rating agency guidelines and (ii) an asset coverage of at least 200%
(or such higher or lower percentage as may be required at the time
under the Investment Company Act of 1940, as amended (the "1940
Act")) with respect to all outstanding preferred stock of the Fund,
including the Series D Preferred and the Series E Auction Rate
Preferred. See "Description of the Series D Preferred and Series E
Auction Rate Preferred -- Asset Maintenance Requirements."
The Fund estimates that if the shares offered hereby had been issued
and sold as of September 15, 2003, the asset coverage under the 1940
Act would have been approximately 327% immediately following such
issuance (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of
$3,352,500). The asset coverage would have been computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($1,374,744,505) / senior securities representing
indebtedness plus liquidation preference of each class of preferred
stock ($420,000,000), expressed as a percentage = 327%.
The Articles Supplementary for each of the Series D Preferred and the
Series E Auction Rate Preferred, which contain the technical provi
sions of the various components of the asset coverage tests, have
been filed as exhibits to this registration statement and may be
obtained through the web site of the Securities and Exchange Commission
(the "SEC") (http://www.sec.gov).
Mandatory Redemption.................... The Series D Preferred and the Series E Auction Rate Preferred may be
subject to mandatory redemption by the Fund to the extent the Fund
fails to maintain the asset coverage requirements in accordance with
the rating agency guidelines or the 1940 Act described above and does
not cure such failure by the applicable cure date. If the Fund redeems
preferred stock mandatorily, it may, but is not required to, redeem a
sufficient number of shares of preferred stock so that after the
redemption the Fund exceeds the asset coverage required by the
guidelines of each of the applicable rating agencies and the 1940 Act
by 10%.
With respect to the Series D Preferred, any such redemption will be
made for cash at a redemption price equal to $25 per share plus
accumulated and unpaid dividends (whether or not earned or declared)
to the redemption date.
With respect to the Series E Auction Rate Preferred, any such
redemption will be made for cash at a redemption price equal to
$25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the redemption date,
plus, in the case of Series E Auction Rate Preferred having a dividend
period of more than one year, any applicable redemption premium
determined by the Board of Directors. See "Description of the Series
10
D Preferred and Series E Auction Rate Preferred -- Mandatory
Redemption."
In the event of a mandatory redemption, such redemption will be made
from the Series D Preferred, the Series E Auction Rate Preferred or
other preferred stock of the Fund in such proportions as the Fund may
determine, subject to the limitations of the 1940 Act and Maryland
law.
Optional Redemption..................... Subject to the limitations of the 1940 Act and Maryland law, the Fund
may, at its option, redeem the Series
D Preferred and/or the Series E
Auction Rate Preferred as follows:
Series D Preferred. Commencing [__], 2008 and at any time thereafter,
the Fund at its option may redeem the Series D Preferred, in whole or
in part, for cash at a redemption price per share equal to $25 plus
accumulated and unpaid dividends (whether or not earned or declared)
to the redemption date. If fewer than all of the shares of the Series
D Preferred are to be redeemed, any such redemption of Series D
Preferred shares will be made pro rata in accordance with the number
of such shares held. Prior to [__], 2008 the Series D Preferred will
be subject to optional redemption by the Fund at the redemption price
only to the extent necessary for the Fund to continue to qualify for
tax treatment as a regulated investment company. See "Description of
the Series D Preferred and Series E Auction Rate Preferred --
Redemption -- Optional Redemption of the Series D Preferred."
Series E Auction Rate Preferred. The Fund at its option generally may
redeem Series E Auction Rate Preferred, in whole or in part, at any
time other than during a non-call period. The Fund may declare a non-
call period during a dividend period of more than seven days. If
fewer than all of the shares of the Series E Auction Rate Preferred
are to be redeemed, any such redemption of Series E Auction Rate
Preferred shares will be made pro rata in accordance with the number
of such shares held. See "Description of the Series D Preferred and
Series E Auction Rate Preferred -- Redemption -- Optional Redemption
of the Series E Auction Rate Preferred."
The redemption price per Series E Auction Rate Preferred share will
equal $25,000 plus an amount equal to any accumulated but unpaid
dividends thereon (whether or not earned or declared) to the
redemption date, plus, in the case of Series E Auction Rate Preferred
having a dividend period of more than one year, any redemption
premium applicable during such dividend period. See "Description of
the Series D Preferred and Series E Auction Rate Preferred --
Redemption -- Optional Redemption of the Series E Auction Rate
Preferred."
The Fund redeemed 100% of its outstanding Series A Preferred on June
17, 2003. The Fund's outstanding Series B Preferred is redeemable at
the option of the Fund beginning June 20, 2006. The Fund generally
may redeem the outstanding Series C Auction Rate
11
Preferred, in whole or in part, at any time other than during a
non-call period. Such redemptions are subject to the limitations of
the 1940 Act and Maryland law. See "Description of the Series D
Preferred and Series E Auction Rate Preferred -- Redemption."
Voting Rights........................... At all times, holders of the Fund's outstanding preferred stock
(including the Series D Preferred and/or Series E Auction Rate
Preferred), voting as a single class, will be entitled to elect two
members of the Fund's Board of Directors, and holders of the
preferred stock and common stock, voting as a single class, will
elect the remaining directors. However, upon a failure by the Fund to
pay dividends on any of its preferred stock in an amount equal to two
full years dividends, holders of the preferred stock, voting as a
single class, will have the right to elect additional directors that
would then constitute a simple majority of the directors until all
cumulative dividends on all shares of preferred stock have been paid
or provided for. Holders of outstanding shares of Series D Preferred,
Series E Auction Rate Preferred and any other preferred stock will
vote separately as a class on certain other matters, as required
under the Charter (including the applicable Articles Supplementary),
the 1940 Act and Maryland law. Except as otherwise indicated in this
prospectus and as otherwise required by applicable law, holders of
Series D Preferred and/or Series E Auction Rate Preferred will be
entitled to one vote per share on each matter submitted to a vote of
stockholders and will vote together with the holders of common stock
and any other preferred stock as a single class. See "Description of
the Series D Preferred and Series E Auction Rate Preferred -- Voting
Rights."
Liquidation Preference.................. The liquidation preference of the Series D Preferred is $25 per share.
The liquidation preference of the Series E Auction Rate Preferred is
$25,000 per share. Upon liquidation, holders of preferred stock will be
entitled to receive the liquidation preference with respect to their shares
of preferred stock plus an amount equal to accumulated but unpaid
dividends with respect to such shares (whether or not earned or
declared) to the date of distribution. See "Description of the Series D
Preferred and Series E Auction Rate Preferred-- Liquidation Rights."
Use of Proceeds......................... The Fund will use the net proceeds from the offering to purchase
additional portfolio securities in accordance with its investment
objectives and policies. See "Use of Proceeds."
Listing of the Series D
Preferred............................... Prior to its being offered, there has been no public market for the
Series D Preferred. Following its issuance (if issued), the Series D
Preferred is expected to be listed on the NYSE. However, during an
initial period which is not expected to exceed 30 days after the date
of its initial issuance, the Series D Preferred will not be listed on
any securities exchange and, consequently, may be illiquid during
that period.
12
Limitation on Secondary
Market Trading of the
Series E Auction Rate Preferred......... The Series E Auction Rate Preferred will not be listed on an
exchange. Broker-dealers may, but are not obliged to, maintain a
secondary trading market in Series E Auction Rate Preferred outside
of auctions. There can be no assurance that a secondary market will
provide owners with liquidity. You may transfer Series E Auction Rate
Preferred outside of auctions only to or through a broker-dealer that
has entered into an agreement with the auction agent and the Fund, or
other persons as the Fund permits.
Special Characteristics
and Risks............................... Risk is inherent in all investing. Therefore, before investing in Series
D Preferred or Series E Auction Rate Preferred you should consider the
risks carefully.
Series D Preferred. Primary risks specially associated with an
investment in the Series D Preferred include:
The market price for the Series D Preferred will be influenced by
changes in interest rates, the perceived credit quality of the Series
D Preferred and other factors.
During an initial period which is not expected to exceed 30 days
after the date of its issuance, the Series D Preferred will not be
listed on any securities exchange. During such period, the
underwriters intend to make a market in the Series D Preferred,
however, they have no obligation to do so. Consequently, the Series D
Preferred may be illiquid during such period. No assurances can be
provided that listing on any securities exchange or market making by
the underwriters will result in the market for Series D Preferred
being liquid at any time.
Series E Auction Rate Preferred. Primary risks specially associated
with an investment in Series E Auction Rate Preferred include:
If an auction fails, you may not be able to sell some or all of your
Series E Auction Rate Preferred. The Fund is not obliged to redeem
your Series E Auction Rate Preferred if an auction fails. The
underwriters are not required to make a market in the Series E
Auction Rate Preferred. No broker-dealer is obligated to maintain a
secondary market for the Series E Auction Rate Preferred apart from
the auctions.
You may receive less than the price you paid for your Series E
Auction Rate Preferred if you sell them outside of the auction,
especially when market interest rates are rising.
Both the Series D Preferred and Series E Auction Rate Preferred. An
investment in either the Series D Preferred or Series E Auction Rate
Preferred also includes the following primary risks:
13
You will have no right to require the Fund to repurchase or redeem
your shares of Series D Preferred or Series E Auction Rate Preferred
at any time.
A rating agency could downgrade or withdraw the rating assigned to
the Series D Preferred and/or Series E Auction Rate Preferred, which
would likely have an adverse effect on the liquidity and market value
of these preferred shares. The present credit rating does not
eliminate or mitigate the risks of investing in these preferred
shares.
In general, the Fund may redeem your Series E Auction Rate Preferred
at any time and may redeem your Series D Preferred at any time after
[__], 2008, and may at any time redeem shares of either or both
series to meet regulatory or rating agency requirements. Upon
redemption, you may not be able to reinvest your proceeds at a rate
that is the same or higher then the Series D Preferred and/or Series
E Auction Rate Preferred. Subject to such redemptions, these
preferred shares are perpetual.
The Fund may not meet the asset coverage requirements or earn
sufficient income from its investments to pay dividends on the Series
D Preferred and/or Series E Auction Rate Preferred.
The Series D Preferred and/or Series E Auction Rate Preferred are not
obligations of the Fund. Although unlikely, precipitous declines in
the value of the Fund's assets could result in the Fund having
insufficient assets to redeem all of the Series D Preferred and/or
Series E Auction Rate Preferred for the full redemption price.
The value of the Fund's investment portfolio may decline, reducing
the asset coverage for the Series D Preferred and/or Series E Auction
Rate Preferred. Further, if an issuer of a common stock in which the
Fund invests experiences financial difficulties or if an issuer's
preferred stock or debt security is downgraded or defaults or if an
issuer in which the Fund invests is affected by other adverse market
factors, there may be a negative impact on the income and/or asset
value of the Fund's investment portfolio.
As a non-diversified investment company under the 1940 Act, the Fund
is not limited in the proportion of its assets that may be invested
in securities of a single issuer, and accordingly, an investment in
the Fund may, under certain circumstances, present greater risk to an
investor than an investment in a diversified company. See "Risk
Factors and Special Considerations -- Non-Diversified Status."
The Fund may invest up to 10% of its total assets in fixed-income
securities rated in the lower rating categories of recognized
statistical rating agencies, also sometimes referred to as "junk
bonds." Such securities are subject to greater risks than investment
grade securities, which reflect their speculative character, including
(i) greater volatility; (ii) greater credit risk; (iii) potentially
greater sensitivity to general economic or industry conditions; (iv)
potential lack of attractive resale
14
opportunities (illiquidity); and (v) additional expenses to seek recovery
from issuers who default. See "Risk Factors and Special
Considerations-- Lower Rated Securities."
The Fund may invest up to 35% of its total assets in foreign
securities. Investing in securities of foreign companies (or foreign
governments), which are generally denominated in foreign currencies,
may involve certain risks and opportunities not typically associated
with investing in domestic companies and could cause the Fund to be
affected favorably or unfavorably by changes in currency exchange
rates and revaluation of currencies. See "Risk Factors and Special
Considerations -- Foreign Securities."
The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment
objectives and policies. These include, among others, the possibility
of greater loss and the likelihood of higher volatility of the net
asset value of the Fund and the asset coverage for the Series D
Preferred and/or Series E Auction Rate Preferred. Such volatility may
increase the likelihood of the Fund having to sell investments in
order to meet dividend payments on the preferred stock, or to redeem
preferred stock when it may be disadvantageous to do so. See "Risk
Factors and Special Considerations -- Leverage Risk."
The Fund has entered into an interest rate swap transaction with
respect to its outstanding Series C Auction Rate Preferred and may
enter into an interest rate swap or cap transaction with respect to
all or a portion of the Series E Auction Rate Preferred. The use of
interest rate swaps and caps is a highly specialized activity that
involves certain risks to the Fund including, among others,
counterparty risk and early termination risk. See "How the Fund
Manages Risk -- Interest Rate Transactions."
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of
Mr. Gabelli, its ability to service the Fund could be adversely
affected. There can be no assurance that a suitable replacement could
be found for Mr. Gabelli in the event of his death, resignation,
retirement or inability to act on behalf of the Investment Adviser.
See "Risk Factors and Special Considerations -- Dependence on Key
Personnel."
The Fund has qualified, and intends to remain qualified, for federal
income tax purposes as a regulated investment company. Qualification
requires, among other things, compliance by the Fund with certain
distribution requirements. Statutory limitations on distributions on
the common stock if the Fund fails to satisfy the 1940 Act's asset
coverage requirements could jeopardize the Fund's ability to meet the
distribution requirements. The Fund presently intends, however, to
purchase or redeem preferred stock to the extent necessary in order
to maintain compliance with such asset coverage requirements. See
15
"Taxation" for a more complete discussion of these and other federal
income tax considerations.
Management and Fees..................... Gabelli Funds, LLC serves as the Fund's investment adviser (the
"Investment Adviser") and is compensated for its services and its
related expenses at an annual rate of 1.00% of the Fund's average
weekly net assets. The Investment Adviser is responsible for
administration of the Fund and currently utilizes and pays the fees of
a third party sub-administrator. Notwithstanding the foregoing, the
Investment Adviser has voluntarily agreed to waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund
equal to the aggregate stated value of the Fund's outstanding Series D
Preferred or Series E Auction Rate Preferred, as the case may be, for
any calendar year in which the net asset value total return of the Fund
allocable to the common stock, including distributions and the advisory
fee subject to potential waiver, is less than (i) in the case of the Series
D Preferred, the stated annual dividend rate of such series and (ii) in
the case of the Series E Auction Rate Preferred, the net cost of capital
to the Fund with respect to the Series E Auction Rate Preferred for
such year expressed as a percentage (including, without duplication,
dividends paid by the Fund on the Series E Auction Rate Preferred and
the net cost to the Fund of any associated swap or cap transaction if the
Fund hedges its Series E Auction Rate Preferred dividend obligations).
This waiver will apply to the portion of the Fund's assets attributable
to the Series D Preferred and Series E Auction Rate Preferred,
respectively, for so long as any shares of such series remain
outstanding. See "Management of the Fund."
Repurchase of
Stock................................... The Fund may repurchase Series D Preferred or, outside of an auction,
Series E Auction Rate Preferred when it is deemed advisable by the
Board of Directors in compliance with the requirements of the 1940 Act
and regulations thereunder and other applicable requirements. The Fund
will not repurchase Series E Auction Rate Preferred at Auction. This
Prospectus will serve as notice that the Fund may from time to time
repurchase Series D Preferred when such shares are trading the below
the $25 per share liquidation preference. See "Description of the
Series D Preferred and Series E Auction Rate Preferred-- Repurchase of
Series D Preferred and Series E Auction Rate Preferred Stock."
The Fund's Board of Directors has authorized the Fund to repurchase its
common stock in the open market when the common stock is trading at a
discount of 10% or more from net asset value. Such repurchases are
subject to the Fund maintaining asset coverage on its preferred stock
and to certain notice and other requirements, including those set forth
in Rule 23c-1 under the 1940 Act. See "Description of Capital Stock and
Other Securities -- Common Stock." Through September 15, 2003, the Fund
has repurchased in the open market zero shares of its common stock
under this authorization. See "Description of Capital Stock and Other
Securities -- Common Stock."
Anti-takeover Provisions................ Certain provisions of the Fund's charter (the "Charter") and the Fund's
by-laws (the "By-Laws") may be regarded as "anti-takeover" provisions.
Pursuant to these provisions, only one of three classes of directors is
elected each year. In addition, the affirmative vote of the holders of
66 2/3% of each class of the Fund's outstanding voting stock, each
voting as a separate class, is necessary to authorize the conversion of
the Fund from a closed-end to an open-end investment company or to
authorize certain transactions between the Fund and a beneficial owner
of more than 5% of any class of the Fund's capital stock. The vote of a
majority (as defined in the 1940 Act ) of the holders of the Fund's
outstanding voting securities, voting as a single class, is also
necessary to authorize the conversion of the Fund from a closed-end to
an open-end investment company. The overall effect of these provisions
is to render more difficult the accomplishment of a merger with, or the
assumption of control by, a principal stockholder. These provisions may
have the effect of depriving Fund stockholders of an opportunity to sell
their stock at a premium to the prevailing market price. See
"Anti-takeover Provisions of the Charter and By-Laws."
16
Custodian, Transfer Agent,
Auction Agent and
Dividend Disbursing Agent............... State Street Bank and Trust Company (the "Custodian"), located at 150
Royall Street, Canton, MA 02021, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement,
the Custodian holds the Fund's assets in compliance with the 1940 Act.
For its services, the Custodian will receive a monthly fee based upon,
among other things, the average value of the total assets of the Fund,
plus certain charges for securities transactions.
EquiServe Trust Company, N.A., located at P.O. Box 43025, Providence,
RI 02940-3025, serves as the Fund's dividend disbursing agent, as
agent under the Fund's automatic dividend reinvestment and voluntary
cash purchase plan, and as transfer agent and registrar with respect
to the common stock of the Fund.
Series D Preferred. EquiServe will also serve as the transfer agent,
registrar, dividend paying agent and redemption agent with respect to
the Series D Preferred. EquiServe currently serves in such capacities
with respect to the Series B Preferred.
Series E Auction Rate Preferred. The Bank of New York will serve as
the auction agent, transfer agent, registrar, dividend paying agent
and redemption agent with respect to the Series E Auction Rate
Preferred. The Bank of New York currently serves in such capacities
with respect to the Series C Auction Rate Preferred.
Interest Rate Transactions ............. The Fund has entered into an interest rate swap transaction with
respect to its outstanding Series C Auction Rate Preferred, and may
enter into interest rate swap or cap transactions in relation to all
or a portion of the Series E Auction Rate Preferred in order to
manage the impact on its portfolio of changes in the dividend rate of
the Series E Auction Rate Preferred. Through these transactions the
Fund may, for example, obtain the equivalent of a fixed rate for such
auction rate preferred stock that is lower than the Fund would have
to pay if it issued fixed rate preferred stock. The use of interest
rate swaps and caps is a highly specialized activity that involves
investment techniques and risks different from those associated with
ordinary portfolio security transactions.
17
In an interest rate swap, the Fund would agree to pay to the other
party to the interest rate swap (which is known as the
"counterparty") periodically a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund periodically a variable rate
payment that is intended to approximate the Fund's variable rate
payment obligation on the auction rate preferred stock. In an
interest rate cap, the Fund would pay a premium to the counterparty
to the interest rate cap and, to the extent that a specified variable
rate index exceeds a predetermined fixed rate, the Fund would receive
from the counterparty payments of the difference based on the
notional amount of such cap.
Interest rate swap and cap transactions introduce additional risk
because the Fund would remain obligated to pay preferred stock
dividends when due in accordance with the Articles Supplementary even
if the counterparty defaulted. Depending on the general state of
short-term interest rates and the returns on the Fund's portfolio
securities at that point in time, such a default could negatively
affect the Fund's ability to make dividend payments on the Series D
Preferred and Series E Auction Rate Preferred. In addition, at the
time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of the replacement
will not be as favorable as on the expiring transaction. If this
occurs, it could have a negative impact on the Fund's ability to make
dividend payments on the Series D Preferred and Series E Auction Rate
Preferred.
A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. If the Fund fails to
maintain the required asset coverage on its outstanding preferred
stock or fails to comply with other covenants, the Fund may, at its
option (and in certain circumstances will be required to)
consistent with its Charter and the requirements of the 1940 Act
mandatorily redeem some or all of its preferred
stock (including the Series D Preferred or the Series E Auction
Rate Preferred). Such redemption likely would result in the Fund
seeking to terminate early all or a portion of any swap or cap
transaction. Early termination of a swap could require the Fund to
make a termination payment to the counterparty.
The Fund intends to segregate cash or liquid securities having a
value at least equal to the value of the Fund's net payment
obligations under any swap transaction, marked to market daily. The
Fund does not presently intend to enter into interest rate swap or
cap transactions relating to the Series E Auction Rate Preferred in a
notional amount in excess of the outstanding amount of the Series E
Auction Rate Preferred. The Fund will monitor any such swap or cap
transaction with a view to ensuring that the Fund remains in
compliance with all applicable regulatory investment policy and tax
requirements. See "How the Fund Manages Risk -- Interest Rate
Transactions" for additional information.
18
Use of Leverage..........................As provided in the 1940 Act, and subject to compliance with the Fund's
investment limitations, the Fund may issue senior securities
representing stock, such as preferred stock, so long as immediately
following such issuance the stock will have an asset coverage of 200%.
The use of leverage magnifies the impact of changes in net asset value.
In addition, if the cost of leverage exceeds the return on the
securities acquired with the proceeds of leverage, the use of leverage
will diminish rather than enhance the return to the Fund. See "Invest
Objectives and Policies-- Special Investment Methods -- Leveraging."
19
FINANCIAL HIGHLIGHTS
The selected data below sets forth the per share operating
performance and ratios for the periods presented. The financial information
was derived from and should be read in conjunction with the Financial
Statements of the Fund and Notes thereto, which are incorporated by reference
into this prospectus and the SAI. The financial information for the year
ending December 31, 2002, and for each of the preceding nine years has been
audited by PricewaterhouseCoopers LLP, the Fund's independent accountants,
whose unqualified report on such Financial Statements is incorporated by
reference into the SAI.
Selected data for a Fund common share outstanding throughout each period:
20
Six Months
Ended Year Ended December 31,
June 30, 2003
(unaudited) 2002(a) 2001(a) 2000(a) 1999(a) 1998(a)
--------- ------- ------- ------- ------- -------
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 6.28 $ 8.97 $ 10.89 $ 12.75 $11.47 $11.56
--------- ------- ------- ------- ------- -------
Net investment income............................. 0.03 0.06 0.08 0.05 0.04 0.07
Net realized and unrealized gain (loss) on
investments..................................... 0.95 (1.64) (0.16) (0.51) 3.25 1.09
--------- ------- ------- ------- ------- -------
Total from investment operations.................. 0.98 (1.58) (0.08) (0.46) 3.29 1.16
--------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO PREFERRED STOCK SHAREHOLDERS:
Net investment income............................. (0.09) (0.01) (0.01) (0.00)(c) (0.00)(c) (0.00)(c)
Net realized gain on investments.................. --- (0.16) (0.11) (0.09) (0.09) (0.05)
--------- ------- ------- ------- ------- -------
Total distributions to preferred stock shareholders (0.09) (0.17) (0.12) (0.09) (0.09) (0.05)
--------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN NET ASSETS
ATTRIBUTABLE TO COMMON STOCK SHAREHOLDER'S
RESULTING FROM OPERATIONS ...................... 0.89 (1.75) (0.20) (0.55) 3.20 1.11
--------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
Net investment income............................. (0.40) (0.05) (0.06) (0.04) (0.03)(b) (0.06)
Net realized gain on investments.................. --- (0.90) (1.02) (1.27) (1.21)(b) (1.10)
Paid-in capital................................... --- (0.00)(c) -- -- (0.68)(b) --
--------- ------- ------- ------- ------- -------
Total distributions to common stock shareholders.. (0.40) (0.95) (1.08) (1.31) (1.92) (1.16)
--------- ------- ------- ------- ------- -------
CAPITAL SHARE TRANSACTIONS:
Increase in net asset value from common stock
share transactions.............................. 0.01 0.02 0.03 -- -- --
Decrease in net asset value from shares issued
in rights offering................................. -- -- (0.62) -- -- --
Offering costs for preferred shares charged to
paid-in capital (0.00)(c) (0.01) (0.05) -- -- (0.04)
--------- ------- ------- ------- ------- -------
Total capital share transactions.................. 0.01 0.01 (0.64) -- -- (0.04)
--------- ------- ------- ------- ------- -------
NET ASSET VALUE ATTRIBUTABLE TO COMMON STOCK
SHAREHOLDERS, END OF PERIOD..................... $ 6.75 $ 6.28 $ 8.97 $ 10.89 $ 12.75 $11.47
========= ======= ======= ======= ======= =======
Net asset value total return+..................... 14.50% (21.00)% (3.68)% (4.39)% 29.49% 9.55%
========= ======= ======= ======= ======= =======
Market value, end of period....................... $ 7.47 $ 6.85 $ 10.79 $ 11.44 $ 12.56 $ 11.56
========= ======= ======= ======= ======= =======
Total investment return++......................... 15.65% (28.36)% 10.32% 1.91% 26.57% 9.23%
========= ======= ======= ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets including liquidation value of
preferred shares, end of period (in 000's)...... $1,216,575 $1,271,600 $1,465,369 $1,318,26 $1,503,641 $1,352,190
Net assets attributable to common stock,
end of period (in 000's)........................ $ 921,575 $ 842,403 $1,166,171 $1,184,04 $1,368,981 $1,217,190
Ratio of net investment income to average net
assets attributable to common stock............ 0.73%(k) 0.81% 0.81% 0.42% 0.34% 0.60%
Ratio of operating expenses to average net assets
attributable to common stock (e)(g)............. 1.86%(k) 1.37% 1.12% 1.14% 1.27% 1.15%
Ratio of operating expenses to average total
net assets including liquidation value
of preferred shares (e)(g) 1.26%(k) 1.00% 0.95% 1.03% 1.15% 1.09%
Portfolio turnover rate........................... 2.2% 27.1% 23.9% 32.1% 38.0% 39.8%
PREFERRED STOCK:
7.25% CUMULATIVE PREFERRED STOCK
Liquidation value, end of period (in 000's)....... $ -- $134,198 $134,198 $134,223 $134,660 $135,000
Total shares outstanding (in 000's)............... -- 5,368 5,368 5,369 5,386 5,400
Liquidation preference per share.................. $ -- $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00
Average market value (d).......................... $ -- $ 25.75 $ 25.39 $ 22.62 $ 24.43 $ 25.63
7.20% CUMULATIVE PREFERRED STOCK
Liquidation value, end of period (in 000's)....... $ 165,000 $165,000 $165,000 -- -- --
Total shares outstanding (in 000's)............... 6,600 6,600 6,600 -- -- --
Liquidation preference per share.................. $ 25.00 $ 25.00 $ 25.00 -- -- --
Average market value (d).......................... $ 27.12 $ 26.40 $ 25.60 -- -- --
AUCTION RATE CUMULATIVE PREFERRED STOCk
Liquidation value, end of period (in 000's)....... $ 130,000 $130,000 -- -- -- --
Total shares outstanding (in 000's)............... 5 5 -- -- -- --
Liquidation preference per share.................. $ 25,000 $ 25,000 -- -- -- --
Average market value (d).......................... $ 25,000 $ 25,000 -- -- -- --
ASSET COVERAGE (f)................................ 412% 296% 490% 982% 1,117% 1,001%
ASSET COVERAGE PER SHARE (f)...................... $ 184.18 $ 106.20 $ 122.44 $ 245.54 $ 279.16 $ 250.41
21
Year Ended December 31,
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
--------- --------- --------- --------- ---------
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 9.77 $ 9.95 $ 9.46 $ 11.23 $ 10.58
Net investment income............................. 0.08 0.11 0.13 0.14 0.14
Net realized and unrealized gain (loss)
on investments 2.75 0.71 1.74 (0.08) 2.13
Total from investment operations.................. 2.83 0.82 1.87 0.06 2.27
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
Net investment income............................. (0.08) (0.11) (0.13) (0.14)(h) (0.11)
In excess of net investment income................ (0.00)(d) -- -- -- --
Net realized gain on investments ................. (0.93) (0.78) (0.47) (0.37)(h) (0.77)
In excess of net realized gain on investments..... -- (0.00)(c) (0.02) -- (0.02)
Paid-in capital................................... (0.03) (0.11) (0.38) (1.32)(h) (0.21)
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net asset
value from Fund share transactions............. -- -- (0.37) -- (0.50)
Decrease in net asset value from shares issued in
rights offering................................. -- -- -- -- --
Offering expenses charged to capital surplus...... -- -- (0.01) -- (0.01)
TOTAL DISTRIBUTIONS.................................. (1.04) (1.00) (1.00) (1.83) (1.11)
NET ASSET VALUE, END OF PERIOD....................... $ 11.56 $ 9.77 $ 9.95 $ 9.46 $ 11.23
Market value, end of period....................... $ 11.69 $ 9.38 $ 9.375 $ 9.625 $ 12.125
Net asset value total return +.................... 30.46% 9.00% 20.60% 0.50% 22.40%
Total investment return ++........................ 37.46% 11.00% 11.70% (5.10)% 36.50%
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $1,210,570 $1,015,437 $1,034,091 $ 825,193 $ 937,773
Net assets attributable to common stock, end
of period (in 000's)............................ 1,210,570 1,015,437 1,034,091 825,193 937,773
Ratio of net investment income to average net asse
attributable to common stock....................ts 0.76% 1.07% 1.26% 1.29% 1.25%
Ratio of operating expenses to average total net
assets(i)....................................... 1.14% 1.18% 1.21% 1.19% 1.20%
Portfolio turnover rate........................... 39.2% 18.9% 25.1% 22.2% 24.4%
_________________________
+ Based on net asset value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to rights
offering, assuming full subscription by stockholder. Total return for the
period less than one year is not annualized.
++ Based on market value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to rights
offering, assuming full subscription by stockholder. Total return for the
period less than one year is not annualized.
(a) Per share amounts have been calculated using the monthly average shares
outstanding method.
(b) A distribution equivalent to $0.75 per share for The Gabelli Utility
Trust spin-off from net investment income, realized short-term gains,
realized long-term gains, and paid-in-capital were $0.01029, $0.07453,
$0.34218 and $0.32300, respectively.
(c) Amount represents less than $0.005 per share. (d) Based on weekly prices.
(e) The ratios do not include a reduction of expenses for custodian fee
credits on cash balances maintained with the custodian. Including such
custodian fee credits for the years ended December 31, 2002, 2001 and
2000, the expense ratios of operating expenses to average net assets
attributable to common stock would be 1.37%, 1.11% and 1.14%,
respectively, and the expense ratios of operating expenses to average
total net assets including liquidation value of preferred shares would be
1.00%, 0.94% and 1.03%, respectively.
(f) Asset coverage is calculated by combining all series of preferred stock.
(g) The Fund incurred interest expense during the six months ended June 30,
2000 and the year ended December 31, 2002. If interest expense had not
been incurred, the expense ratio of operating expenses to average net
assets attributable to common stock would be 1.37% and 1.19%,
respectively, and the expense ratio of operating expenses to average total
net assets including liquidation value of preferred shares would be 0.92%
and 0.87% respectively.
(h) Includes a distribution equivalent to $0.75 per share for The Gabelli
Global Multimedia Trust Inc. spin-off comprising net investment income,
realized short-term gains, and paid-in capital of $0.064, $0.031, and
$0.655, respectively.
(i) Amounts are attributable to both common and preferred stock assets.
(j) Prior to 1998 there was no preferred stock outstanding.
(k) Annualized.
22
The following table provides information about the Fund's Series A
Preferred, Series B Preferred and Series C Auction Rate Preferred since the
issuance of each such series. The information has been audited by
PricewaterhouseCoopers LLP, independent accountants.
Involuntary
Liquidation Average
Year ended Shares Asset Coverage Preference Market
December 31, Outstanding Per Share Per Share Value Per Share
------------ ----------- --------- --------- ---------------
2002 Series A Preferred: 5,367,900 $106.20 $25.00 $25.75
Series B Preferred: 6,600,000 $106.20 $25.00 $26.40
Series C Auction: 5,200 $106.20 $25,000
Rate Preferred: $25,000
2001 Series A Preferred: 5,367,900 $122.44 $25.00 $25.39
Series B Preferred: 6,600,000 $122.44 $25.00 $25.60
2000 Series A Preferred: 5,368,900 $245.54 $25.00 $22.62
1999 Series A Preferred: 5,386,400 $279.16 $25.00 $24.43
1998 Series A Preferred: 5,400,000 $250.41 $25.00 $25.63
For purposes of the foregoing table, the Asset Coverage Per Share is
calculated by dividing the total value of the Fund's assets on December 31 of
the relevant year by the aggregate liquidation preference of the Fund's
preferred shares outstanding on that date. Involuntary Liquidation Preference
Per Share refers to the amount holders of Series A Preferred, Series B
Preferred and Series C Auction Rate Preferred are entitled to receive per
share in the event of liquidation of the Fund prior to the holders of common
stock being entitled to receive any amounts in respect of the assets of the
Fund. The Average Market Value Per Share for each the Series A Preferred and
the Series B Preferred is the average of the weekly closing prices of such
series on the NYSE each week during the relevant year.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $[__], after
deduction of the underwriting discounts and estimated offering expenses
payable by the Fund. The Investment Adviser expects that it will initially
invest the proceeds of the offering in high quality short-term debt securities
and instruments. The Investment Adviser anticipates that the investment of the
proceeds will be made in accordance with the Fund's investment objectives and
policies within three months; however, changes in the current market
conditions or other developments affecting the industries in which the Fund
normally invests could result in the Fund's anticipated investment period
extending to as long as six months.
23
THE FUND
The Fund, incorporated in Maryland on May 20, 1986, is a closed-end,
non-diversified management investment company registered under the 1940 Act.
The Fund's common stock is traded on the NYSE under the symbol "GAB." Prior to
its redemption on June 17, 2003, the Fund's Series A Preferred traded on the
NYSE under the symbol "GAB Pr." The Fund's Series B Preferred trades under the
symbol "GAB P.B."
24
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of September 15, 2003, and its adjusted capitalization assuming the
Series D Preferred and/or Series E Auction Rate Preferred offered in this
prospectus had been issued.
As of September 15, 2003
(unaudited)
Actual As Adjusted
------ -----------
Preferred stock, $0.001 par value,
18,000,000 shares authorized.
(The "Actual" column reflects Fund's
outstanding capitalization as of September
15, 2003; the "As Adjusted" column assumes
the issuance of an additional 3,000,000
shares of Series D Preferred and 2,000
shares of Series E Auction Rate Preferred,
$25 and $25,000 liquidation preference,
respectively) .......................................... $ 295,000,000 $ 420,000,000
---------------- ---------------
Stockholders' Equity Applicable to shares of
common stock
Common stock, $.001 par value per share;
182,000,000 shares authorized,
136,014,878 shares outstanding.......................... 136,015 136,015
Paid-in surplus*............................................. 873,744,705 870,392,205
Accumulated distributions in excess of net
investment income....................................... (84,923,457) (84,923,457)
Accumulated net realized loss from
investment transactions................................. (2,169,658) (2,169,658)
Net unrealized appreciation.................................. 171,309,400 171,309,400
---------------- ---------------
Net assets applicable to common stockholders................. 958,097,005 954,744,505
---------------- ---------------
Net assets, plus liquidation preference of
preferred stock......................................... $1,253,097,005 $1,374,744,505
================ ===============
* As adjusted paid-in surplus reflects a reduction for the sales load
and estimated offering cost of the Series D Preferred and/or Series E
Auction Rate Preferred issuance of $3,352,500.
As used in this prospectus, unless otherwise noted, the Fund's
"managed assets" include the aggregate net asset value of the Fund's common
stock plus assets attributable to its outstanding preferred stock, with no
deduction for the liquidation preference of such preferred stock. For
financial reporting purposes, however, the Fund is required to deduct the
liquidation preference of its outstanding preferred stock from "managed
assets," so long as the preferred stock has redemption features that are not
solely within the control of the Fund. For all regulatory purposes, the Fund's
preferred stock will be treated as stock (rather than as indebtedness).
25
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to achieve long-term
growth of capital by investing primarily in a portfolio of equity securities
consisting of common stock, preferred stock, convertible or exchangeable
securities and warrants and rights to purchase such securities selected by the
Investment Adviser. Income is the secondary investment objective. The
investment objectives of long-term growth of capital and income are
fundamental policies of the Fund. These fundamental policies and the
investment limitations described in the SAI under the caption "Investment
Restrictions" cannot be changed without the approval of the holders of a
majority of the Fund's outstanding shares of preferred stock voting as a
separate class and the approval of the holders of a majority of the Fund's
outstanding voting securities. Such majority votes require, in each case, the
lesser of (i) 67% of the Fund's applicable shares represented at a meeting at
which more than 50% of the Fund's applicable shares outstanding are
represented, whether in person or by proxy, or (ii) more than 50% of the
applicable shares outstanding shares of the applicable class.
Under normal market conditions, the Fund will invest at least 80% of
the value of its total assets in equity securities.
The Investment Adviser selects investments on the basis of
fundamental value and, accordingly, the Fund typically invests in the
securities of companies that are believed by the Investment Adviser to be
priced lower than justified in relation to their underlying assets. Other
important factors in the selection of investments include favorable
price/earnings and debt/equity ratios and strong management.
The Fund seeks to achieve its secondary investment objective of
income, in part, by investing up to 10% of its total assets in a portfolio
consisting primarily of high-yielding, fixed-income securities, such as
corporate bonds, debentures, notes, convertible securities, preferred stocks
and domestic and foreign government obligations. Generally, debt securities
purchased by the Fund will be rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated CCC or lower
by S&P or Caa or lower by Moody's, or will be nonrated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions and are often referred to in
the financial press as "junk bonds."
No assurance can be given that the Fund's investment objectives will
be achieved.
Investment Methodology of the Fund
In selecting securities for the Fund, the Investment Adviser normally
will consider the following factors, among others:
o the Investment Adviser's own evaluations of the private
market value, cash flow, earnings per share and other
fundamental aspects of the underlying assets and business of
the company;
o the potential for capital appreciation of the securities;
o the interest or dividend income generated by the securities;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of call
protection or other protective covenants;
o the existence of any anti-dilution protections or guarantees
of the security; and
o the diversification of the portfolio of the Fund as to issuers.
26
The Investment Adviser's investment philosophy with respect to equity
securities seeks to identify assets that are selling in the public market at a
discount to their private market value. The Investment Adviser defines private
market value as the value informed purchasers are willing to pay to acquire
assets with similar characteristics. The Investment Adviser also normally
evaluates the issuers' free cash flow and long-term earnings trends. Finally,
the Investment Adviser looks for a catalyst, something indigenous to the
company, its industry or country that will surface additional value.
Certain Investment Practices
Foreign Securities. The Fund may invest up to 35% of its total assets
in foreign securities. Among the foreign securities in which the Fund may
invest are those issued by companies located in developing countries, which
are countries in the initial stages of their industrialization cycles.
Investing in the equity and debt markets of developing countries involves
exposure to economic structures that are generally less diverse and less
mature, and to political systems that can be expected to have less stability,
than those of developed countries. The markets of developing countries
historically have been more volatile than the markets of the more mature
economies of developed countries, but often have provided higher rates of
return to investors.
The Fund may also invest in the debt securities of foreign
governments. Although such investments are not a principal strategy of the
Fund, there is no independent limit on the Fund's ability to invest in the
debt securities of foreign governments.
Temporary Defensive Investments. Subject to the Fund's investment
restrictions, when a temporary defensive period is believed by the Investment
Adviser to be warranted, ("temporary defensive periods"), the Fund may, without
limitation, hold cash or invest its assets in securities of U.S. government
sponsored instrumentalities, in repurchase agreements in respect of those
instruments, and in certain high grade commercial paper instruments. During
temporary defensive periods the Fund may also invest in money market mutual
funds that invest primarily in securities of U.S. government sponsored
instrumentalities and repurchase agreements in respect of those instruments.
Under current law, in the absence of an exemptive order, such money market
mutual funds will not be affiliated with the Investment Adviser. Obligations of
certain agencies and instrumentalities of the U.S. government, such as the
Government National Mortgage Association, are supported by the "full faith and
credit" of the U.S. government; others, such as those of the Export-Import Bank
of the U.S., are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. government to purchase
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial
support to U.S. government sponsored instrumentalities if it is not obligated to
do so by law. During temporary defensive periods, the Fund may be less likely to
achieve its secondary investment objective of income.
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories (as
described below) of recognized statistical rating agencies, such as securities
rated "CCC" or lower by S&P or "Caa" or lower by Moody's, or non-rated
securities of comparable quality. These debt securities are predominantly
speculative and involve major risk exposure to adverse conditions and are
often referred to in the financial press as "junk bonds."
Generally, lower rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher
rated securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the ratings organizations, are
outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation. The market values of certain of these securities also tend to
be more sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, such lower rated securities
and comparable unrated securities generally present a higher degree of credit
risk.
27
The risk of loss due to default by these issuers is significantly greater
because such lower rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. In light of these risks, the Investment
Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources, its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue, the perceived ability and integrity of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories
is more volatile than that of higher quality securities, and the markets in
which such lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the
effect of limiting the ability of the Fund to sell securities at their fair
market value to respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a
feature of fixed income securities), the Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in
interest rates, in the event of rising interest rates the value of the
securities held by the Fund may decline proportionately more than a portfolio
consisting of higher rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes
in interest rates than bonds that pay interest currently.
As part of its investments in lower rated fixed-income securities,
the Fund may invest in securities of issuers in default. The Fund will only
make an investment in securities of issuers in default when the Investment
Adviser believes that such issuers will honor their obligations or emerge from
bankruptcy protection and the value of these securities will appreciate. By
investing in the securities of issuers in default, the Fund bears the risk
that these issuers will not continue to honor their obligations or emerge from
bankruptcy protection or that the value of the securities will not appreciate.
Other Investments. In addition to the investment methods discussed
under "--Special Invesment Methods," the Fund is permitted to invest in
special situations, illiquid securities, warrants, options and other rights. A
discussion of these investments and techniques (and the risks associated with
them) and further information on the investment objectives and policies of the
Fund are set forth in the SAI.
28
Special Investment Methods
Futures Contracts and Options Thereon. On behalf of the Fund, the
Investment Adviser may, subject to the Fund's investment restrictions and
guidelines of the Board of Directors, purchase and sell financial futures
contracts and options thereon which are traded on a commodities exchange or
board of trade for certain hedging, yield enhancement and risk management
purposes. These futures contracts and related options may be on debt securities,
financial indices, securities indices, U.S. government securities and foreign
currencies. A financial futures contract is an agreement to purchase or sell an
agreed amount of securities or currencies at a set price for delivery in the
future.
The Investment Adviser has claimed an exclusion from the definition
of the term "commodity pool operator" under the Commodity Exchange Act and
therefore is not subject to the registration requirements under the Commodity
Exchange Act. Accordingly, the Fund's investments in derivative instruments
described in this prospectus and in the SAI are not limited by or subject to
regulation under the Commodity Exchange Act or otherwise regulated by the
Commodity Futures Trading Commission. Nevertheless, the Fund's investment
restrictions place certain limitations and prohibitions on the Fund's ability
to purchase or sell commodities or commodity contracts. See "Investment
Restrictions." In addition, investment in futures contracts and related
options generally will be limited by the rating agency guidelines applicable
to any of the Fund's outstanding preferred stock.
Forward Currency Exchange Contracts. Subject to guidelines of the
Board of Directors, the Fund may enter into forward foreign currency exchange
contracts to protect the value of its portfolio against future changes in the
level of currency exchange rates. The Fund may enter into such contracts on a
spot, i.e., cash, basis at the rate then prevailing in the currency exchange
market or on a forward basis, by entering into a forward contract to purchase
or sell currency. A forward contract on foreign currency is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days agreed upon by the parties from the date of the contract at a
price set on the date of the contract. The Fund's dealings in forward
contracts generally will be limited to hedging involving either specific
transactions or portfolio positions. The Fund does not have an independent
limitation on its investments
29
in foreign futures contracts and options on foreign currency futures
contracts. See "Investment Objectives and Policies-- Investment Practices" in
the SAI.
Special Risks of Derivative Transactions. Participation in the
options or futures markets and in currency exchange transactions involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. If the Investment Adviser's prediction of
movements in the direction of the securities, foreign currency and interest
rate markets are inaccurate, the consequences to the Fund may leave the Fund
in a worse position than if such strategies were not used. Risks inherent in
the use of options, foreign currency, futures contracts and options on futures
contracts, securities indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates,
securities prices and currency markets;
o imperfect correlation between the price of options and
futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged;
o the fact that skills needed to use these strategies are
different from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences; and
o the possible inability of the Fund to purchase or sell a
security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a
security at a disadvantageous time due to a need for the Fund
to maintain "cover" or to segregate securities in connection
with the hedging techniques.
See "Risk Factors and Special Considerations-- Futures Transactions."
Repurchase Agreements. The Fund may enter into repurchase agreements
with primary government securities dealers recognized by the Federal Reserve
Bank of New York and member banks of the Federal Reserve System which furnish
collateral at least equal in value or market price to the amount of their
repurchase obligation. The Fund will not enter into repurchase agreements with
the Adviser or its affiliates. In a repurchase agreement, the Fund purchases a
debt security from a seller which undertakes to repurchase the security at a
specified resale price on an agreed future date. Repurchase agreements are
generally for one business day but may have longer durations. The SEC has
taken the position that, in economic reality, a repurchase agreement is a loan
by the Fund to the other party to the transaction secured by securities
transferred to the Fund. The resale price generally exceeds the purchase price
by an amount which reflects an agreed upon market interest rate for the term
of the repurchase agreement. The principal risk is that, if the seller
defaults, the Fund might suffer a loss to the extent that the proceeds from
the sale of the underlying securities and other collateral held by the Fund
are less than the repurchase price. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. The Board
of Directors will monitor the creditworthiness of the counterparty to the
repurchase agreements.
If the financial institution which is a party to the repurchase
agreement petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is
30
unsettled. As a result, under these circumstances, there may be a restriction
on the Fund's ability to sell the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities. To increase income, the Fund may lend
its portfolio securities to securities broker-dealers or financial
institutions if (i) the loan is collateralized in accordance with applicable
regulatory requirements and (ii) no loan will cause the value of all loaned
securities to exceed 20% of the value of the Fund's total assets.
If the borrower fails to maintain the requisite amount of collateral,
the loan automatically terminates and the Fund could use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over the value of the collateral. As with any extension of
credit, there are risks of delay in recovery and in some cases even loss of
rights in collateral should the borrower of the securities fail financially.
While these loans of portfolio securities will be made in accordance with
guidelines approved by the Board of Directors, there can be no assurance that
borrowers will not fail financially. On termination of the loan, the borrower
is required to return the securities to the Fund, and any gain or loss in the
market price during the loan would inure to the Fund. If the counterparty to
the loan petitions for bankruptcy or becomes subject to the United States
Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a
result, under these circumstances, there may be a restriction on the Fund's
ability to sell the collateral and the Fund would suffer a loss. See
"Investment Objectives and Policies -- Investment Practices" in the SAI.
Borrowing. The Fund may borrow money in accordance with its
investment restrictions, including as a temporary measure for extraordinary or
emergency purposes. The Fund may not borrow for investment purposes. See
"Investment Restrictions" in the SAI.
Leveraging. As provided in the 1940 Act, and subject to compliance with
the Fund's investment limitations, the Fund may issue senior securities
representing stock, such as preferred stock, so long as immediately following
such issuance of stock, the Fund's total assets exceed 200% of the amount of
such stock. The use of leverage magnifies the impact of changes in net asset
value. For example, a fund that uses 33% leverage will show a 1.5% increase or
decline in net asset value for each 1% increase or decline in the value of its
total assets. In addition, if the cost of leverage exceeds the return on the
securities acquired with the proceeds of leverage, the use of leverage will
diminish rather than enhance the return to the Fund. The use of leverage
generally increases the volatility of returns to the Fund. See "Risk Factors and
Special Considerations -- Preferred Stock -- Leverage Risk."
Further information on the investment objectives and policies of the
Fund are set forth in the SAI.
Investment Restrictions. The Fund has adopted certain investment
restrictions as fundamental policies of the Fund. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Fund
(voting together as a single class). In addition, pursuant to the Fund's
Articles Supplementary, a majority, as defined in the 1940 Act, of the
outstanding preferred stock of the Fund (voting separately as a single class)
is also required to change a fundamental policy. The Fund's investment
restrictions are more fully discussed under "Investment Restrictions" in the
SAI.
Portfolio Turnover. The Fund will buy and sell securities to
accomplish its investment objective. The investment policies of the Fund may
lead to frequent changes in investments, particularly in periods of rapidly
fluctuating interest or currency exchange rates. The portfolio turnover may be
higher than that of other investment companies.
31
Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less). To the extent the Fund experiences high
portfolio turnover, such turnover is likely to decrease tax advantages to
individual investors in the Fund to the extent it results in a decrease of the
long term capital gains portion of distributions to stockholders.
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2002, December 31, 2001 and December 31, 2000 were 27.1%, 23.9%
and 32.1%, respectively.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special
considerations associated with investing in the Fund.
Preferred Stock
General. There are a number of risks associated with an investment in
the Series D Preferred or Series E Auction Rate Preferred. The market value
for the Series D Preferred and/or Series E Auction Rate Preferred will be
influenced by changes in interest rates, the perceived credit quality of the
Series D Preferred or Series E Auction Rate Preferred and other factors. The
Series D Preferred and/or Series E Auction Rate Preferred are subject to
optional and mandatory redemption by the Fund under specified circumstances
and investors may not be able to reinvest the proceeds of any such redemption
in an investment providing the same or a better rate of return than that of
the Series D Preferred or Series E Auction Rate Preferred. Subject to optional
and mandatory redemption by the Fund, the Series D Preferred and/or Series E
Auction Rate Preferred are perpetual. See "Description of the Series D
Preferred and Series E Auction Rate Preferred -- Redemption."
The credit rating on the Series D Preferred or Series E Auction Rate
Preferred could be reduced or withdrawn while an investor holds shares, and
the credit rating does not eliminate or mitigate the risks of investing in the
Series D Preferred or Series E Auction Rate Preferred. A reduction or
withdrawal of the credit rating would likely have an adverse effect on the
market value of the Series D Preferred or Series E Auction Rate Preferred.
The Series D Preferred and the Series E Auction Rate Preferred are
not obligations of the Fund. The Series D Preferred and/or Series E Auction
Rate Preferred would be junior in respect of dividends and liquidation
preference to any indebtedness incurred by the Fund. Although unlikely,
precipitous declines in the value of the Fund's assets could result in the
Fund having insufficient assets to redeem all of the Series D Preferred and/or
Series E Auction Rate Preferred for the full redemption price.
In addition, the Fund has adopted a policy of distributing to its
common stockholders at least 10% of average quarter-end assets attributable to
the common stock. In the event investment returns do not provide sufficient
amounts to fund such distributions, the Fund may be required to return capital
as part of such distribution, which may have the effect of decreasing the
asset coverage per share with respect to the Fund's outstanding preferred
shares, including the Series D Preferred and Series E Auction Rate Preferred.
The Fund has made quarterly distributions with respect to its shares of common
stock since 1987. A portion of the returns during nine fiscal years since then
have constituted a return of capital.
Leverage Risk. The Fund uses financial leverage for investment
purposes by issuing preferred stock. It is currently anticipated that, taking
into account the Series D Preferred and/or Series E Auction
32
Rate Preferred being offered in this prospectus, the amount of leverage will
represent approximately 30.5% of the Fund's managed assets (as defined below)
as of September 15, 2003. The Fund's leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of greater loss and the
likelihood of higher volatility of the net asset value of the Fund and the
asset coverage for the Series D Preferred and/or Series E Auction Rate
Preferred. Such volatility may increase the likelihood of the Fund having to
sell investments in order to meet dividend or interest payments on the debt or
preferred stock, or to redeem preferred stock or repay debt, when it may be
disadvantageous to do so. Also, if the Fund is utilizing leverage, a decline
in net asset value could affect the ability of the Fund to make common stock
dividend payments and such a failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Code. See "Taxation."
Because the fee paid to the Investment Adviser will be calculated on
the basis of the Fund's managed assets, which equal the aggregate net asset
value of the common stock plus assets attributable to outstanding shares of
its preferred stock, with no deduction for the liquidation preference of such
shares of preferred stock (rather than only on the basis of net assets
attributable to the common stock), the fee may be higher when leverage is
utilized, giving the Investment Adviser an incentive to utilize leverage.
However, the Investment Adviser has agreed not to accept an incremental fee
with respect to any series of its outstanding preferred stock unless the
Fund's total return at least equals the cost of capital on such series of the
preferred stock. See "Management of the Fund -- General."
Restrictions on Dividends and Other Distributions. Restrictions
imposed on the declaration and payment of dividends or other distributions to
the holders of the Fund's common stock and preferred stock, both by the 1940
Act and by requirements imposed by rating agencies, might impair the Fund's
ability to maintain its qualification as a regulated investment company for
federal income tax purposes. While the Fund intends to redeem its preferred
stock (including the Series D Preferred and/or Series E Auction Rate
Preferred) to the extent necessary to enable the Fund to distribute its income
as required to maintain its qualification as a regulated investment company
under the Code, there can be no assurance that such actions can be effected in
time to meet the Code requirements. See "Taxation" in the SAI.
Ratings and Asset Coverage Risk. While it is a condition to the
closing of the offering that Moody's assigns a rating of "Aaa" to any Series D
Preferred and any Series E Auction Rate Preferred, and that S&P assigns a
rating of "AAA" to any Series E Auction Rate Preferred, the ratings do not
eliminate or necessarily mitigate the risks of investing in Series D Preferred
or Series E Auction Rate Preferred. The credit rating on the Series D
Preferred or Series E Auction Rate Preferred could be reduced or withdrawn
while an investor holds shares, which would likely have an adverse effect on
the market value of the Series D Preferred or Series E Auction Rate Preferred.
A reduction or withdrawal of the credit ratings on the Series E Auction Rate
Preferred may also make your Series E Auction Rate Preferred shares less
liquid at an auction or in the secondary market.
In addition, if a rating agency rating the Series E Auction Rate
Preferred at the Fund's request downgrades the Series E Auction Rate
Preferred, the maximum rate on the Series E Auction Rate Preferred will
increase. See "Description of the Series D Preferred and Series E Auction Rate
Preferred -- Rating Agency Guidelines" for a description of the asset
maintenance tests the Fund must meet. In addition, should the rating on the
Fund's preferred stock be lowered or withdrawn by the relevant rating agency,
the Fund may also be required to redeem all or part of its outstanding
preferred stock.
33
Special Risks of the Series D Preferred
Illiquidity Prior to Exchange Listing. Prior to the offering, there
has been no public market for the Series D Preferred. In the event the Series
D Preferred is issued, prior application will have been made to list the
Series D Preferred on the NYSE. However, during an initial period, which is
not expected to exceed 30 days after the date of its initial issuance, the
Series D Preferred may not be listed on any securities exchange. During such
period, the underwriters intend to make a market in the Series D Preferred,
though, they have no obligation to do so. Consequently, an investment in the
Series D Preferred may be illiquid during such period.
Special Risks of the Series E Auction Rate Preferred
Auction Risk. You may not be able to sell your Series E Auction Rate
Preferred at an auction if the auction fails, i.e., if there is more Series E
Auction Rate Preferred offered for sale than there are buyers for those shares.
Also, if you place an order (a hold order) at an auction to retain Series E
Auction Rate Preferred only at a specified rate that exceeds the rate set at
the auction, you will not retain your Series E Auction Rate Preferred.
Additionally, if you place a hold order without specifying a rate below which
you would not wish to continue to hold your shares and the auction sets a
below-market rate, you will receive a lower rate of return on your shares than
the market rate. Finally, the dividend period may be changed, subject to
certain conditions and with notice to the holders of the Series E Auction Rate
Preferred, which could also affect the liquidity of your investment. See
"Description of the Series D Preferred and Series E Auction Rate Preferred" and
"The Auction of Series E Auction Rate Preferred."
Secondary Market Risk. If you try to sell your Series E Auction Rate
Preferred between auctions, you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the Fund has
designated a special dividend period of more than seven days, changes in
interest rates could affect the price you would receive if you sold your
shares in the secondary market. Broker-dealers that maintain a secondary
trading market for the Series E Auction Rate Preferred are not required to
maintain this market, and the Fund is not required to redeem Series E Auction
Rate Preferred if either an auction or an attempted secondary market sale
fails because of a lack of buyers. The Series E Auction Rate Preferred is not
registered on a stock exchange or the NASDAQ stock market. If you sell your
Series E Auction Rate Preferred to a broker-dealer between auctions, you may
receive less than the price you paid for them, especially when market interest
rates have risen since the last auction or during a special dividend period.
Long-term Objective
The Fund is intended for investors seeking long-term capital growth.
The Fund is not meant to provide a vehicle for those who wish to play
short-term swings in the stock market. An investment in shares of the Fund
should not be considered a complete investment program. Each stockholder
should take into account the Fund's investment objectives as well as the
stockholder's other investments when considering an investment in the Fund.
Non-diversified Status
The Fund is classified as a "non-diversified" investment company
under the 1940 Act, which means the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. However, the Fund has in the past conducted and intends to conduct its
operations so as to qualify as a "regulated investment company," or RIC, for
purposes of the Code, which will relieve it of any liability for federal
income tax to the extent its earnings are distributed to stockholders. To
qualify as a "regulated investment company," among other requirements, the
Fund will limit its investments so that, with certain exceptions, at the close
of each quarter of the taxable year:
34
o not more than 25% of the market value of its total assets
will be invested in the securities (other than U.S.
government securities or the securities of other RICs) of a
single issuer or any two or more issuers that the Fund
controls and which are determined to be engaged in the same,
similar or related trades or businesses; and
o at least 50% of the market value of the Fund's assets will be
represented by cash, securities of other regulated investment
companies, U.S. government securities and other securities,
with such other securities limited in respect of any one
issuer to an amount not greater than 5% of the value of the
Fund's assets and not more than 10% of the outstanding voting
securities of such issuer.
As a non-diversified investment company, the Fund may invest in the
securities of individual issuers to a greater degree than a diversified
investment company. As a result, the Fund may be more vulnerable to events
affecting a single issuer and therefore, subject to greater volatility than a
fund that is more broadly diversified. Accordingly, an investment in the Fund
may present greater risk to an investor than an investment in a diversified
company.
Market Value and Net Asset Value
The Fund is a closed-end, non-diversified, management investment
company. Shares of closed- end funds are bought and sold in the securities
markets and may trade at either a premium or discount from net asset value.
Listed shares of closed-end investment companies frequently trade at a
discount from net asset value. This characteristic of stock of a closed-end
fund is a risk separate and distinct from the risk that the Fund's net asset
value will decrease. The Fund cannot predict whether its listed stock will
trade at, below or above net asset value. Stockholders desiring liquidity may,
subject to applicable securities laws, trade their common stock in the Fund on
the NYSE or other markets on which such stock may trade at the then-current
market value, which may differ from the then-current net asset value.
Stockholders will incur brokerage or other transaction costs to sell stock.
Lower Rated Securities
The Fund may invest up to 10% of its total assets in fixed-income
securities rated in the lower rating categories of recognized statistical
rating agencies. These high yield securities, also sometimes referred to as
"junk bonds," generally pay a premium above the yields of U.S. government
securities or debt securities of investment grade issuers because they are
subject to greater risks than these securities. These risks, which reflect
their speculative character, include the following:
o greater volatility;
o greater credit risk;
o potentially greater sensitivity to general economic or
industry conditions;
o potential lack of attractive resale opportunities
(illiquidity); and
o additional expenses to seek recovery from issuers who
default.
The market value of lower-rated securities may be more volatile than
the market value of higher- rated securities and generally tends to reflect
the market's perception of the creditworthiness of the issuer and short-term
market developments to a greater extent than more highly rated securities,
which primarily reflect fluctuations in general levels of interest rates.
35
Ratings are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition.
As a part of its investment in lower rated fixed-income securities,
the Fund may invest in the securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Investment Adviser
believes that such issuers will honor their obligations and emerge from
bankruptcy protection and that the value of such issues' securities will
appreciate. By investing in the securities of issuers in default, the Fund
bears the risk that these issuers will not continue to honor their obligations
or emerge from bankruptcy protection or that the value of these securities will
not appreciate.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Investment
Practices" in the SAI. For a description of the ratings categories of certain
recognized statistical ratings agencies, see Appendix A to this prospectus.
Foreign Securities
The Fund may invest up to 35% of its total assets in foreign
securities. Investments in the securities of foreign issuers involve certain
considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Foreign securities
exchanges, brokers and listed companies may be subject to less government
supervision and regulation than exists in the United States. Dividend and
interest income may be subject to withholding and other foreign taxes, which
may adversely affect the net return on such investments. There may be
difficulty in obtaining or enforcing a court judgment abroad. In addition, it
may be difficult to effect repatriation of capital invested in certain
countries. In addition, with respect to certain countries, there are risks of
expropriation, confiscatory taxation, political or social instability or
diplomatic developments that could affect assets of the Fund held in foreign
countries.
There may be less publicly available information about a foreign
company than a U.S. company. Foreign securities markets may have substantially
less volume than U.S. securities markets and some foreign company securities
are less liquid than securities of otherwise comparable U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance
and settlement procedures that could cause the Fund to encounter difficulties
in purchasing and selling securities on such markets and may result in the
Fund missing attractive investment opportunities or experiencing loss. In
addition, a portfolio that includes foreign securities can expect to have a
higher expense ratio because of the increased transaction costs on non-U.S.
securities markets and the increased costs of maintaining the custody of
foreign securities. The Fund does not have an independent limit on the amount
of its assets that it may invest in the securities of foreign issuers.
The Fund also may purchase sponsored American Depository Receipts
("ADRs") or U.S. denominated securities of foreign issuers. ADRs are receipts
issued by United States banks or trust companies in respect of securities of
foreign issuers held on deposit for use in the United States securities
markets. While ADRs may not necessarily be denominated in the same currency as
the securities into which they may be converted, many of the risks associated
with foreign securities may also apply to ADRs. In addition, the underlying
issuers of certain depository receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
stockholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
36
Interest Rate Transactions
The Fund has entered into an interest rate swap transaction with
respect to its outstanding Series C Auction Rate Preferred, and may enter into
an interest rate swap or cap transaction with respect to all or a portion of
the Series E Auction Rate Preferred. The use of interest rate swaps and caps
is a highly specialized activity that involves certain risks to the Fund
including, among others, counterparty risk and early termination risk. See
"How the Fund Manages Risk -- Interest Rate Transactions."
Futures Transactions
Futures and options on futures entail certain risks, including but
not limited to the following:
o no assurance that futures contracts or options on futures can
be offset at favorable prices;
o possible reduction of the yield of the Fund due to the use of
hedging;
o possible reduction in value of both the securities hedged and
the hedging instrument;
o possible lack of liquidity due to daily limits or price
fluctuations;
o imperfect correlation between the contracts and the
securities being hedged; and
o losses from investing in futures transactions that are
potentially unlimited and the segregation requirements for
such transactions.
For a further description of the Fund's investments in futures, see
"Investment Objectives and Policies -- Investment Practices" in the SAI.
Forward Currency Exchange Contracts
The use of forward currency contracts may involve certain risks,
including the failure of the counter party to perform its obligations under
the contract and that the use of forward contracts may not serve as a complete
hedge because of an imperfect correlation between movements in the prices of
the contracts and the prices of the currencies hedged or used for cover. For a
further description of such investments, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
Dependence on Key Personnel
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund could be adversely affected. There
can be no assurance that a suitable replacement could be found for Mr. Gabelli
in the event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser.
Current Market Uncertainties
The war with Iraq, its aftermath and the continuing occupation of
Iraq are likely to have a substantial impact on the U.S. and world economies
and securities markets. The nature, scope and duration of the occupation
cannot be predicted with any certainty. Terrorist attacks on the World Trade
Center and the Pentagon on September 11, 2001 closed some of the U.S. markets
for a four-day period and
37
the occurrence of similar events in the future cannot be ruled out. The war and
occupation, terrorism and related geopolitical risks have led, and may in the
future lead to, increased short-term market volatility and may have adverse
long-term effects on U.S. and world economies and markets generally. Those
events could also have an acute effect on individual issuers or related groups
of issuers. These risks could also adversely affect individual issuers or
related groups of issuers, securities markets, interest rates, auctions,
secondary trading, ratings, credit risk, inflation and other factors relating
to the Series D Preferred and/or Series E Auction Rate Preferred.
Anti-takeover Provisions
The Fund's Charter includes provisions that could limit the ability
of other entities or persons to acquire control of the Fund or convert the
Fund to an open-end fund. See "Anti-takeover Provisions of the Fund's
Charter."
HOW THE FUND MANAGES RISK
Investment Restrictions
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Fund
(voting together as a single class). In addition, pursuant to the Fund's
Articles Supplementary, a majority, as defined in the 1940 Act, of the
outstanding preferred stock of the Fund (voting separately as a single class)
is also required to change a fundamental policy. The Fund may become subject to
guidelines that are more limiting than the investment restrictions set forth
above in order to obtain and maintain ratings from Moody's or S&P on its
preferred stock.
Interest Rate Transactions
The Fund has entered into an interest rate swap transaction with
respect to its outstanding Series C Auction Rate Preferred and may enter into
interest rate swap or cap transactions in relation to all or a portion of the
Series E Auction Rate Preferred in order to manage the impact on its portfolio
of changes in the dividend rate of the Series E Auction Rate Preferred.
Through these transactions the Fund may, for example, obtain the equivalent of
a fixed rate for such auction rate preferred stock that is lower than the Fund
would have to pay if it issued fixed rate preferred stock.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party to the interest rate swap
(which is known as the "counterparty") periodically a fixed rate payment in
exchange for the counterparty agreeing to pay to the Fund periodically a
variable rate payment that is intended to approximate the Fund's variable rate
payment obligation on its auction rate preferred stock. In an interest rate
cap, the Fund would pay a premium to the counterparty to the interest rate cap
and, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, would receive from the counterparty payments of the
difference based on the notional amount of such cap. Interest rate swap and
cap transactions introduce additional risk because the Fund would remain
obligated to pay preferred stock dividends when due in accordance with the
Articles Supplementary even if the counterparty defaulted. Depending on the
general state of short-term interest rates and the returns on the Fund's
portfolio securities at that point in time, such a default could negatively
affect the Fund's ability to make dividend payments on the Series D Preferred
and Series E Auction Rate Preferred. In addition, at the time an interest rate
swap or cap transaction reaches its scheduled termination date, there is a
risk that the Fund will not be able to obtain a replacement transaction or
that the terms of the replacement will not be as favorable as on the expiring
transaction. If
38
this occurs, it could have a negative impact on the Fund's ability to make
dividend payments on the Series D Preferred and Series E Auction Rate
Preferred. To the extent there is a decline in interest rates, the value of
the interest rate swap or cap could decline, resulting in a decline in the
asset coverage for the Series D Preferred and Series E Auction Rate Preferred.
A sudden and dramatic decline in interest rates may result in a significant
decline in the asset coverage. Under the Articles Supplementary, if the Fund
fails to maintain the required asset coverage on the outstanding preferred
stock (including the Series D Preferred and Series E Auction Rate Preferred)
or fails to comply with other covenants, the Fund may be required to redeem
some or all of these shares. The Fund may also choose to redeem some or all of
the Series E Auction Rate Preferred at any time. Such redemption would likely
result in the Fund seeking to terminate early all or a portion of any swap or
cap transaction. Early termination of a swap could result in a termination
payment by the Fund to the counterparty, while early termination of a cap
could result in a termination payment to the Fund.
The Fund will usually enter into swaps or caps on a net basis; that
is, the two payment streams will be netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The Fund
intends to segregate cash or liquid securities having a value at least equal
to the value of the Fund's net payment obligations under any swap transaction,
marked to market daily. The Fund does not presently intend to enter into
interest rate swap or cap transactions relating to Series E Auction Rate
Preferred in a notional amount in excess of the outstanding amount of the
Series E Auction Rate Preferred. The Fund will monitor any such swap with a
view to ensuring that the Fund remains in compliance with all applicable
regulatory investment policy and tax requirements.
MANAGEMENT OF THE FUND
General
The Fund's Directors (who, with its officers, are described in the
SAI) has overall responsibility for the management of the Fund. The Board
decides upon matters of general policy and reviews the actions of the
Investment Adviser, Gabelli Funds, LLC, located at One Corporate Center, Rye,
New York 10580-1422, and the Sub-Administrator (as defined below). Pursuant to
an Investment Advisory Agreement with the Fund, the Investment Adviser, under
the supervision of the Fund's Board of Directors, provides a continuous
investment program for the Fund's portfolio; provides investment research and
makes and executes recommendations for the purchase and sale of securities;
provides all facilities and personnel, including officers required for its
administrative management; and pays the compensation of all officers and
directors of the Fund who are its affiliates. As compensation for its services
and the related expenses borne by the Investment Adviser, the Fund pays the
Investment Adviser a fee, computed daily and payable monthly, equal, on an
annual basis, to 1.00% of the Fund's average weekly net assets. However, the
Investment Adviser had voluntarily agreed to waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund equal
to the aggregate stated value of, as the case may be, its outstanding Series D
Preferred and/or Series E Auction Rate Preferred for any calendar year in which
the net asset value total return of the Fund allocable to the common stock,
including distributions and the advisory fee subject to potential waiver, is
less than (i) in the case of the Series D Preferred, the stated annual dividend
rate of such series and (ii) in the case of the Series E Auction Rate
Preferred, the net cost of capital to the Fund with respect to the Series E
Auction Rate Preferred for such year expressed as a percentage (including,
without duplication, dividends paid by the Fund on the Series E Auction Rate
Preferred and the net cost to the Fund of any associated swap or cap
transaction if the Fund hedges its Series E Auction Rate Preferred dividend
obligations). This waiver will apply to the portion of the Fund's assets
attributable to the Series D Preferred and Series E Auction Rate Preferred,
respectively, for so long as any shares of such series remain outstanding. The
Investment Adviser has voluntarily agreed to similar waivers with respect to
the Fund's outstanding Series B Preferred and Series C Auction Rate Preferred.
39
For purposes of the calculation of the fees payable to the Investment Adviser
by the Fund, average weekly net assets of the Fund are determined at the end
of each month on the basis of its average net assets for each week during the
month. The assets for each weekly period are determined by averaging the net
assets at the end of a week with the net assets at the end of the prior week.
The Investment Adviser
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
corporation with principal offices located at One Corporate Center, Rye, New
York 10580. The Investment Adviser was organized in 1999 and is the successor
to Gabelli Funds, Inc., which was organized in 1980. As of June 30, 2003, the
Investment Adviser acted as registered investment adviser to 19 management
investment companies with aggregate net assets of $9.3 billion. The Investment
Adviser, together with other affiliated investment advisers noted below had
assets under management totaling approximately $21.9 billion as of June 30,
2003. GAMCO Investors, Inc., an affiliate of the Investment Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts and
endowments, and as a sub-adviser to management investment companies having
aggregate assets of $10.8 billion under management as of June 30, 2003.
Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for The Treasurer's Fund and separate accounts having
aggregate assets of $1.2 billion under management as of June 30, 2003. Gabelli
Advisers, Inc., an affiliate of the Investment Adviser, acts as investment
manager to the Gabelli Westwood Funds having aggregate assets of $493 million
under management as of June 30, 2003.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded
on the NYSE under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a
"controlling person" of the Investment Adviser on the basis of his ownership
of a majority of the stock of the Gabelli Group Capital Partners, Inc., which
owns a majority of the capital stock of Gabelli Asset Management Inc.
Payment of Expenses
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by the Investment Advisory Agreement
between the Fund and the Investment Adviser (the "Advisory Agreement")
including compensation of and office space for its officers and employees
connected with investment and economic research, trading and investment
management and administration of the Fund, as well as the fees of all
directors of the Fund who are affiliated with the Investment Adviser. The Fund
pays all other expenses incurred in its operation including, among other
things, expenses for legal and independent accountants' services, costs of
printing proxies, stock certificates and stockholder reports, charges of the
custodian, any subcustodian and transfer and dividend paying agent, expenses
in connection with its respective automatic dividend reinvestment and
voluntary cash purchase plan, SEC fees, fees and expenses of unaffiliated
directors, accounting and pricing costs, including costs of calculating the
net asset value of the Fund, membership fees in trade associations, fidelity
bond coverage for its officers and employees, directors' and officers' errors
and omission insurance coverage, interest, brokerage costs, taxes, stock
exchange listing fees and expenses, expenses of qualifying its stock for sale
in various states, litigation and other extraordinary or non-recurring
expenses, and other expenses properly payable by the Fund.
In addition to the fees of the Investment Adviser, the Fund is
responsible for the payment of all its other expenses incurred in the
operation of the Fund, which include, among other things, expenses for legal
and independent accountant's services, stock exchange listing fees, expenses
relating to the offering of preferred stock, rating agency fees, costs of
printing proxies, stock certificates and stockholder reports, charges of State
Street Bank and Trust Company ("State Street" or the "Custodian"), charges of
EquiServe and The Bank of New York, SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the
40
Fund's officers and employees, interest, brokerage costs, taxes, expenses of
qualifying the Fund for sale in various states, expenses of personnel
performing stockholder servicing functions, litigation and other extraordinary
or non-recurring expenses and other expenses properly payable by the Fund.
Selection of Securities Brokers
The Investment Advisory Agreement contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of the
Fund. Under those provisions, the Investment Adviser may (i) direct Fund
portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer
affiliates of the Investment Adviser and (ii) pay commissions to brokers other
than Gabelli & Company, Inc. that are higher than might be charged by another
qualified broker to obtain brokerage and/or research services considered by
the Investment Adviser to be useful or desirable for its investment management
of the Fund and/or its other advisory accounts or those of any investment
adviser affiliated with it. The SAI contains further information about the
Investment Advisory Agreement including a more complete description of the
advisory and expense arrangements, exculpatory and brokerage provisions, as
well as information on the brokerage practices of the Fund.
Portfolio Manager
Mario J. Gabelli is currently and has been responsible for the
day-to-day management of the Fund since its formation. Mr. Gabelli has served
as Chairman, President and Chief Investment Officer of the Investment Adviser
since 1980. Mr. Gabelli also serves as Portfolio Manager for several other
funds in the Gabelli fund family. Because of the diverse nature of Mr.
Gabelli's responsibilities, he will devote less than all of his time to the
day-to-day management at the Fund. Over the past five years, Mr. Gabelli has
served as Chairman of the Board and Chief Executive Officer of Gabelli Asset
Management Inc.; Chief Investment Officer of GAMCO Investors, Inc.; and Vice
Chairman of the Board of Lynch Corporation, a diversified manufacturing
company, and Vice Chairman of the Board and Chief Executive Officer of Lynch
Interactive Corporation, a multimedia and communications services company.
A portion of the Fund's foreign holdings are managed by Caesar Bryan.
For the last five years, Mr. Bryan has served as the portfolio manager of the
Gabelli International Growth Fund and as co-manager of the Gabelli Global
Opportunity Fund and the Gabelli Global Growth Fund.
Non-resident Director
Karl Otto Pohl, a director of the Fund, resides outside the United
States and all or a significant portion of his assets are located outside the
United States. Mr. Pohl does not have an authorized agent in the United States
to receive service of process. As a result, it may not be possible for
investors to effect service of process within the United States or to enforce
against Mr. Pohl in United States courts judgments predicated upon civil
liability provisions of United States securities laws. It may also not be
possible to enforce against Mr. Pohl in foreign courts judgments of United
States courts or liabilities in original actions predicated upon civil
liability provisions of the United States securities laws.
Sub-Administrator
The Investment Adviser has entered into sub-administration
agreement with PFPC Inc. (the "Sub- Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for
the Fund's operations which do not include the investment advisory and
portfolio management services provided by the Investment Adviser. For these
services and the related expenses borne by the Sub-Administrator, the
Investment Adviser pays a prorated monthly fee at the annual rate of .0275%
of the first $10.0 billion of the aggregate average net assets of the Fund
and all other funds advised by the Investment Adviser and administered by
the Sub-Administrator, .0125% of the aggregate average net
41
assets exceeding $10 billion and .01% of the aggregate average net
assets in excess of $15 billion. The Sub-Administrator has its principal
office at 760 Moore Road, King of Prussia, Pennsylvania 19406.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company, Inc., an affiliate of the Investment
Adviser, may execute portfolio transactions on stock exchanges and in the
over-the-counter markets on an agency basis and receive a stated commission
therefor. For a more detailed discussion of the Fund's brokerage allocation
practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund may retain for reinvestment, and pay the resulting federal
income taxes on, its net capital gain, if any, although the Fund reserves the
authority to distribute its net capital gain in any year. The Fund has a
policy, which may be modified at any time by its Board of Directors, of paying
quarterly distributions on its common stock of 10% of the Fund's quarterly net
asset value attributable to common stock. This policy permits holders of
common stock to realize a predictable, but not assured, level of cash flow and
some liquidity periodically with respect to their common stock without having
to sell shares. To avoid paying income tax at the corporate level, the Fund
will distribute substantially all of its investment company taxable income and
net capital gain. In the event that the Fund's investment company taxable
income and net capital gain exceed the total of the Fund's monthly
distributions, the Fund intends to pay such excess once a year. If, for any
calendar year, the total quarterly distributions exceed investment company
taxable income and net capital gain, the excess will generally be treated as
a tax-free return of capital up to the amount of a stockholder's tax basis in
the stock. The amount treated as a tax-free return of capital will reduce a
stockholder's tax basis in the stock, thereby increasing such stockholder's
potential gain or reducing his or her potential loss on the sale of the stock.
Any amounts distributed to a stockholder in excess of the basis in the stock
will be taxable to the stockholder as capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing
the Fund's expense ratio. In addition, in order to make such distributions,
the Fund might have to sell a portion of its investment portfolio at a time
when independent investment judgment might not dictate such action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, has obtained an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its common stock calls for
periodic (e.g., quarterly or semi- annually, but in no event more frequently
than monthly) distributions in an amount equal to a fixed percentage of the
Fund's average net asset value over a specified period of time or market price
per share of common stock at or about the time of distribution or pay-out of a
fixed dollar amount. The exemption also permits the Fund to make distributions
with respect to its preferred stock in accordance with such stock's terms.
42
DESCRIPTION OF THE SERIES D PREFERRED
AND SERIES E AUCTION RATE PREFERRED
The Fund offers by this prospectus, in the aggregate, $125 million
of preferred stock of either Series D Preferred or Series E Auction Rate
Preferred, or a combination of both such series. The following is a brief
description of the terms of each of the Series D Preferred and the Series E
Auction Rate Preferred. This description does not purport to be complete and
is qualified by reference to the Fund's Charter, including the provisions of
the Articles Supplementary establishing each of the Series D Preferred and the
Series E Auction Rate Preferred. For complete terms of the Series D Preferred
or the Series E Auction Rate Preferred, including definitions of terms used in
this prospectus, please refer to the actual terms of such series, which are
set forth in the applicable Articles Supplementary.
General
Under its Charter, the Fund is authorized to issue up to 200,000,000
shares of capital stock. The Fund is authorized to issue up to 16,000,000
shares of preferred stock. Up to 6,006,000 shares of preferred stock may be
designated as Series D Preferred and/or Series E Auction Rate Preferred. No
fractional shares of either series will be issued. The Board of Directors
reserves the right to issue additional shares of preferred stock, including
Series D Preferred or Series E Auction Rate Preferred, from time to time,
subject to the restrictions in the Fund's Charter and the 1940 Act.
If and when issued, the Series D Preferred will have a liquidation
preference of $25 per share and the Series E Auction Rate Preferred will have
a liquidation preference of $25,000 per share. Upon a liquidation, each holder
of Series D Preferred or Series E Auction Rate Preferred will be entitled to
receive out of the assets of the Fund available for distribution to
stockholders (after payment of claims of the Fund's creditors but before any
distributions with respect to the Fund's common stock or any other stock of
the Fund ranking junior to the Series D Preferred and Series E Auction Rate
Preferred as to liquidation payments) an amount per share equal to such
share's liquidation preference plus any accumulated but unpaid dividends
(whether or not earned or declared) to the date of distribution and such
stockholders shall be entitled to no further participation in any distribution
or payment in connection with such liquidation. The Series D Preferred and the
Series E Auction Rate Preferred will rank on a parity with shares of any other
series of preferred stock of the Fund as to the payment of dividends and the
distribution of assets upon liquidation. Series D Preferred and Series E
Auction Rate Preferred shares each carry one vote per share on all matters on
which such stock is entitled to vote. The Series D Preferred and the Series E
Auction Rate Preferred will, upon issuance, be fully paid and nonassessable
and will have no preemptive, exchange or conversion rights. Any Series D
Preferred or Series E Auction Rate Preferred repurchased or redeemed by the
Fund will be classified as authorized but unissued preferred stock. The Board
of Directors may by resolution classify or reclassify any authorized but
unissued capital stock of the Fund from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or terms or conditions of redemption. The Fund may
not issue any class of stock senior to the Series D Preferred and/or Series E
Auction Rate Preferred.
Rating Agency Guidelines
Upon issuance, both the Series D Preferred and the Series E
Auction Rate Preferred will be rated "Aaa" by Moody's. In addition, the
Series E Auction Rate Preferred will also be rated "AAA" by S&P. The Fund
is required under Moody's and S&P guidelines to maintain assets having in
the aggregate a discounted value at least equal to the Basic Maintenance
Amount (as defined below) for its outstanding preferred stock, including
any outstanding Series D Preferred or Series E Auction Rate Preferred, with
respect to the separate guidelines Moody's and S&P has each established for
determining discounted value. To the extent any particular portfolio
holding does not satisfy the applicable rating agency's
43
guidelines, all or a portion of such holding's value will not be
included in the calculation of discounted value (as defined by such rating
agency). The Moody's and S&P guidelines also impose certain diversification
requirements and industry concentration limitations on the Fund's overall
portfolio, and apply specified discounts to securities held by the Fund (except
certain money market securities). The "Basic Maintenance Amount" is equal to
(i) the sum of (a) the aggregate liquidation preference of the preferred stock
then outstanding plus (to the extent not included in the liquidation preference
of such preferred stock) an amount equal to the aggregate accumulated but
unpaid dividends (whether or not earned or declared) in respect of such
preferred stock, (b) the total principal of any debt (plus accrued and
projected interest), (c) certain Fund expenses and (d) certain other current
liabilities (excluding any unpaid dividends on the Fund's common stock) less
(ii) the Fund's (a) cash and (b) assets consisting of indebtedness which (x)
are to mature prior to or on the date of redemption or repurchase of the
preferred stock, (y) are U.S. Government Obligations or evidences of
indebtedness rated at least Aaa, P-1, VMIG-1 or MIG-1 by Moody's or AAA, SP-1+
or A-1+ by Standard and Poor's, and (z) are held by the Fund for the payment of
dividends or distributions, the amounts needed to redeem or repurchase
preferred stock, or the Fund's liabilities.
If the Fund does not timely cure a failure to maintain a discounted
value of its portfolio equal to the Basic Maintenance Amount in accordance
with the requirements of the applicable rating agency or agencies then rating
the Series D Preferred or the Series E Auction Rate Preferred at the request
of the Fund, the Fund may, and in certain circumstances will be required to,
mandatorily redeem preferred stock, including the Series D Preferred or the
Series E Auction Rate Preferred, as described below under " -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's or S&P.
Failure to adopt any such modifications, however, may result in a change in
the relevant rating agency's ratings or a withdrawal of such ratings
altogether. In addition, any rating agency providing a rating for the Series D
Preferred or the Series E Auction Rate Preferred at the request of the Fund
may, at any time, change or withdraw any such rating. The Board of Directors,
without further action by the stockholders, may amend, alter, add to or repeal
certain of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines if the Board determines that
such modification is necessary to prevent a reduction in rating of the shares
of preferred stock by Moody's and/or S&P, as the case may be, is in the best
interests of the holders of shares of common stock and is not adverse to the
holders of preferred stock in view of advice to the Fund by Moody's and/or S&P
(or such other rating agency then rating the Series D Preferred and/or Series
E Auction Rate Preferred at the request of the Fund) that such modification
would not adversely affect, as the case may be, its then current rating of the
Series D Preferred and/or the Series E Auction Rate Preferred.
The Board of Directors may amend the Articles Supplementary
definition of "Maximum Rate" (the "maximum rate" as defined below under " --
Dividends on the Series E Auction Rate Preferred -- Maximum Rate") to increase
the percentage amount by which the applicable reference rate is multiplied to
determine the maximum rate without the vote or consent of the holders of
Series E Auction Rate Preferred or any other stockholder of the Fund, but only
after consultation with the broker-dealers and with confirmation from each
applicable rating agency that the Fund could meet applicable rating agency
asset coverage tests immediately following any such increase
As described by Moody's and S&P, the ratings assigned to the Series D
Preferred and the Series E Auction Rate Preferred are assessments of the
capacity and willingness of the Fund to pay the obligations of each of the
Series D Preferred and the Series E Auction Rate Preferred. The ratings on the
Series D Preferred and the Series E Auction Rate Preferred are not
recommendations to purchase, hold or sell shares of either series, inasmuch as
the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines also do not address the likelihood that
an owner of
44
Series D Preferred or Series E Auction Rate Preferred will be able to sell
such shares on an exchange, in an auction or otherwise. The ratings are based
on current information furnished to Moody's and S&P by the Fund and the
Investment Adviser and information obtained from other sources. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
The rating agency guidelines will apply to the Series D Preferred or
Series E Auction Rate Preferred, as the case may be, only so long as such
rating agency is rating such shares at the request of the Fund. The Fund will
pay fees to Moody's and S&P for rating the Series D Preferred and the Series E
Auction Rate Preferred.
Asset Maintenance Requirements
In addition to the requirements summarized under " -- Rating Agency
Guidelines" above, the Fund must also satisfy asset maintenance requirements
under the 1940 Act with respect to its preferred stock. The 1940 Act
requirements are summarized below.
The Fund will be required under the Articles Supplementary for each
of the Series D Preferred and/or Series E Auction Rate Preferred to determine
whether it has as of the last business day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of at
least 200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of the
Fund that are stock, including any outstanding Series D Preferred and the
Series E Auction Rate Preferred. If the Fund fails to maintain the asset
coverage required under the 1940 Act on such dates and such failure is not
cured within 60 calendar days, in the case of the Series D Preferred, or 10
business days, in the case of the Series E Auction Rate Preferred, (including
the Series D Preferred or Series E Auction Rate Preferred) the Fund may, and
in certain circumstances will be required to, mandatorily redeem shares of
preferred stock sufficient to satisfy such asset coverage. See " --
Redemption" below.
If the shares of Series D Preferred and/or Series E Auction Rate
Preferred offered hereby had been issued and sold as of September 15, 2003 ,
the asset coverage required under the 1940 Act deduction of the underwriting
discounts and estimated offering expenses for such shares of $3,352,500), would
have been computed as follows:
value of Fund assets less liabilities not constituting
senior securities ($1,374,744,505) / senior securities
representing indebtedness plus liquidation preference of
each class of preferred stock ($420,000,000, expressed as a
percentage = 327%.
Dividends on the Series D Preferred
Upon issuance of the Series D Preferred (if issued), holders of
shares of Series D Preferred will be entitled to receive, when, as and if
declared by the Board of Directors of the Fund out of funds legally available
therefor, cumulative cash dividends, at the annual rate of [__]% (computed on
the basis of a 360- day year consisting of twelve 30-day months) of the
liquidation preference of $25 per share, payable quarterly on March 26, June
26, September 26 and December 26 in each year or, if any such day is not a
business day, the immediately succeeding business day. Such dividends will
commence on [__], 2003, and will be payable to the persons in whose names the
shares of Series D Preferred are registered at the close of business on the
fifth preceding business day.
45
Dividends on the Series E Auction Rate Preferred
General. Upon issuance of the Series E Auction Rate Preferred (if
issued), the holders of Series E Auction Rate Preferred will be entitled to
receive cash dividends stated at annual rates as a percentage of its $25,000
per share liquidation preference, that will vary from dividend period to
dividend period. The dividend rate for the initial dividend period for any
Series E Auction Rate Preferred offered in this prospectus will be the rate
set out on the cover of this prospectus. For subsequent dividend periods, the
Series E Auction Rate Preferred will pay dividends based on a rate set at the
auction, normally held weekly, but the rates set at the auction will not
exceed the maximum rate. Dividend periods generally will be seven days, and
the dividend periods generally will begin on the first business day after an
auction. In most instances, dividends will also be paid weekly, on the
business day following the end of the dividend period. The Fund, subject to
some limitations, may change the length of the dividend periods, designating
them as "special dividend periods," as described below.
Dividend Payments. Except as described below, the dividend payment
date will be the first business day after the dividend period ends. The
dividend payment dates for special dividend periods of more (or less) than
seven days will be set out in the notice designating a special dividend
period. See " -- Designation of Special Dividend Periods" for a discussion of
payment dates for a special dividend period.
Dividends on Series E Auction Rate Preferred will be paid on the
dividend payment date to holders of record as their names appear on the Fund's
stock ledger or stock records on the business day next preceding the dividend
payment date. If dividends are in arrears, they may be declared and paid at
any time to holders of record as their names appear on the Fund's stock ledger
or stock records on a date not more than 15 days before the payment date, as
the Fund's Board of Directors may fix.
The dividend paying agent, in accordance with its current procedures,
is expected to credit in same-day funds on each dividend payment date
dividends received from the Fund to the accounts of broker-dealers who act on
behalf of holders of the Series E Auction Rate Preferred. Such broker-dealers,
in turn, are expected to distribute dividend payments to the person for whom
they are acting as agents. If a broker-dealer does not make dividends
available to Series E Auction Rate Preferred holders in same-day funds, these
stockholders will not have funds available until the next business day.
Dividend Rate Set at Auction. The Series E Auction Rate Preferred
pays dividends based on a rate set at auction at which Series E Auction Rate
Preferred may be bought and sold. The auction usually is held weekly, but may
be held more or less frequently. The Bank of New York, the auction agent,
reviews orders from broker-dealers on behalf of existing holders who wish to
sell, hold at the auction rate, or hold only at a specified dividend rate, and
on behalf of potential holders who wish to buy Series E Auction Rate
Preferred. The auction agent then determines the lowest dividend rate that
will result in all of the Series E Auction Rate Preferred continuing to be
held. See "The Auction of Series E Auction Rate Preferred."
If an auction is not held because an unforeseen event, or unforeseen
events cause a day that otherwise would have been an auction date not to be a
business day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for such period will be the
applicable rate for the then- current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
immediately succeeding the end of such period.
Determination of Dividend Rates. The Fund computes the dividends per
share by multiplying the applicable rate determined at the auction by a
fraction, the numerator of which normally is the number of days in such
dividend period and the denominator of which is 360. This applicable rate is
then multiplied by $25,000 to arrive at the dividend per share.
46
Maximum Rate. The dividend rate that results from an auction for the
Series E Auction Rate Preferred will not be greater than the applicable
"maximum rate." The maximum rate means (i) in the case of a dividend period of
184 days or less, the applicable percentage of the "AA" Financial Composite
Commercial Paper Rate on the date of such auction determined as set forth in
the following chart based on the lower of the credit ratings assigned to the
Series E Auction Rate Preferred by Moody's and S&P or (ii) in the case of a
dividend period of longer than 184 days, the applicable percentage of the
Treasury Index Rate.
Credit Rating for Series E Auction Rate Preferred
-------------------------------------------------
Moody's Credit Rating S&P Credit Rating Applicable Percentage
--------------------- ----------------- ---------------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 175%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
The "Treasury Index Rate" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities having
the same number of 30-day periods to maturity as the length of the applicable
dividend period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next
longer number of 30-day periods to maturity treating all dividend periods with
a length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15 (519)); provided,
however, that if the most recent such statistical release will not have been
published during the 15 days preceding the date of computation, the foregoing
computations will be based upon the average of comparable data as quoted to
the Fund by at least three recognized dealers in U.S. government securities
selected by the Fund.
There is no minimum dividend rate in respect of any dividend period.
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund
fails to pay the paying agent the full amount of any dividend for the Series E
Auction Rate Preferred in a timely manner, but the Fund cures the failure and
pays any late charge before 12:00 noon, New York City time on the third
business day following the date the failure occurred, no default will be
deemed to have occurred and the dividend rate for the dividend period
immediately following the dividend with respect to which the dividend payment
default would otherwise have occurred will be the applicable rate set at the
auction for such dividend period.
However, if the Fund does not effect a timely cure, the dividend rate
for the Series E Auction Rate Preferred for such default period, and any
subsequent dividend period for which such default is continuing, will be the
default rate. In the event the Fund fully pays all default amounts due during
a dividend period, the dividend rate for the remainder of that dividend period
will be, as the case may be, the applicable rate (for the first dividend
period following a dividend default) or the then-maximum rate (for any
subsequent dividend period for which such default is continuing).
47
The default rate means 300% of the applicable "AA" Financial
Composite Commercial Paper Rate for a dividend period of 184 days or fewer and
300% of the applicable Treasury Index Rate for a dividend period of longer
than 184 days. Late charges are also calculated at the applicable default
rate.
Designation of Special Dividend Periods. The Fund may instruct the
auction agent to hold auctions more or less frequently than weekly and may
designate dividend periods longer or shorter than one week. The Fund may do
this if, for example, the Fund expects that short-term rates might increase or
market conditions otherwise change, in an effort to optimize the effect of the
Fund's leverage on holders of its common stock. The Fund does not currently
expect to hold auctions and pay dividends less frequently than weekly or
establish dividend periods longer or shorter than one week. If the Fund
designates a special dividend period, changes in interest rates could affect
the price received if shares of Series E Auction Rate Preferred are sold in
the secondary market.
Any designation of a special dividend period will be effective only
if (i) notice thereof will have been given as provided for in the Charter,
(ii) any failure to pay in a timely matter to the auction agent the full
amount of any dividend on, or the redemption price of, the Series E Auction
Rate Preferred will have been cured as provided for in the Charter, (iii) the
auction immediately preceding the special dividend period was not a failed
auction, (iv) if the Fund will have mailed a notice of redemption with respect
to Series E Auction Rate Preferred, the Fund will have deposited with the
paying agent all funds necessary for such redemption, and (v) the Fund has
confirmed that as of the auction date next preceding the first day of such
special dividend period, it has assets with an aggregate discounted value at
least equal to the Basic Maintenance Amount (as defined below), and the Fund
has consulted with the broker-dealers for the Series E Auction Rate Preferred
and has provided notice of such designation and a Basic Maintenance Report to
each rating agency then rating the Series E Auction Rate Preferred at the
request of the Fund.
The dividend payment date for any special dividend period will be the
first business day after the end of the special dividend period. In addition,
for special dividend periods of (x) at least 91 days but not more than one
year, dividend payment dates will occur on the 91st, 181st and 271st days
within such dividend period, if applicable, and on the business day following
the last day of such dividend period and (y) of more than one year, dividend
payment dates will occur on each March 26, June 26, September 26 and December
26 during the special dividend period.
Before the Fund designates a special dividend period: (1) at least
seven business days (or two business days in the event the duration of the
dividend period prior to such special dividend period is less than eight days)
and not more than 30 business days before the first day of the proposed
special dividend period, the Fund will issue a press release stating its
intention to designate a special dividend period and inform the auction agent
of the proposed special dividend period by telephonic or other means and
confirm it in writing promptly thereafter and (2) the Fund must inform the
auction agent of the proposed special dividend period by 3:00 p.m., New York
City time on the second business day before the first day of the proposed
special dividend period.
See the SAI for more information.
Restrictions on Dividends and Other Distributions for the Series D Preferred
and the Series E Auction Rate Preferred
So long as any Series D Preferred or Series E Auction Rate Preferred
is outstanding, the Fund may not pay any dividend or distribution (other than
a dividend or distribution paid in common stock or in options, warrants or
rights to subscribe for or purchase common stock) in respect of the common
stock or call for redemption, redeem, purchase or otherwise acquire for
consideration any common stock (except by conversion into or exchange for
shares of common stock of the Fund ranking junior to the Series D
48
Preferred and/or Series E Auction Rate Preferred as to the payment of
dividends and the distribution of assets upon liquidation), unless:
o the Fund has declared and paid (or provided to the relevant
dividend paying agent) all cumulative dividends on the
Fund's preferred stock, including the Series D Preferred
and/or Series E Auction Rate Preferred, due on or prior to
the date of such common stock dividend or distribution;
o the Fund has redeemed the full number of shares of common
stock of Series D Preferred and/or Series E Auction Rate
Preferred to be redeemed pursuant to any mandatory
redemption provision in the Fund's Charter; and
o after paying the dividend, the Fund meets applicable asset
coverage requirements described under " -- Rating Agency
Guidelines" and " -- Asset Maintenance Requirements."
No full dividend will be declared or paid on the Series D Preferred
or Series E Auction Rate Preferred for any dividend period, or part thereof,
unless full cumulative dividends due through the most recent dividend payment
dates therefor for all outstanding series of preferred stock of the Fund
ranking on a parity with the Series D Preferred and Series E Auction Rate
Preferred as to the payment of dividends have been or contemporaneously are
declared and paid. If full cumulative dividends due have not been paid on all
outstanding shares of preferred stock of the Fund ranking on a parity with the
Series D Preferred and/or Series E Auction Rate Preferred as to the payment of
dividends, any dividends being paid on the shares of such preferred stock
(including the Series D Preferred and/or Series E Auction Rate Preferred) will
be paid as nearly pro rata as possible in proportion to the respective amounts
of dividends accumulated but unpaid on each such series of preferred stock on
the relevant dividend payment date.
Redemption
Mandatory Redemption Relating to Asset Coverage Requirements.
Consistent with its Charter and the 1940 Act, the Fund may, and in certain
circumstances will be required to, mandatorily redeem preferred stock
(including, at its discretion, the Series D Preferred or Series E Auction Rate
Preferred) in the event that:
o the Fund fails to maintain the asset coverage requirements
specified under the 1940 Act and such failure is not cured
on or before 60 days, in the case of the Series D Preferred,
or 10 business days in the case of the Series E Auction Rate
Preferred following such failure; or
o the Fund fails to maintain the asset coverage requirements
as calculated in accordance with the applicable rating
agency guidelines as of any monthly valuation date, and such
failure is not cured on or before 10 business days after
such valuation date.
The redemption price for each of the Series D Preferred and Series E
Auction Rate Preferred subject to mandatory redemption will be, respectively,
$25 per share and $25,000 per share, in each case plus an amount equal to any
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption, plus, in the case of Series E Auction Rate
Preferred having a dividend period of more than one year, any applicable
redemption premium determined by the Board of Directors.
The number of shares of preferred stock that will be redeemed in the
case of a mandatory redemption will equal the minimum number of outstanding
shares of preferred stock the redemption of which, if such redemption had
occurred immediately prior to the opening of business on the applicable
49
cure date, would have resulted in the relevant asset coverage requirement
having been met or, if the required asset coverage cannot be so restored, all
of the shares of preferred stock. In the event that shares of preferred stock
are redeemed due to a failure to satisfy the 1940 Act asset coverage
requirements, the Fund may, but is not required to, redeem a sufficient number
of shares of preferred stock so that the Fund's assets exceed the asset
coverage requirements under the 1940 Act after the redemption by 10% (that is,
220% asset coverage). In the event that shares of preferred stock are redeemed
due to a failure to satisfy applicable rating agency guidelines, the Fund may,
but is not required to, redeem a sufficient number of shares of preferred
stock so that the Fund's discounted portfolio value (as determined in
accordance with the applicable rating agency guidelines) after redemption
exceeds the asset coverage requirements of each applicable rating agency by up
to 10% (that is, 110% rating agency asset coverage). In addition, as discussed
under " -- Optional Redemption" below, the Fund generally may exercise its
optional redemption rights with respect to the Series E Auction Rate Preferred
at any time.
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the shares of preferred stock to be
redeemed on any redemption date, the Fund will redeem on such redemption date
that number of shares for which it has legally available funds, or is
otherwise able to redeem, from the holders whose shares are to be redeemed
ratably on the basis of the redemption price of such shares, and the remainder
of those shares to be redeemed will be redeemed on the earliest practicable
date on which the Fund will have funds legally available for the redemption
of, or is otherwise able to redeem, such shares upon written notice of
redemption.
If fewer than all shares of the Fund's outstanding preferred stock
are to be redeemed, the Fund, at its discretion and subject to the limitations
of the 1940 Act and Maryland law, will select one or more series of preferred
stock from which shares will be redeemed and the amount of preferred stock to
be redeemed from each such series. If fewer than all of the shares of a series
of preferred stock are to be redeemed, such redemption will be made as among
the holders of that series pro rata in accordance with the respective number
of shares of such series held by each such holder on the record date for such
redemption (or by such other equitable method as the Fund may determine). If
fewer than all shares of the preferred stock held by any holder are to be
redeemed, the notice of redemption mailed to such holder will specify the
number of shares to be redeemed from such holder, which may be expressed as a
percentage of shares held on the applicable record date.
Optional Redemption of the Series D Preferred. Prior to [__], the
shares of Series D Preferred are not subject to optional redemption by the
Fund unless such redemption is necessary, in the judgment of the Fund, to
maintain the Fund's status as a regulated investment company under the Code.
Commencing on [__], and thereafter, the Fund may at any time redeem shares of
Series D Preferred in whole or in part for cash at a redemption price per
share equal to $25 per share plus accumulated and unpaid dividends (whether or
not earned or declared) to the redemption date. Such redemptions are subject
to the notice requirements set forth under " -- Redemption Procedures" and the
limitations of the 1940 Act and Maryland law.
Optional Redemption of the Series E Auction Rate Preferred. The Fund
may, at its option, redeem the Series E Auction Rate Preferred, in whole or in
part, at any time following the initial dividend period so long as the Fund
has not designated a non-call period. The Fund may designate a non-call period
during a dividend period of more than seven days. In the case of Series E
Auction Rate Preferred having a dividend period of one year or less, the
redemption price per share will equal $25,000 plus an amount equal to any
accumulated but unpaid dividends thereon (whether or not earned or declared)
to the redemption date, and in the case of Series E Auction Rate Preferred
having a dividend period of more than one year, for the redemption price plus
any redemption premium applicable during such dividend period. Such
redemptions are subject to the notice requirements set forth under " --
Redemption Procedures" and the limitations of the 1940 Act and Maryland law.
50
Redemption Procedures. A notice of redemption with respect to an
optional redemption will be given to the holders of record of preferred stock
selected for redemption not less than 15 days (subject to NYSE requirements),
in the case of the Series D Preferred, and not less than 7 days in the case of
the Series E Auction Rate Preferred, nor, in both cases, more than 40 days
prior to the date fixed for redemption. Preferred stockholders may receive
shorter notice in the event of a mandatory redemption. Each notice of
redemption will state (i) the redemption date, (ii) the number or percentage
of shares of preferred stock to be redeemed (which may be expressed as a
percentage of such shares outstanding), (iii) the CUSIP number(s) of such
shares, (iv) the redemption price (specifying the amount of accumulated
dividends to be included therein), (v) the place or places where such shares
are to be redeemed, (vi) that dividends on the shares to be redeemed will
cease to accrue on such redemption date, (vii) the provision of the Articles
Supplementary under which the redemption is being made and (viii) any
conditions precedent to such redemption. No defect in the notice of redemption
or in the mailing thereof will affect the validity of the redemption
proceedings, except as required by applicable law.
The holders of Series D Preferred or Series E Auction Rate Preferred
will not have the right to redeem their shares of the Fund at their option.
Liquidation Rights
Upon a liquidation, dissolution or winding up of the affairs of the
Fund (whether voluntary or involuntary), holders of Series D Preferred or
Series E Auction Rate Preferred then outstanding will be entitled to receive
out of the assets of the Fund available for distribution to stockholders,
after satisfying claims of creditors but before any distribution or payment of
assets is made to holders of the common stock or any other class of stock of
the Fund ranking junior to the Series D Preferred or Series E Auction Rate
Preferred as to liquidation payments, a liquidation distribution in the amount
of $25 per share, in the case of the Series D Preferred, or $25,000 per share,
in the case of the Series E Auction Rate Preferred, in either case plus an
amount equal to all unpaid dividends accumulated to and including the date
fixed for such distribution or payment (whether or not earned or declared by
the Fund but excluding interest thereon), and such holders will be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. If, upon any liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary or
involuntary, the assets of the Fund available for distribution among the
holders of all outstanding shares of preferred stock of the Fund ranking on a
parity with the Series D Preferred and/or Series E Auction Rate Preferred as
to payment upon liquidation will be insufficient to permit the payment in full
to such holders of the Series D Preferred and/or Series E Auction Rate
Preferred and other parity preferred stock of the amounts due upon liquidation
with respect to such shares, then such available assets will be distributed
among the holders of the Series D Preferred, the Series E Auction Rate
Preferred and such other parity preferred stock ratably in proportion to the
respective preferential amounts to which they are entitled. Unless and until
the liquidation payments due to holders of the Series D Preferred and/or
Series E Auction Rate Preferred and such other parity preferred stock have
been paid in full, no dividends or distributions will be made to holders of
the common stock or any other stock of the Fund ranking junior to the Series D
Preferred and/or Series E Auction Rate Preferred and other parity preferred
stock as to liquidation.
Voting Rights
Except as otherwise stated in this prospectus, specified in the
Fund's Charter or resolved by the Board of Directors or as otherwise required
by applicable law, holders of the Series D Preferred and/or Series E Auction
Rate Preferred shall be entitled to one vote per share held on each matter
submitted to a vote of the stockholders of the Fund and will vote together
with holders of shares of common stock and of any other preferred stock then
outstanding as a single class.
51
In connection with the election of the Fund's directors, holders of
the outstanding shares of Series D Preferred, Series E Auction Rate Preferred
and the other series of preferred stock, voting together as a single class,
will be entitled at all times to elect two of the Fund's directors, and the
remaining directors will be elected by holders of shares of common stock and
holders of the Series D Preferred, Series E Auction Rate Preferred and other
series of preferred stock, voting together as a single class. In addition, if
(i) at any time dividends on outstanding shares of the Series D Preferred,
Series E Auction Rate Preferred and/or any other preferred stock are unpaid in
an amount equal to at least two full years dividends thereon and sufficient
cash or specified securities have not been deposited with the applicable paying
agent for the payment of such accumulated dividends or (ii) at any time holders
of any other series of preferred stock are entitled to elect a majority of the
directors of the Fund under the 1940 Act or the Articles Supplementary creating
such shares, then the number of directors constituting the Board of Directors
automatically will be increased by the smallest number that, when added to the
two directors elected exclusively by the holders of the Series D Preferred,
Series E Auction Rate Preferred and other series of preferred stock as
described above, would then constitute a simple majority of the Board of
Directors as so increased by such smallest number. Such additional directors
will be elected by the holders of the Series D Preferred, Series E Auction Rate
Preferred and the other series of preferred stock, voting together as a single
class, at a special meeting of stockholders which will be called as soon as
practicable and will be held not less than 10 or more than 20 days after the
mailing date of the meeting notice. If the Fund fails to send such meeting
notice or to call such a special meeting, the meeting may be called by any
preferred stockholder on like notice. The terms of office of the persons who
are directors at the time of that election will continue. If the Fund
thereafter pays or declares and sets apart for payment in full, all dividends
payable on all outstanding shares of preferred stock for all past dividend
periods or the holders of other series of preferred stock are no longer
entitled to elect such additional directors, the additional voting rights of
the holders of the preferred stock as described above will cease, and the terms
of office of all of the additional directors elected by the holders of the
preferred stock (but not of the directors with respect to whose election the
holders of shares of common stock were entitled to vote or the two directors
the holders of shares of preferred stock have the right to elect as a separate
class in any event) will terminate.
So long as shares of Series D Preferred or Series E Auction Rate
Preferred are outstanding, the Fund will not, without the affirmative vote of
the holders of a majority (as defined in the 1940 Act) of the shares of
preferred stock outstanding at the time (including the Series D Preferred or
Series E Auction Rate Preferred, as applicable), voting separately as one
class, amend, alter or repeal the provisions of the Fund's Charter, whether by
merger, consolidation or otherwise, so as to materially adversely affect any
of the contract rights expressly set forth in the Charter with respect to such
shares of preferred stock. Also, to the extent permitted under the 1940 Act,
in the event shares of more than one series of preferred stock are
outstanding, the Fund will not approve any of the actions set forth in the
preceding sentence which materially adversely affects the contract rights
expressly set forth in the Charter with respect to such shares of a series of
preferred stock (such as the Series D Preferred or Series E Auction Rate
Preferred) differently than those of a holder of shares of any other series of
preferred stock without the affirmative vote of the holders of at least a
majority of the shares of preferred stock of each series materially adversely
affected and outstanding at such time (each such materially adversely affected
series voting separately as a class to the extent its rights are affected
differently).
Under the Charter and applicable provisions of Maryland law, the
affirmative vote of a majority of the votes entitled to be cast by holders of
outstanding shares of the preferred stock (including the Series D Preferred
and/or Series E Auction Rate Preferred), voting together as a single class,
will be required to approve any plan of reorganization adversely affecting the
preferred stock. The approval of 66 2/3% of each class, voting separately, of
the Fund's outstanding voting stock must approve the conversion of the fund
from a closed-end to an open-end investment company. The approval of a majority
(as that term is defined in the 1940 Act) of the Fund's outstanding preferred
stock and a majority (as that term is defined in the 1940 Act) of the Fund's
outstanding voting securities are required to approve any action requiring a
vote of security holders under Section 13(a) of the 1940 Act (other than a
conversion of the Fund from a closed-end to open-end investment company),
including, among other things, changes in the Fund's investment objective or
changes in the investment restrictions described as fundamental policies under
"Investment Objectives and Policies" and "Investment Restrictions" in this
prospectus and the SAI.
52
phrase) means, in accordance with Section 2(a)(42) of the 1940 Act, the vote,
at the annual or a special meeting of the stockholders of the Fund duly called
(i) of 67% or more of the shares of preferred stock present at such meeting,
if the holders of more than 50% of the outstanding shares of preferred stock
are present or represented by proxy or (ii) more than 50% of the outstanding
shares of preferred stock, whichever is less. The class vote of holders of
shares of the preferred stock described above in each case will be in addition
to a separate vote of the requisite percentage of shares of common stock,
Series D Preferred, Series E Auction Rate Preferred and any other preferred
stock, voting together as a single class, that may be necessary to authorize
the action in question.
The calculation of the elements and definitions of certain terms of
the rating agency guidelines may be modified by action of the Board of
Directors without further action by the stockholders if the Board of Directors
determines that such modification is necessary to prevent a reduction in
rating of the shares of preferred stock by Moody's and/or S&P (or any other
rating agency then rating the Series D Preferred or Series E Auction Rate
Preferred at the request of the Fund), as the case may be, or is in the best
interests of the holders of shares of common stock and is not adverse to the
holders of preferred stock in view of advice to the Fund by the relevant
rating agencies that such modification would not adversely affect its
then-current rating of the preferred stock.
The foregoing voting provisions will not apply to any Series D
Preferred or Series E Auction Rate Preferred if, at or prior to the time when
the act with respect to which such vote otherwise would be required will be
effected, such shares will have been redeemed or called for redemption and
sufficient cash or cash equivalents provided to the applicable paying agent to
effect such redemption. The holders of Series D Preferred and/or Series E
Auction Rate Preferred will have no preemptive rights or rights to cumulative
voting.
Limitation on Issuance of Preferred Stock
So long as the fund has preferred stock outstanding, subject to
receipt of approval from the rating agencies of each series of preferred stock
outstanding, and subject to compliance with the Fund's investment objective,
policies and restrictions, the Fund may issue and sell shares of one of more
other series of additional preferred stock provided that the Fund will,
immediately after giving effect to the issuance of such additional preferred
stock and to its receipt and application of the proceeds thereof (including,
without limitation, to the redemption of preferred stock to be redeemed out of
such proceeds) have an "asset coverage" for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 200% of the sum of
the liquidation preference of the shares of preferred stock of the Fund then
outstanding and all indebtedness of the Fund constituting senior securities
and no such additional preferred stock will have any preference or priority
over any other preferred stock of the Fund upon the distribution of the assets
of the Fund or in respect of the payment of dividends.
The Fund does not currently intend to offer additional shares of
preferred stock or senior securities representing indebtedness. However, the
Fund will monitor market conditions, including, among other things, interest
rates and the asset levels of the Fund, and will consider from time to time
whether to offer additional preferred stock or securities representing
indebtedness and may issue such additional securities if the Board of
Directors concludes that such an offering would be consistent with the Fund's
Charter and applicable law, and in the best interest of existing common
stockholders.
Repurchase of Series D Preferred and Series E Auction Rate Preferred Stock
The Fund is a closed-end investment company and, as such, holders of
the Series D Preferred or Series E Auction Rate Preferred do not and will not
have the right to redeem their preferred stock of the Fund. The Fund, however,
may repurchase Series D Preferred or, outside of an auction, Series E Auction
Rate Preferred when it is deemed advisable by the Board of Directors in
compliance with the requirements
53
of the 1940 Act and regulations thereunder and other applicable requirements.
Unlike a redemption of the Series D Preferred and/or the Series E Auction Rate
Preferred, where stockholders are subject to the redemption terms, in a
repurchase offer the Fund is purchasing stock on an exchange (with respect to
the Series D Preferred only) or is through private transactions or tender
offers soliciting repurchases, and stockholders may choose whether or not to
sell. The Fund will not repurchase Series E Auction Rate Preferred at Auction.
See "The Auction of Series E Auction Rate Preferred."
This Prospectus will serve as notice that the Fund may from time to
time repurchase Series D Preferred when such shares are trading below
$25 per share liquidation preference.
Book-Entry
Shares of Series D Preferred will initially be held in the name of
Cede & Co. as nominee for DTC. The Fund will treat Cede & Co. as the holder of
record of the Series D Preferred for all purposes. In accordance with the
procedures of DTC, however, purchasers of Series D Preferred will be deemed
the beneficial owners of stock purchased for purposes of dividends, voting and
liquidation rights. Purchasers of Series D Preferred may obtain registered
certificates by contacting the Transfer Agent.
Shares of Series E Auction Rate Preferred will initially be held by
the auction agent as custodian for Cede & Co., in whose name the shares of the
Series E Auction Rate Preferred shall be registered. The Fund will treat Cede
& Co. as the holder of record of the Series E Auction Rate Preferred for all
purposes.
THE AUCTION OF SERIES E AUCTION RATE PREFERRED
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the
Series E Auction Rate Preferred, which are described in more detail in the
SAI. These auction procedures are complicated, and there are exceptions to
these procedures. Many of the terms in this section have a special meaning.
Accordingly, this description does not purport to be complete and is
qualified, in its entirety, by reference to the Fund's Charter, including the
provisions of the Articles Supplementary establishing the Series E Auction
Rate Preferred.
The auctions determine the dividend rate for the Series E Auction
Rate Preferred, but each dividend rate will not be higher than the maximum
rate. See "Description of the Series D Preferred and Series E Auction Rate
Preferred -- Dividends on the Series E Auction Rate Preferred." If you own
shares of Series E Auction Rate Preferred, you may instruct your broker-dealer
to enter one of three kinds of orders in the auction with respect to your
stock: sell, bid and hold.
o If you enter a sell order, you indicate that you want to
sell Series E Auction Rate Preferred at $25,000 per share,
no matter what the next dividend period's rate will be.
o If you enter a bid (or "hold at a rate") order, which must
specify a dividend rate, you indicate that you want to sell
Series E Auction Rate Preferred only if the next dividend
period's rate is less than the rate you specify.
o If you enter a hold order you indicate that you want to
continue to own Series E Auction Rate Preferred, no matter
what the next dividend period's rate will be.
You may enter different types of orders for different portions of
your Series E Auction Rate Preferred. You may also enter an order to buy
additional Series E Auction Rate Preferred. All orders must be for whole
shares of stock. All orders you submit are irrevocable. There is a fixed
number of shares of Series E Auction Rate Preferred, and the dividend rate
likely will vary from auction to auction depending on the number of bidders,
the number of shares the bidders seek to buy, the rating of the Series E
54
Auction Rate Preferred and general economic conditions including current
interest rates. If you own Series E Auction Rate Preferred and submit a bid
for them higher than the then-maximum rate, your bid will be treated as a sell
order. If you do not enter an order, the broker-dealer will assume that you
want to continue to hold Series E Auction Rate Preferred, but if you fail to
submit an order and the dividend period is longer than 28 days, the
broker-dealer will treat your failure to submit a bid as a sell order.
If you do not then own Series E Auction Rate Preferred, or want to
buy more shares, you may instruct a broker-dealer to enter a bid order to buy
shares in an auction at $25,000 per share at or above the dividend rate you
specify. If your bid for shares you do not own specifies a rate higher than
the then- maximum rate, your bid will not be considered.
Broker-dealers will submit orders from existing and potential holders
of Series E Auction Rate Preferred to the auction agent. Neither the Fund nor
the auction agent will be responsible for a broker- dealer's failure to submit
orders from existing or potential holders of Series E Auction Rate Preferred.
A broker-dealer's failure to submit orders for Series E Auction Rate Preferred
held by it or its customers will be treated in the same manner as a holder's
failure to submit an order to the broker-dealer. A broker- dealer may submit
orders to the auction agent for its own account. The Fund may not submit an
order in any auction.
The auction agent after each auction for the Series E Auction Rate
Preferred will pay to each broker-dealer, from funds provided by the Fund, a
service charge equal to, in the case of any auction immediately preceding a
dividend period of less than 365 days, the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of shares of Series E Auction Rate Preferred placed
by such broker-dealer at such auction or, in the case of any auction
immediately preceding a dividend period of one year or longer, a percentage of
the purchase price of the Series E Auction Rate Preferred placed by the
broker-dealers at the auction agreed to by the Fund and the broker-dealers.
If the number of Series E Auction Rate Preferred shares subject to
bid orders by potential holders with a dividend rate equal to or lower than
the then-maximum rate is at least equal to the number of Series E Auction Rate
Preferred shares subject to sell orders, then the dividend rate for the next
dividend period will be the lowest rate submitted which, taking into account
that rate and all lower rates submitted in order from existing and potential
holders, would result in existing and potential holders owning all the Series
E Auction Rate Preferred available for purchase in the auction.
If the number of shares of Series E Auction Rate Preferred subject to
bid orders by potential holders with a dividend rate equal to or lower than
the then-maximum rate is less than the number of shares of Series E Auction
Rate Preferred subject to sell orders, then the auction is considered to be a
failed auction, and the dividend rate will be the maximum rate. In that event,
existing holders that have submitted sell orders (or are treated as having
submitted sell orders) may not be able to sell any or all of the Series E
Auction Rate Preferred for which they submitted sell orders.
The auction agent will not consider a bid above the then-maximum
rate. The purpose of the maximum rate is to place an upper limit on dividends
with respect to the Series E Auction Rate Preferred and in so doing to help
protect the earnings available to pay dividends on common stock, and to serve
as the dividend rate in the event of a failed auction (that is, an auction
where there are more Series E Auction Rate Preferred offered for sale than
there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding Series E Auction Rate Preferred, the auction is considered an "all
hold" auction and the dividend rate for the next dividend period will be the
"all hold rate," which is 80% of the "AA" Financial Composite Commercial Paper
Rate, as determined in accordance with procedures set forth in the Articles
Supplementary establishing the
55
Series E Auction Rate Preferred. See "Description of the Series D Preferred
and Series E Auction Rate Preferred - Dividends on the Series E Auction Rate
Preferred - Maximum Rate."
The auction procedures include a pro rata allocation of shares of
Series E Auction Rate Preferred for purchase and sale. This allocation process
may result in an existing holder continuing to hold or selling, or a potential
holder buying, fewer shares than the number of shares of Series E Auction Rate
Preferred in its order. If this happens, broker-dealers will be required to
make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business
day (which also is a dividend payment date) after the auction date through
DTC. Purchasers will pay for their Series E Auction Rate Preferred through
broker-dealers in same-day funds to DTC against delivery to the
broker-dealers. DTC will make payment to the sellers' broker-dealers in
accordance with its normal procedures, which require broker-dealers to make
payment against delivery in same-day funds. As used in this prospectus, a
business day is a day on which the NYSE is open for trading, and which is not
a Saturday, Sunday or any other day on which banks in New York City are
authorized or obligated by law to close.
The first auction for Series E Auction Rate Preferred will be held on
[__], 2003, the business day preceding the dividend payment date for the
initial dividend period. Thereafter, except during special dividend periods,
auctions for Series E Auction Rate Preferred normally will be held every
Thursday (or the next preceding business day if Thursday is a holiday), and each
subsequent dividend period for the Series E Auction Rate Preferred normally
will begin on the following Friday.
If an auction is not held because an unforeseen event or unforeseen
events cause a day that otherwise would have been an auction date not to be a
business day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for such period will be the
applicable rate for the then- current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
immediately succeeding the end of such period.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding shares of Series E Auction Rate
Preferred and three current holders. The three current holders and three
potential holders submit orders through broker-dealers at the auction:
Current Holder A Owns 500 shares, wants to Bid order at 1.6% rate
sell all 500 shares if for all 500 shares
auction rate is less
than 1.6%
Current Holder B Owns 300 shares, Hold order - will take
wants to hold the auction rate
Current Holder C Owns 200 shares, wants to Bid order at 1.4% rate
sell all 200 shares for all 200 shares
if auction rate is less
than 1.4%
Potential Holder D Wants to buy 200 shares Places order to buy
at or above 1.5%
Potential Holder E Wants to buy 300 shares Places order to buy
at or above 1.4%
56
Potential Holder F Wants to buy 200 shares Places order to buy
at or above 1.6%
The lowest dividend rate that will result in all 1,000 Series E
Auction Rate Preferred shares continuing to be held is 1.5% (the offer by D).
Therefore, the dividend rate will be 1.5%. Current holders B and C will
continue to own their shares. Current holder A will sell its shares because
A's dividend rate bid was higher than the dividend rate. Potential holder D
will buy 200 shares and potential holder E will buy 300 shares because their
bid rates were at or below the dividend rate. Potential holder F will not buy
any shares because its bid rate was above the dividend rate.
Secondary Market Trading and Transfer of Series E Auction Rate Preferred
The underwriters are not required to make a market in the Series E
Auction Rate Preferred. The broker-dealers (including the underwriters) may
maintain a secondary trading market for outside of auctions, but they are not
required to do so. There can be no assurance that a secondary trading market
for the Series E Auction Rate Preferred will develop or, if it does develop,
that it will provide owners with liquidity of investment. The Series E Auction
Rate Preferred will not be registered on any stock exchange or on the NASDAQ
market. Investors who purchase Series E Auction Rate Preferred in an auction
for a special dividend period should note that because the dividend rate on
such shares will be fixed for the length of that dividend period, the value of
such shares may fluctuate in response to the changes in interest rates, and
may be more or less than their original cost if sold on the open market in
advance of the next auction thereof, depending on market conditions.
You may sell, transfer, or otherwise dispose of the Series E Auction
Rate Preferred only in whole shares and only pursuant to a bid or sell order
placed with the auction agent in accordance with the auction procedures, to
the Fund or its affiliates or to or through a broker-dealer that has been
selected by the Fund or to such other persons as may be permitted by the Fund.
However, if you hold your Series E Auction Rate Preferred in the name of a
broker-dealer, a sale or transfer of your Series E Auction Rate Preferred to
that broker-dealer, or to another customer of that broker-dealer, will not be
considered a sale or transfer for purposes of the foregoing if the shares
remain in the name of the broker-dealer immediately after your transaction. In
addition, in the case of all transfers other than through an auction, the
broker- dealer (or other person, if the Fund permits) receiving the transfer
must advise the auction agent of the transfer.
Further description of the auction procedures can be found in the SAI.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
Common Stock
The Fund, which was incorporated under the laws of the State of
Maryland on May 20, 1986, is authorized to issue 200,000,000 shares of common
stock, par value $.001 per share. Each share has equal voting, dividend,
distribution and liquidation rights. The shares of capital stock issued and
outstanding are fully paid and non-assessable. Shares of the common stock are
not redeemable and have no preemptive, conversion or cumulative voting rights.
The Fund's shares of common stock are listed and traded on the NYSE under the
symbol "GAB." The Fund is authorized, subject to maintaining required asset
coverage each series of outstanding preferred stock, to repurchase its common
stock on the open market when the shares are trading at a discount of 10% or
more (or such other percentage as the Board of Directors may determine from
time to time) from their net asset value.
57
Stockholders whose common stock is registered in their own name will
have all distributions reinvested pursuant to the Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan. For a more detailed discussion
of the Fund's reinvestment plan, see "Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan" in the SAI.
Preferred Stock
Currently, 18,000,000 shares of the Fund's capital stock have been
classified by the Board of Directors as preferred stock, par value $.001 per
share. The terms of such preferred stock may be fixed by the Board of
Directors and may materially limit and/or qualify the rights of the holders
of the Fund's common stock. As of September 15, 2003, the Fund had no
outstanding shares of Series A Preferred, 6,600,000 shares of Series B
Preferred and 5,200 shares of Series C Auction Rate Preferred, which, along
with the Series D Preferred and/or Series E Auction Rate Preferred being
issued in connection with this prospectus, are senior securities of the Fund.
The Series B Preferred is rated "Aaa" by Moody's and the Series C Auction Rate
Preferred is rated "Aaa" by Moody's and "AAA" by Standard and Poor's and each
is ranked on a parity with the Series D Preferred and Series E Auction Rate
Preferred as to dividend and liquidation preference.
Dividends on the Series B Preferred accumulate at an annual rate of
7.20% of the liquidation preference of $25 per share, are cumulative from the
date of original issuance thereof and are payable quarterly on March 26, June
26, September 26 and December 26 in each year. The Series B Preferred is rated
"Aaa" by Moody's and the Fund is required to meet similar asset coverage
requirements with respect to the Series B Preferred as are described in this
prospectus for the Series D Preferred. The Fund's outstanding Series B
Preferred is redeemable at the option of the Fund beginning June 20, 2006. The
Series B Preferred is listed and traded on the NYSE under the symbol "GAB
PrB".
Dividends on the Series C Auction Rate Preferred accumulate at the
rate set at auction. The Fund is required to meet similar coverage
requirements with respect to the Series C Auction Rate Preferred as are
described in this prospectus for the Series E Auction Rate Preferred. The
Series C Auction Rate Preferred is rated "Aaa" by Moody's and "AAA" by S&P.
The liquidation preference of the Series C Auction Rate Preferred is $25,000.
The Fund generally may redeem the outstanding Series C Auction Rate Preferred,
in whole or in part, at any time other than during a non-call period. The
Series C Auction Rate Preferred is not traded on any exchange.
The following table shows (i) the classes of capital stock authorized,
(ii) the number of shares authorized in each class, and (iii) the number of
shares outstanding in each class as of September 15, 2003.
AMOUNT
CLASS OF STOCK AMOUNT AUTHORIZED OUTSTANDING*
-------------- ----------------- ------------
Common Stock.......................... 182,000,000 136,014,878
Series A Preferred.................... 5,750,000 0
Series B Preferred.................... 10,000,000 6,600,000
Series C Auction Rate 5,200
Preferred............................. 6,000
* Does not include the Series D Preferred or Series E Auction Rate
Preferred being offered pursuant to this prospectus.
58
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its stockholders. No attempt
is made to present a detailed explanation of all U.S. federal, state, local
and foreign tax concerns affecting the Fund and its stockholders (including
stockholders owning large positions in the Fund), and the discussion set forth
herein does not constitute tax advice. Investors are urged to consult their
own tax advisers to determine the tax consequences to them of investing in the
Fund. The discussion reflects applicable tax laws of the United States as of
the date of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively.
Taxation of the Fund
The Fund has elected to be treated and has qualified as, and intends
to continue to qualify as, a regulated investment company under Subchapter M
of the Code. Accordingly, the Fund must, among other things, (i) derive in
each taxable year at least 90% of its gross income (including tax-exempt
interest) from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited
to gain from options, futures and forward contracts) derived with respect to
its business of investing in such stock, securities or currencies; and (ii)
diversify its holdings so that, at the end of each quarter of each taxable
year (a) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, U.S. government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
market value of the Fund's total assets is invested in the securities of any
issuer (other than U.S. government securities and the securities of other
regulated investment companies) or of any two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related trades or businesses.
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to stockholders, if it distributes at least 90% of the sum of the
Fund's (i) investment company taxable income (as that term is defined in the
Code) determined without regard to the deduction for dividends paid, and (ii)
its net tax-exempt interest (the excess of its gross tax-exempt interest over
certain disallowed deductions). The Fund intends to distribute at least
annually substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount at least equal to the sum of (i) 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year (unless an election is made to use
the Fund's fiscal year), and (iii) certain undistributed amounts from previous
years on which the Fund paid no U.S. federal income tax. While the Fund
intends to distribute any income and capital gains in the manner necessary to
minimize imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the
Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any
59
deduction for distributions to stockholders, and such distributions will be
taxable to the stockholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits.
Taxation of Stockholders
Distributions paid to you by the Fund from its net investment income
or from an excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
generally taxable to you as ordinary income to the extent of the Fund's
earning and profits. Such dividends (if designated by the Fund) may, however,
qualify (provided holding period and other requirements are met at the Fund
and stockholder level) (i) for the dividends received deduction in the case of
corporate stockholders to the extent that the Fund's income consists of
qualifying dividend income from U.S. corporations and (ii) under the recently
enacted Jobs and Growth Tax Relief Reconciliation Act of 2003 (effective for
taxable years after December 31, 2002 through December 31, 2008) ("2003 Tax
Act"), as qualified dividend income eligible for the reduced maximum rate to
individuals of generally 15% (5% for individuals in lower tax brackets) to the
extent that the Fund receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations and
certain foreign corporations (e.g., generally, foreign corporations
incorporated in a possession of the United States or in certain countries with
a comprehensive tax treaty with the United States, or the stock of which is
readily tradable on an established securities market in the United States).
Distributions made to you from an excess of net long-term capital gains over
net short- term capital losses ("capital gain dividends"), including capital
gain dividends credited to you but retained by the Fund, are taxable to you as
long-term capital gains if they have been properly designated by the Fund,
regardless of the length of time you have owned Fund stock. Under the 2003 Tax
Act, the tax rate on net long-term capital gain of individuals is reduced
generally from 20% to 15% (5% for individuals in lower brackets) for such gain
realized after May 6, 2003 and before January 1, 2009. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of
your stock and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to you (assuming the stock is held as a capital
asset). Generally, not later than 60 days after the close of its taxable year,
the Fund will provide you with a written notice designating the amount of any
qualified dividend income or capital gain dividends and other distributions.
Over the past three years, approximately 89% of the Fund's distributions to
stockholders consisted of long-term capital gain and, of the remaining 11%
distributed to stockholders, 68% would have, under the current tax provisions,
constituted qualified dividend income taxable at the 15% rate. Over the last one
year, approximately 93% of the Fund's distributions to stockholders consisted of
long-term capital gain and, of the remaining 7% distributed to stockholders,
approximately 99% would have, under the current tax provisions, constituted
qualified dividend income taxable at the 15% rate. We cannot assure you,
however, as to what percentage of the dividends paid on the Series D Preferred
or Series E Auction Rate Preferred will consist of long-term capital gains and
qualified dividend income, which are currently taxed at lower rates for
individuals than ordinary income.
The sale or other disposition of common stock of the Fund will
generally result in capital gain or loss to you, and will be long-term capital
gain or loss if the stock has been held for more than one year at the time of
sale. Any loss upon the sale or exchange of Fund stock held for six months or
less will be treated as long-term capital loss to the extent of any capital
gain dividends received (including amounts credited as an undistributed
capital gain dividend) by you. A loss realized on a sale or exchange of stock
of the Fund will be disallowed if other substantially identical Fund stock is
acquired within a 61-day period beginning 30 days before and ending 30 days
after the date that the stock is disposed of. In such case, the basis of the
stock acquired will be adjusted to reflect the disallowed loss. Present law
taxes both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non- corporate taxpayers, under the 2003
Act, short-term capital gains will currently be taxed at a maximum rate of 35%
while long-term capital gains generally will be taxed at a maximum rate of
15%.
If the Fund pays you a dividend in January that was declared in the
previous October, November or December to stockholders of record on a
specified date in one of such months, then such dividend will be treated for
tax purposes as being paid by the Fund and received by you on December 31 of
the year in which the dividend was declared.
The Fund is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's stock who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and
60
certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from
payments made to you may be refunded or credited against your U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the Series E Auction Rate Preferred at any time in the
future, the Fund intends to take the position that under present law the
Series E Auction Rate Preferred will constitute stock, rather than debt of the
Fund. It is possible, however, that the IRS could take a contrary position
asserting, for example, that the Series E Auction Rate Preferred constitutes
debt of the Fund. If that position were upheld, distributions on the Series E
Auction Rate Preferred would be considered interest, taxable as ordinary
income regardless of the taxable income of the Fund. The Fund believes this
position, if asserted, would be unlikely to prevail.
The foregoing is a general and abbreviated summary of the provisions
of the Code and the Treasury regulations in effect as they directly govern the
taxation of the Fund and its stockholders. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive. A more complete discussion of the tax rules applicable to the
Fund and its stockholders can be found in the Statement of Additional
Information that is incorporated by reference into this prospectus.
Stockholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, local income or other taxes.
ANTI-TAKEOVER PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter and By-Laws which
could have the effect of limiting, in each case:
o the ability of other entities or persons to acquire control
of the Fund;
o the Fund's freedom to engage in certain transactions; or
o the ability of the Fund's Directors or stockholders to amend
the Charter and By-Laws or effectuate changes in the Fund's
management.
These provisions may be regarded as "anti-takeover" provisions. The Board of
Directors of the Fund is divided into three classes, each having a term of no
more than three years. Each year the term of one class of Directors will
expire. Accordingly, only those Directors in one class may be changed in any
one year, and it would require two years to change a majority of the Board of
Directors. Such system of electing Directors may have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the stockholders of the Fund to change the majority of Directors. See
"Management of the Fund" in the SAI. A Director of the Fund may be removed
only for cause and by a vote of a majority of the votes entitled to be cast
for the election of Directors of the Fund.
In addition, the affirmative vote of the holders of 66 2/3% of the
Fund's outstanding shares of each class (voting separately) is required to
authorize the conversion of the Fund from a closed-end to an open-end
investment company or generally to authorize any of the following
transactions:
o the merger or consolidation of the Fund with any entity;
o the issuance of any securities of the Fund for cash to any
entity or person;
61
o the sale, lease or exchange of all or any substantial part
of the assets of the Fund to any entity or person (except
assets having an aggregate fair market value of less than
$1,000,000); or
o the sale, lease or exchange to the Fund, in exchange for
securities of the Fund, of any assets of any entity or
person (except assets having an aggregate fair market value
of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
any class of capital stock of the Fund. However, such vote would not be
required when, under certain conditions, the Board of Directors approves the
transaction. Reference is made to the Charter and By-Laws of the Fund, on file
with the SEC Securities and Exchange Commission. In addition, the vote of a
majority (as defined in the 1940 Act) of the holders of the Fund's outstanding
voting securities, voting as a single class, is also necessary to authorize
the conversion of the Fund from a closed-end to an open-end investment
company.
Further, unless a higher percentage is provided for under the Charter,
the affirmative vote of a majority (as defined in the 1940 Act) of the votes
entitled to be cast by holders of outstanding shares of the Fund's preferred
stock, voting as a separate class, will be required to approve any plan of
reorganization adversely affecting such stock or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act, including, among other
things, changing the Fund's investment objectives or changing the investment
restrictions described as fundamental policies under "Investment Restrictions"
in the SAI.
Maryland corporations that are subject to the Securities Exchange Act
of 1934 and have at least three outside directors, such as the Fund, may by
board resolution elect to become subject to certain corporate governance
provisions set forth in the Maryland corporate law, even if such provisions
are inconsistent with the corporation's charter and by-laws. Accordingly,
notwithstanding its Charter or By-Laws, under Maryland law the Fund's Board of
Directors may elect by resolution to, among other things:
o require that special meetings of stockholders be called only at the
request of stockholders entitled to cast at least a majority of the votes
entitled to be cast at such meeting;
o reserve for the Board the right to fix the number of Fund
directors;
o provide that directors are subject to removal only by the
vote of the holders of two-thirds of the stock entitled to
vote; and
o retain for the Board sole authority to fill vacancies
created by the death, removal or resignation of a director,
with any director so appointed to serve for the balance of
the unexpired term rather than only until the next annual
meeting of stockholders.
The Board may make any of the foregoing elections without amending
the Fund's Charter or By-Laws and without stockholder approval. Though a
corporation's charter or a resolution by its board may prohibit its directors
from making the elections set forth above, the Fund's Board currently is not
prohibited from making any such elections.
The provisions of the Charter and By-Laws and Maryland law described
above could have the effect of depriving the owners of stock in the Fund of
opportunities 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 a
62
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a principal stockholder.
The governing documents of the Fund are on file with the SEC. For the
full text of these provisions see "Further Information."
The provisions of the Charter and By-Laws described above could have
the effect of depriving the owners of shares in the Fund of opportunities 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 a tender offer or
similar transaction. The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
principal stockholder. The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests of
the stockholders generally.
CUSTODIAN, TRANSFER AGENT,
AUCTION AGENT AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (the "Custodian"), located at 150
Royall Street, Canton, MA 02021, serves as the custodian of the Fund's assets
pursuant to a custody agreement. Under the custody agreement, the Custodian
holds the Fund's assets in compliance with the 1940 Act. For its services, the
Custodian will receive a monthly fee based upon the average weekly value of
the total assets of the Fund, plus certain charges for securities
transactions.
EquiServe Trust Company, N.A., located at P.O. Box 43025, Providence,
RI 02940-3025, serves as the Fund's dividend disbursing agent, as agent under
the Fund's automatic dividend reinvestment and voluntary cash purchase plan
and as transfer agent and registrar for the common stock of the Fund.
Series D Preferred. Along with the Series A Preferred and Series B
Preferred, EquiServe will also serve as the Fund's transfer agent, registrar,
dividend paying agent and redemption agent with respect to the Series D
Preferred.
Series E Auction Rate Preferred. Along with the Series C Auction Rate
Preferred, the Bank of New York, located at 5 Penn Plaza, 13th Floor, New
York, NY 10001, will serve as the Fund's auction agent, transfer agent,
registrar, dividend paying agent and redemption agent with respect to the
Series E Auction Rate Preferred.
63
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement
dated [__], 2003, each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriters, the number of
shares of preferred stock set forth opposite the name of such underwriter.
Number of Number of
Series D Series E Auction
Underwriter Preferred Shares Rate Preferred Shares
----------- ---------------- ---------------------
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Gabelli & Company, Inc............... ---------------- -----------------
Total.............. ================ =================
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
the approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all of the Series D
Preferred and Series E Auction Rate Preferred, as applicable, if they purchase
any such shares. In the underwriting agreement, the Fund and the Investment
Adviser have agreed to indemnify the underwriters against certain liabilities,
including liabilities arising under the Securities Act of 1933, as amended, or
to contribute to payments the underwriters may be required to make for any of
those liabilities.
The expenses of the offering are estimated at approximately $[__]
and are payable by the Fund.
Offering of the Series D Preferred
The underwriters propose to initially offer some of the shares of
Series D Preferred directly to the public at the public offering price set
forth on the cover page of this prospectus and some of the shares of Series D
Preferred to certain dealers at the public offering price less a concession
not in excess of $[__] per Series D Preferred share. The sales load the Fund
will pay of $[__] per Series D Preferred share is equal to [__ ]% of the
initial offering price. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $[__] per Series D Preferred share on
sales to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed. Investors must pay for any
Series D Preferred Shares purchased in the initial public offering on or
before [__ ], 2003.
Prior to the offering, there has been no public market for the
Series D Preferred. Application has been made to list the Series D Preferred
on the New York Stock Exchange. However, during an initial period that is not
expected to exceed 30 days after the date of this prospectus, the Series D
Preferred will not be listed on any securities exchange. During such period,
the underwriters intend to make a market in the Series D Preferred; however,
they have no obligation to do so. Consequently, an investment in the Series D
Preferred may be illiquid during such period.
The underwriters may purchase and sell the Series D Preferred in
the open market. These transactions may include short sales and stabilizing
transactions. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
64
transactions consist of various bids for or purchases of shares made by the
underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the underwriters have repurchased
shares sold by or for the account of such underwriter in stabilizing or short
covering transactions.
Similar to other purchase transactions, the underwriters' purchases
to cover the syndicate short sales may have the effect of raising or
maintaining the market price of the shares or preventing or retarding a
decline in the market price of the Series D Preferred. As a result, the price
of the Series D Preferred may be higher than the price that might otherwise
exist in the open market.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Series D Preferred.
The underwriters may conduct such transactions on the NYSE or in the OTC
market, or otherwise. The underwriters do not make any representation that
they will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
Offering of Series E Auction Rate Preferred
The underwriters propose to initially offer some of the Series E
Auction Rate Preferred directly to the public at the public offering prices
set forth on the cover page of this prospectus and some of the Series E
Auction Rate Preferred to certain dealers at the public offering price less a
concession not in excess of $[__] per Series E Auction Rate Preferred share.
The sales load the Fund will pay of $[_] per Series E Auction Rate Preferred
share is equal to [_]% of the initial offering price. After the initial public
offering, the public offering price and concession may be changed. Investors
must pay for any Series E Auction Rate Preferred purchased in the initial
public offering on or before [_], 2003.
Provisions of Other Services to the Fund
The Fund anticipates that the underwriters may from time to time act
as brokers or, after they have ceased to be underwriters, dealers in executing
the Fund's portfolio transactions and that the underwriters, or their
affiliates, may act as a counterparty in connection with the interest rate
transactions described under "How the Fund Manages Risk -- Interest Rate
Transaction" after they have ceased to be underwriters. The underwriters are
active underwriters of, and dealers in, securities and act as market makers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund. The Fund anticipates that the
underwriters or their respective affiliates may, from time to time, act in
auctions as broker-dealers and receive fees as set forth under "The Auction of
the Series E Auction Rate Preferred" and in the SAI.
The underwriters have performed investment banking and advisory
services for the Fund and the Investment Adviser from time to time, for which
they have received customary fees and expenses. The underwriters and their
affiliates may from time to time engage in transactions with and perform
services for the Fund in the ordinary course of their business.
The principal business address of Citigroup Global Markets Inc. is
388 Greenwich Street, New York, New York 10013. The principal business address
of Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial
Center, New York, New York 10080. The principal business address of Gabelli &
Company, Inc. is One Corporate Center, Rye, New York 10580.
65
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli
Securities, Inc., which is a majority-owned subsidiary of the parent
company of the Investment Adviser which is, in turn, indirectly
majority-owned by Mario J. Gabelli. As a result of these relationships, Mr.
Gabelli, the Fund's President and Chief Investment Officer, may be deemed
to be a "controlling person" of Gabelli & Company, Inc.
66
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Series D Preferred and Series E Auction Rate Preferred will be passed on by
Miles & Stockbridge P.C., Baltimore, Maryland. Certain legal matters will be
passed on by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York,
special counsel to the Fund in connection with the offering of the Series D
Preferred and/or Series E Auction Rate Preferred, and by Simpson Thacher &
Bartlett LLP, New York, New York, counsel to the underwriters. Skadden, Arps,
Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett LLP will each rely as
to matters of Maryland law on the opinion of Miles & Stockbridge P.C.
EXPERTS
The audited financial statements of the Fund as of December 31, 2002
have been incorporated by reference into the SAI in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. The report of
PricewaterhouseCoopers LLP is included in the SAI. PricewaterhouseCoopers LLP
is located at 1177 Avenue of the Americas, New York, New York 10036.
67
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in
accordance therewith files reports and other information with the SEC.
Reports, proxy statements and other information filed by the Fund with the SEC
pursuant to the informational requirements of such Acts can be inspected and
copied at the public reference facilities maintained by the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC maintains a web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the SEC.
The Fund's common stock and Series B Preferred is listed on the
NYSE, and reports, proxy statements and other information concerning the Fund
and filed with the SEC by the Fund can be inspected at the offices of the
NYSE, Inc., 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a Registration Statement filed
by the Fund with the SEC under the Securities Act of 1933, as amended, and the
1940 Act. This prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Fund and the Series D Preferred and Series E Auction Rate Preferred offered
hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the SEC. Each such statement is qualified in
its entirety by such reference. The complete Registration Statement may be
obtained from the SEC upon payment of the fee prescribed by its rules and
regulations or free of charge through the SEC's web site (http://www.sec.gov).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors and Special Considerations" and elsewhere in this
prospectus. As a result of the foregoing and other factors, no assurance can
be given as to the future results, levels of activity or achievements, and
neither the Fund nor any other person assumes responsibility for the accuracy
and completeness of such statements.
68
TABLE OF CONTENTS OF SAI
An SAI dated as of September [__], 2003, has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
prospectus. An SAI may be obtained without charge by writing to the Fund at
its address at One Corporate Center, Rye, New York 10580-1422 or by calling
the Fund toll-free at (800) GABELLI (422-3554). The Table of Contents of the
SAI is as follows:
PAGE
THE FUND ..................................................... B-2
INVESTMENT OBJECTIVES AND POLICIES ........................... B-2
INVESTMENT RESTRICTIONS....................................... B-11
MANAGEMENT OF THE FUND........................................ B-13
PORTFOLIO TRANSACTIONS ....................................... B-21
REPURCHASE OF COMMON STOCK.................................... B-23
PORTFOLIO TURNOVER ........................................... B-23
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN................................ B-23
TAXATION ..................................................... B-25
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR SERIES E AUCTION RATE PREFERRED .............. B-30
ADDITIONAL INFORMATION CONCERNING THE SERIES
D PREFERRED AND SERIES E AUCTION RATE PREFERRED ........... B-38
MOODY'S AND S&P GUIDELINES ................................... B-46
NET ASSET VALUE............................................... B-56
BENEFICIAL OWNERS............................................. B-57
GENERAL INFORMATION........................................... B-58
FINANCIAL STATEMENTS.......................................... B-60
GLOSSARY...................................................... A-1
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser or the
underwriters. Neither the delivery of this prospectus nor any sale made
hereunder will, under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates.
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy such securities in any circumstance in which such an offer or
solicitation is unlawful.
69
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
-------------------------------------------------------------------------------
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
-------------------------------------------------------------------------------
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make
the long-term risk appear somewhat larger than in Aaa Securities.
-------------------------------------------------------------------------------
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present that suggest a
susceptibility to impairment some time in the future.
-------------------------------------------------------------------------------
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
-------------------------------------------------------------------------------
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
-------------------------------------------------------------------------------
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small. Moody's applies numerical modifiers
(1, 2, and 3) with respect to the bonds rated Aa through B. The
modifier 1 indicates that the company ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in
the lower end of its generic rating category.
-------------------------------------------------------------------------------
Caa Bonds that are rated Caa are of poor standing. These issues may be
in default or there may be present elements of danger with respect
to principal or interest.
-------------------------------------------------------------------------------
Ca Bonds that are rated Ca represent obligations that are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
-------------------------------------------------------------------------------
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
-------------------------------------------------------------------------------
A-1
FITCH, INC.
-------------------------------------------------------------------------------
AAA This is the highest rating assigned by Fitch to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
-------------------------------------------------------------------------------
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
Principal and interest payments on bonds in this category are
regarded as safe.
-------------------------------------------------------------------------------
A Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
-------------------------------------------------------------------------------
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
-------------------------------------------------------------------------------
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation, and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions. Debt rated C1 is reserved for income bonds on which no interest is
being paid and debt rated D is in payment default.
AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that Fitch does not
rate a particular type of obligation as a matter of policy.
A-2
STANDARD & POOR'S RATINGS SERVICES
-------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
-------------------------------------------------------------------------------
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
-------------------------------------------------------------------------------
A Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
-------------------------------------------------------------------------------
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
-------------------------------------------------------------------------------
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation, and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions. Debt rated C 1 is reserved for income bonds on which no interest
is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations that
S&P believes may experience high variability in expected returns due to
noncredit risks created by the terms of the obligations.
AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
A-3
===========================================================================
$125,000,000
THE GABELLI EQUITY TRUST INC.
3,000,000 Shares, [__]% Series D Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
2,000 Shares, Series E Auction Rate Cumulative Preferred Stock
(Liquidation Preference $25,000 per Share)
[Gabelli Logo]
------------------
PROSPECTUS
[__], 2003
------------------
Citigroup
Merrill Lynch & Co.
Gabelli & Company, Inc.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated October 1, 2003
THE GABELLI EQUITY TRUST INC.
__________________________
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Equity Trust Inc., or the Fund, is a closed-end
non-diversified management investment company organized as a Maryland
corporation on May 20, 1986 and registered under the 1940 Act that has a
primary investment objective of long-term growth of capital and a secondary
investment objective of income. The Fund commenced investment operations on
August 21, 1986. The Fund's investments are selected by Gabelli Funds, LLC,
its Investment Adviser. The Fund invests primarily in equity securities
including common stock, preferred stock, convertible or exchangeable
securities and warrants and rights to purchase such securities.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the prospectus for the Fund dated
September 30, 2003 (the "Prospectus"). Investors should obtain and read the
Prospectus prior to purchasing the Series D Preferred or the Series E Auction
Rate Preferred. A copy of the Prospectus may be obtained without charge by
calling the Fund at 1-800- GABELLI (1-800-422-3554) or (914) 921-5070. This
SAI incorporates by reference the entire Prospectus.
Each capitalized term used but not defined in this SAI has the
meaning ascribed to it, as the case may be, in the Prospectus or in the
glossary of this SAI.
TABLE OF CONTENTS
Page
----
The Fund .......................................................................................... B-2
Investment Objectives and Policies................................................................. B-2
Investment Restrictions............................................................................ B-11
Management of the Fund............................................................................. B-12
Portfolio Transactions............................................................................. B-21
Repurchase of Common Stock......................................................................... B-22
Portfolio Turnover................................................................................. B-23
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan................................... B-23
Taxation .......................................................................................... B-24
Additional Information Concerning Auctions for the Series E Auction Rate Preferred................. B-29
Additional Information Concerning the Series D Preferred and Series E Auction Rate Preferred....... B-38
Moody's and S&P Guidelines......................................................................... B-45
Net Asset Value.................................................................................... B-56
Beneficial Owners.................................................................................. B-57
General Information................................................................................ B-57
Financial Statements............................................................................... B-59
Glossary .......................................................................................... A-1
Appendix A ........................................................................................
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the SEC, Washington, D.C. The
registration statement may be obtained from the SEC upon payment of the fee
prescribed, or inspected at the SEC's office at no charge. This Statement of
Additional Information is dated September 30, 2003.
B-1
THE FUND
The Fund was incorporated in Maryland on May 20, 1986, and is a
non-diversified, closed-end management investment company registered under the
1940 Act. The Fund's investment operations commenced on August 21, 1986. The
Fund's common stock is traded on the NYSE under the symbol "GAB". The Fund's
Series B Preferred is traded on the NYSE under the symbol "GAB PrB".
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
The Fund's primary investment objective is long-term growth of
capital. Income is a secondary objective. Under normal market conditions, the
Fund will invest at least 80% of its total assets in equity securities. See
"Investment Objectives and Policies" in the Prospectus.
Investment Practices
Special Situations. Although the Fund typically invests in the
securities of companies on the basis of fundamental value, the Fund from time
to time may as a non-principal investment strategy, invest in companies that
are determined by the Investment Adviser to possess "special situation"
characteristics. In general, a special situation company is a company whose
securities are expected to increase in value solely by reason of a development
particularly or uniquely applicable to the company. Developments that may
create special situations include, among others, a liquidation,
reorganization, recapitalization or merger, material litigation, technological
breakthrough or new management or management policies. The principal risk
associated with investments in special situation companies is that the
anticipated development thought to create the special situation may not occur
and the investment therefore may not appreciate in value or may decline in
value.
Temporary Defensive Investments. The money market instruments in
which the Fund may invest during temporary defensive periods are U.S.
Government Obligations, commercial paper rated A-1 or higher by S&P or Prime-1
by Moody's; and certificates of deposit and bankers' acceptances issued by
domestic branches of U.S. banks that are members of the Federal Deposit
Insurance Corporation. For a description of such ratings, see Appendix A to
the Prospectus. The Fund may also invest during temporary defensive periods to
the extent permitted by applicable law in shares of money market mutual funds
that invest primarily in U.S. Government Obligations and repurchase agreements
in respect of those securities. Under current law, in the absence of an
exemptive order, such funds will not be affiliated with the Investment
Adviser. Money market mutual funds are investment companies and the
investments by the Fund in those companies are subject to certain other
limitations. See "Investment Restrictions." As a shareholder in a mutual fund,
the Fund will bear its ratable share of the fund's expenses, including
management fees, and will remain subject to payment of the fees to the
Investment Adviser with respect to assets so invested.
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities
B-2
rated "CCC" or lower by S&P or "Caa" or lower by Moody's, or non-rated
securities of comparable quality. These debt securities are predominantly
speculative and involve major risk exposure to adverse conditions and are
often referred to in the financial press as "junk bonds." See "Investment
Objectives and Policies -- Certain Investment Practices -- Lower Rated
Securities" in the Prospectus.
In addition to using recognized rating agencies and other sources,
the Investment Adviser also performs its own analysis in seeking investments
that it believes to be underrated (and thus higher- yielding) in light of the
financial condition of the issuer. Its analysis of issuers may include, among
other things, current and anticipated cash flow and borrowing requirements,
value of assets in relation to historical cost, strength of management,
responsiveness to business conditions, credit standing and current anticipated
results of operations. In selecting investments for the Fund, the Investment
Adviser may also consider general business conditions, anticipated changes in
interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced. In addition, it is possible
that statistical rating agencies might not change their ratings of a
particular issue or reflect subsequent events on a timely basis. Moreover,
such ratings do not assess the risk of a decline in market value. None of
these events will require the sale of the securities by the Fund, although the
Investment Adviser will consider these events in determining whether the Fund
should continue to hold the securities.
The market for certain lower rated and comparable unrated securities
has in the past experienced a major economic recession. The recession
adversely affected the value of such securities as well as the ability of
certain issuers of such securities to repay principal and pay interest
thereon. The market for those securities could react in a similar fashion in
the event of any future economic recession.
As a result of all these factors, to the extent the Fund invests in
high yield bonds, its net asset value is expected to be more volatile than the
net asset value of funds that invest solely in higher rated debt securities.
Options. The Fund may, subject to guidelines of the Board of
Directors, purchase or sell (i.e., write) options on securities, securities
indices and foreign currencies which are listed on a national securities
exchange or in the U.S. over-the-counter ("OTC") markets as a means of
achieving additional return or of hedging the value of the Fund's portfolio.
The Fund may write covered call options on common stocks that it owns or has
an immediate right to acquire through conversion or exchange of other
securities in an amount not to exceed 25% of total assets or invest up to 10%
of its total assets in the purchase of put options on common stocks that the
Fund owns or may acquire through the conversion or exchange of other
securities that it owns.
A call option is a contract that gives the holder of the option the
right to buy from the writer (seller) of the call option, in return for a
premium paid, the security or currency underlying the option at a specified
exercise price at any time during the term of the option. The writer of the
call option has the obligation, upon exercise of the option, to deliver the
underlying security or currency upon payment of the exercise price during the
option period.
A put option is the reverse of a call option, giving the holder the
right, in return for a premium, to sell the underlying security or currency to
the writer, at a specified price, and obligating the writer to purchase the
underlying security or currency from the holder at that price. The writer of
the put, who receives the premium, has the obligation to buy the underlying
security or currency upon exercise, at the exercise price during the option
period.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
An exchange traded option may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration upon conversion or exchange
of another instrument held in its portfolio (or for additional cash
consideration held in a segregated account by its custodian). A call option is
also covered if the Fund holds a call on the same instrument as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written or (ii) greater than the exercise price
of the call written if the difference is maintained by the Fund in cash, U.S.
Government Obligations or other high-grade short-term obligations in a
segregated account with its custodian. A put option is "covered" if the Fund
maintains cash or other high grade short-term obligations with a value equal
to the exercise price in a segregated account with its custodian, or else
holds a put on the same instrument as the put written where the exercise price
of the put held is equal to or greater than the exercise price of the put
written. If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by
B-3
purchasing an option of the same series as the option previously written.
However, once the Fund has been assigned an exercise notice, the Fund will be
unable to effect a closing purchase transaction. Similarly, if the Fund is the
holder of an option it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Since call option prices generally
reflect increases in the price of the underlying security, any loss resulting
from the repurchase of a call option may also be wholly or partially offset by
unrealized appreciation of the underlying security. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date. Gains
and losses on investments in options depend, in part, on the ability of the
Investment Adviser to predict correctly the effect of these factors. The use
of options cannot serve as a complete hedge since the price movement of
securities underlying the options will not necessarily follow the price
movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If the
Fund, as a covered call option writer, is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and
sell call and put options on securities indices. A stock index reflects in a
single number the market value of many different stocks. Relative values are
assigned to the stocks included in an index and the index fluctuates with
changes in the market values of the stocks. The options give the holder the
right to receive a cash settlement during the term of the option based on the
difference between the exercise price and the value of the index. By writing a
put or call option on a securities index; the Fund is obligated, in return for
the premium received, to make delivery of this amount. The Fund may offset its
position in the stock index options prior to expiration by entering into a
closing transaction on an exchange or it may let the option expire
unexercised.
The Fund may also buy or sell call options on foreign currencies. A
put option on a foreign currency gives the purchaser of the option the right
to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency gives the purchaser of the option the right
to purchase the currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from exchange-traded
options in that they are two-party contracts with price and other terms
negotiated between buyer and seller and generally
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do not have as much market liquidity as exchange-traded options.
Over-the-counter options are illiquid securities.
Use of options on securities indices entails the risk that trading in
the options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase these options unless the
Investment Adviser is satisfied with the development, depth and liquidity of
the market and the Investment Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate
precisely with the movements in the level of an index and, therefore, the use
of options on indexes cannot serve as a complete hedge and will depend, in
part, on the ability of the Investment Adviser to predict correctly movements
in the direction of the stock market generally or of a particular industry.
Because options on securities indexes require settlement in cash, the
Investment Adviser may be forced to liquidate portfolio securities to meet
settlement obligations.
Although the Investment Adviser will attempt to take appropriate
measures to minimize the risks relating to the Fund's writing of put and call
options, there can be no assurance that the Fund will succeed in any option
writing program it undertakes.
Futures Contracts and Options on Futures.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the assets underlying
the contract at a specified price at a specified future time. A "purchaser" of
a futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the assets underlying the contract at a
specified price at a specified future time. Certain futures contracts,
including stock and bond index futures, are settled on a net cash payment
basis rather than by the sale and delivery of the assets underlying the
futures contracts. No consideration will be paid or received by the Fund upon
the purchase or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker an amount of cash or cash equivalents
equal to approximately 1% to 10% of the contract amount (this amount is
subject to change by the exchange or board of trade on which the contract is
traded and brokers or members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract. Subsequent payments,
known as "variation margins," to and from the broker will be made daily as the
price of the index or security underlying the futures contracts fluctuates. At
any time prior to the expiration of a futures contract, the Fund may to close
the position by taking an opposite position, which will operate to terminate
it existing position in the contract.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time prior to the expiration of
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the option. Upon exercise of an option, the delivery of the futures positions
by the writer of the options to the holder of the option will be accompanied
by delivery of the accumulated balance in the writer's futures margin account
attributable to that contract, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of an option on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option purchased is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but
not limited to the following: no assurance that futures contracts or options
on futures can be offset at favorable prices, possible reduction of the yield
of the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due
to daily limits on price fluctuations, imperfect correlation between the
contracts and the securities being hedged, losses from investing in futures
transactions that are potentially unlimited and the segregation requirements
described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the 1940 Act an amount of cash,
U.S. Government Obligations or other liquid securities equal to the market
value of the contract must be deposited and maintained in a segregated account
with the custodian of the Fund to collateralize the positions, thereby
ensuring that the use of the contract is unleveraged. For short positions in
futures contracts and sales of call option, the Fund may establish a
segregated account (not with a futures commission merchant or broker) with
cash or liquid securities that, when added to amounts deposited with a futures
commission merchant or a broker as margin, equal the market value of the
instruments or currency underlying the futures contract or call option or the
market price at which the short positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may
purchase or sell interest rate futures contracts to take advantage of or to
protect the Fund against fluctuations in interest rates affecting the value of
debt securities which the Fund holds or intends to acquire. For example, if
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities, the values of which historically have a high degree of
positive correlation to the values of the Fund's portfolio securities. Such a
sale would have an effect similar to selling an equivalent value of the Fund's
portfolio securities. If interest rates increase, the value of the Fund's
portfolio securities will decline, but the value of the futures contracts to
the Fund will increase at approximately an equivalent rate thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities with
longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures
market may be more liquid than the cash market, the use of futures contracts
as a risk management technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when
it is expected that interest rates may decline. The purchase of futures
contracts for this purpose constitutes a hedge against increases in the price
of debt securities (caused by declining interest rates) which the Fund intends
to acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be
purchased, the Fund can take advantage of the anticipated rise in the cost of
the debt securities without actually buying them. Subsequently, the Fund can
make its intended purchase of the debt securities in the cash market and
currently liquidate its futures position. To the extent the Fund
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enters into futures contracts for this purpose, it will maintain in a
segregated asset account with the Fund's custodian, assets sufficient to cover
the Fund's obligations with respect to such futures contracts, which will
consist of cash or other liquid securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial margin deposited by the Fund
with its custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call option
on a futures contract to hedge against a market advance due to declining
interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the
value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, the Fund will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Fund's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities that are deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the price of debt
securities that the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from options on futures it
has written may to some extent be reduced or increased by changes in the value
of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate futures
contracts and options thereon discussed previously. By entering into currency
futures and options thereon, the Fund will seek to establish the rate at which
it will be entitled to exchange U.S. dollars for another currency at a future
time. By selling currency futures, the Fund will seek to establish the number
of dollars it will receive at delivery for a certain amount of a foreign
currency. In this way, whenever the Fund anticipates a decline in the value of
a foreign currency against the U.S. dollar, the Fund can attempt to "lock in"
the U.S. dollar value of some or all of the securities held in its portfolio
that are denominated in that currency. By purchasing currency futures, the
Fund can establish the number of dollars it will be required to pay for a
specified amount of a foreign currency in a future month. Thus, if the Fund
intends to buy securities in the future and expects the U.S. dollar to decline
against the relevant foreign currency during the period before the purchase is
effected, the Fund can attempt to "lock in" the price in U.S. dollars of the
securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for
the price of the premium and related transaction costs it must pay for the
option, to decide whether or not to buy (in the case of a call option) or to
sell (in the case of a put option) a futures contract at a specified price at
any time during the period before the option expires. If the Investment
Adviser, in purchasing an option, has been correct in
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its judgment concerning the direction in which the price of a foreign currency
would move as against the U.S. dollar, the Fund may exercise the option and
thereby take a futures position to hedge against the risk it had correctly
anticipated or close out the option position at a gain that will offset, to
some extent, currency exchange losses otherwise suffered by the Fund. If
exchange rates move in a way the Fund did not anticipate, however, the Fund
will have incurred the expense of the option without obtaining the expected
benefit; any such movement in exchange rates may also thereby reduce rather
than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or
sales of securities index futures contracts are used for hedging purposes to
attempt to protect the Fund's current or intended investments from broad
fluctuations in stock or bond prices. For example, the Fund may sell
securities index futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in the
securities market and anticipates a significant market advance, it may
purchase securities index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in securities index futures contracts will be closed
out. The Fund may write put and call options on securities index futures
contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts and Options
on Futures Contracts. The Investment Adviser has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act and therefore is not subject to registration under the Commodity Exchange
Act. Accordingly, the Fund's investments in derivative instruments described
in the Prospectus and this SAI are not limited by or subject to regulation
under the Commodity Exchange Act or otherwise regulated by the Commodity
Futures Trading Commission. Nevertheless, the Fund's investment restrictions
place certain limitations and prohibitions on the Fund's ability to purchase
or sell commodities or commodity contracts. See "Investment Restrictions."
Under these restrictions, the Fund may not enter into futures contracts or
options on futures contracts unless (i) the aggregate initial margins and
premiums do not exceed 5% of the fair market value of the Fund's total assets
and (ii) the aggregate market value of the Fund's outstanding futures
contracts and the market value of the currencies and futures contracts subject
to outstanding options written by the Fund, as the case may be, do not exceed
50% of the market value of the Fund's total assets. In addition, investment in
future contracts and related options generally will be limited by the rating
agency guidelines applicable to any of the Fund's outstanding Preferred Stock.
Forward Currency Exchange Contracts. The Fund may engage in currency
transactions other than on futures exchanges to protect against future changes
in the level of future currency exchange rates. The Fund will conduct such
currency exchange transactions either on a spot, i.e., cash, basis at the rate
then prevailing in the currency exchange market or on a forward basis, by
entering into forward contracts to purchase or sell currency. A forward
contract on foreign currency involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract, at a price set on
the date of the contract. The risk of shifting of a forward currency contract
will be substantially the same as a futures contract having similar terms. The
Fund's dealing in forward currency exchange will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest
receivable and Fund expenses. Position hedging is the forward sale of currency
with respect to portfolio security positions denominated or quoted in that
currency or in a currency bearing a high degree of positive correlation to the
value of that currency.
The Fund may not position hedge with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time
of making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If
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the Fund enters into a position hedging transaction, the Fund's custodian or
subcustodian will place cash or other liquid securities in a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of the given forward contract. If the value of
the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account
will, at all times, equal the amount of the Fund's commitment with respect to
the forward contract.
At or before the maturity of a forward sale contract, the Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
delivery. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase
of the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to purchase is less than the price of the currency it
has agreed to sell. Should forward prices increase, the Fund will suffer a
loss to the extent the price of the currency it has agreed to purchase exceeds
the price of the currency it has agreed to sell. Closing out forward purchase
contracts involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward transactions in
currency exchange are usually conducted on a principal basis, no fees or
commissions are involved. The use of foreign currency contracts does not
eliminate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that
might result if the value of the currency increases.
If a decline in any currency is generally anticipated by the
Investment Adviser, the Fund may not be able to contract to sell the currency
at a price above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon.
The Fund's ability to establish and close out positions in futures contracts
and options thereon will be subject to the development and maintenance of
liquid markets. Although the Fund generally will purchase or sell only those
futures contracts and options thereon for which there appears to be a liquid
market, there is no assurance that a liquid market on an exchange will exist
for any particular futures contract or option thereon at any particular time.
In the event no liquid market exists for a particular futures contract or
option thereon in which the Fund maintains a position, it will not be possible
to effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the
futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract
or an option thereon which the Fund has written and which the Fund is unable
to close, the Fund would be required to maintain margin deposits on the
futures contract or option thereon and to make variation margin payments until
the contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Investment Adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the Investment Adviser's expectations are not met, the Fund will be
in a
B-9
worse position than if a hedging strategy had not been pursued. For example,
if the Fund has hedged against the possibility of an increase in interest
rates that would adversely affect the price of securities in its portfolio and
the price of such securities increases instead, the Fund will lose part or all
of the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash to meet daily variation margin requirements,
it may have to sell securities to meet the requirements. These sales may be,
but will not necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.
Additional Risks of Foreign Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts. Options, futures contracts and
options thereon and forward contracts on securities and currencies may be
traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities. The value
of such positions also could be adversely affected by (i) other complex
foreign political, legal and economic factors, (ii) lesser availability than
in the U.S. of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in the foreign markets
during non- business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded
may impose limits on the positions that the Fund may take in certain
circumstances.
Risks of Currency Transactions. Currency transactions are also
subject to risks different from those of other portfolio transactions. Because
currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency and
related instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental
action can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure
as well as incurring transaction costs.
When Issued, Delayed Delivery Securities and Forward Commitments. The
Fund may enter into forward commitments for the purchase or sale of
securities, including on a "when issued" or "delayed delivery" basis, in
excess of customary settlement periods for the type of security involved. In
some cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring, i.e., a when, as and if issued security.
When such transactions are negotiated, the price is fixed at the time of the
commitment, with payment and delivery taking place in the future, generally a
month or more after the date of the commitment. While it will only enter into
a forward commitment with the intention of actually acquiring the security,
the Fund may sell the security before the settlement date if it is deemed
advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
high-grade debt securities in an aggregate amount at least equal to the amount
of its outstanding forward commitments.
Restricted and Illiquid Securities. The Fund may invest up to a total
of 10% of its net assets in securities that are subject to restrictions on
resale and securities the markets for which are illiquid,
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including repurchase agreements with more than seven days to maturity.
Illiquid securities include securities the disposition of which is subject to
substantial legal or contractual restrictions. The sale of illiquid securities
often requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than does the sale of securities eligible
for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar
securities that are not subject to restrictions on resale. Unseasoned issuers
are companies (including predecessors) that have operated less than three
years. The continued liquidity of such securities may not be as well assured
as that of publicly traded securities, and accordingly the Board of Directors
will monitor their liquidity. The Board will review pertinent factors such as
trading activity, reliability of price information and trading patterns of
comparable securities in determining whether to treat any such security as
liquid for purposes of the foregoing 10% test. To the extent the Board treats
such securities as liquid, temporary impairments to trading patterns of such
securities may adversely affect the Fund's liquidity.
In accordance with pronouncements of the SEC, the Fund may invest in
restricted securities that can be traded among qualified institutional buyers
under Rule 144A under the Securities Act of 1933 without registration under
the Securities Act and may treat them as liquid for purposes of the foregoing
10% test if such securities are found to be liquid. The Board of Directors has
adopted guidelines and delegated to the Investment Adviser, subject to the
supervision of the Board of Directors, the function of determining and
monitoring the liquidity of particular Rule 144A securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that cannot be changed without the affirmative vote of
the holders of a majority of the outstanding voting securities of the Fund
along with the affirmative vote of a majority of the votes entitled to be cast
by holders of outstanding preferred stock (including the Series D Preferred
and/or Series E Auction Rate Preferred), voting together as a single class.
For purposes of the voting rights described in the foregoing sentence, except
as otherwise required under the 1940 Act, the majority of the outstanding
voting securities or preferred stock, as the case may be, means, in accordance
with Section 2(a)(42) of the 1940 Act, the vote of (i) of 67% or more of the
holders of such securities present at a stockholders meeting called for such
vote, if the holders of more than 50% of such outstanding securities are
present or represented by proxy or (ii) more than 50% of such outstanding
securities, whichever is less. All percentage limitations set forth below
apply immediately after a purchase or initial investment and any subsequent
change in any applicable percentage resulting from market fluctuations does
not require elimination of any security from the portfolio.
The Fund may not:
o Invest 25% or more of its total assets, taken at market value
at the time of each investment, in the securities of issuers in
any particular industry. This restriction does not apply to
investments in U.S. Government Obligations.
o Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, if more than 10% of the market value of the
total assets of the Fund would be invested in securities of
other investment companies, more than 5% of the market value of
the total assets of the Fund would be invested in the
securities of any one investment company or the Fund would own
more than 3% of any other investment company's securities;
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provided, however, this restriction shall not apply
to securities of any investment company organized
by the Fund that are to be distributed pro rata as
a dividend to its stockholders.
o Purchase or sell commodities or commodity contracts except that
the Fund may purchase or sell futures contracts and related
options thereon if immediately thereafter (i) no more than 5%
of its total assets are invested in margins and premiums and
(ii) the aggregate market value of its outstanding futures
contracts and market value of the currencies and futures
contracts subject to outstanding options written by the Fund do
not exceed 50% of the market value of its total assets. The
Fund may not purchase or sell real estate, provided that the
Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real
estate or interests therein.
o Purchase any securities on margin or make short sales, except
that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio
securities.
o Make loans of money, except by the purchase of a portion of
publicly distributed debt obligations in which the Fund may
invest, and repurchase agreements with respect to those
obligations, consistent with its investment objectives and
policies. The Fund reserves the authority to make loans of its
portfolio securities to financial intermediaries in an
aggregate amount not exceeding 20% of its total assets. Any
such loans may only be made upon approval of, and subject to
any conditions imposed by, the Board of Directors of the Fund.
Because these loans would at all times be fully collateralized,
the risk of loss in the event of default of the borrower should
be slight.
o Borrow money, except that the Fund may borrow from banks and
other financial institutions on an unsecured basis, in an
amount not exceeding 10% of its total assets, to finance the
repurchase of its stock. The Fund also may borrow money on a
secured basis from banks as a temporary measure for
extraordinary or emergency purposes. Temporary borrowings may
not exceed 5% of the value of the total assets of the Fund at
the time the loan is made. The Fund may pledge up to 10% of the
lesser of the cost or value of its total assets to secure
temporary borrowings. The Fund will not borrow for investment
purposes. Immediately after any borrowing, the Fund will
maintain asset coverage of not less than 300% with respect to
all borrowings. While the borrowing of the Fund exceeds 5% of
its respective total assets, the Fund will make no further
purchases of securities, although this limitation will not
apply to repurchase transactions as described above.
o Issue senior securities, except to the extent permitted by
applicable law.
o Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act in
selling portfolio securities; provided, however, this
restriction shall not apply to securities of any investment
company organized by the Fund that are to be distributed pro
rata as a dividend to its stockholders.
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o Invest more than 10% of its total assets in illiquid
securities, such as repurchase agreements with maturities in
excess of seven days, or securities that at the time of
purchase have legal or contractual restrictions on resale.
MANAGEMENT OF THE FUND
Directors and Officers
Overall responsibility for management and supervision of the Fund
rests with its Board of Directors. The Board of Directors approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Fund's (i) Investment
Adviser,(ii) custodian, (iii) transfer agent and dividend disbursing agent for
its common stock and fixed rate preferred stock and (iv) auction agent, paying
agent and registrar with respect to its auction rate preferred stock. See
"Custodian, Transfer Agent, Auction Agent and Dividend Disbursing Agent" in
the Prospectus. The day-to-day operations of the Fund are delegated to the
Investment Adviser.
The names and business addresses of the Directors and principal
officers of the Fund are set forth in the following table, together with their
positions and their principal occupations during the past five years and, in
the case of the Directors, their positions with certain other organizations
and companies.
B-13
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND PRINCIPAL
NAME, POSITION(S) LENGTH OF COMPLEX OCCUPATION(S) OTHER
ADDRESS[1] TIME OVERSEEN BY DURING PAST DIRECTORSHIPS
AND AGE SERVED[2] DIRECTOR FIVE YEARS HELD BY DIRECTOR
----------------- ------------- -------------- ---------------------------- ----------------------
INTERESTED DIRECTORS[3]:
----------------------
Mario J. Gabelli Since 1986* 23 Chairman of the Board and Director of Morgan
Director, President and Chief Executive Officer of Group Holdings, Inc.
Chief Investment Officer Gabelli Asset Management Inc. (holding company); Vice
Age: 61 and Chief Investment Officer Chairman of Lynch
of Gabelli Funds, LLC and Corporation (diversified
GAMCO Investors, Inc; Vice manufacturing company).
Chairman and Chief Executive
Officer of Lynch Interactive
Corporation (multimedia and
services)
Karl Otto Pohl Since 1992*** 33 Member of the Shareholder Director of Gabelli Asset
Director Committee of Sal. Oppenheim Management Inc. (investment
Age: 73 Jr. & Cie (private investment management); Chairman,
bank); Former President of the Incentive Capital and
Deutsche Bundesbank and Incentive Asset
Chairman of its Central Bank Management (Zurich);
Council (1980-1991) Director at Sal Oppenheim
Jr. & Cie, Zurich.
NON-INTERESTED DIRECTORS:
-------------------------
Thomas E. Bratter Since 1986* 3 Director, President and -
Director Founder, The John Dewey
Age: 63 Academy (residential college
preparatory therapeutic high
school)
Anthony J. Colavita4 Since 2001** 35 President and Attorney at Law
Director in the law firm of Anthony
Age: 66 J. Colavita, P.C.
James P. Conn4 Since 1989*** 11 Former Managing Director and Director of LaQuinta
Director Chief Investment Officer of Corp. (hotels) and First
Age: 64 Financial Security Assurance Republic Bank.
Holdings Ltd. (1992-1998)
Frank J. Fahrenkopf, Jr. Since 1998** 3 President and Chief Executive --
Director Officer of the American
Age: 63 Gaming Association since June
1995; Partner in the law firm
of Hogan & Hartson; Chairman
of International Trade Practice
Group; Co-Chairman of the
Commission on Presidential
Debates; Former Chairman of
the Republican National
Committee
B-14
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND PRINCIPAL
NAME, POSITION(S) LENGTH OF COMPLEX OCCUPATION(S) OTHER
ADDRESS[1] TIME OVERSEEN BY DURING PAST DIRECTORSHIPS
AND AGE SERVED[2] DIRECTOR FIVE YEARS HELD BY DIRECTOR
----------------- ------------- -------------- ---------------------------- --------------------
Arthur V. Ferrara Since 2001** 9 Formerly, Chairman of the Director of The Guardian
Director Board and Chief Executive Life Insurance Company
Age: 72 Officer of the Guardian Life of America; Director of
Insurance Company of America The Guardian Insurance
from January 1993 to & Annuity Company,
December 1995; President, Inc., Guardian Investor
Chief Executive Officer and a Services Corporation, and
Director prior thereto 5 mutual funds within the
Guardian Fund Complex
Anthony R. Pustorino Since 1986*** 17 Certified Public Accountant; -
Director Professor Emeritus, Pace
Age: 77 University
Salvatore J. Zizza Since 1986** 11 Chairman of Hallmark Director of Hollis Eden
Director Electrical Supplies Corp.; Pharmaceuticals
Age: 57 Former Executive Vice
President of FMG Group
(OTC) a healthcare provider;
Former President and Chief
Executive Officer of the Lehigh
Group Inc., (electrical supply
wholesaler); an interior
construction company,
through 1997
OFFICERS:
--------
Bruce N. Alpert Since 1998 -- Executive Vice President and
President Chief Operating Officer of
Age: 51 Gabelli Funds, LLC since June
1988 and an officer of all
mutual funds advised by
Gabelli Funds, LLC and its
affiliates. Director and
President of Gabelli Advisors,
Inc.
Carter W. Austin Since 2000 -- Vice President at the Fund
Vice President since 2000. Vice President of
Age: 35 Gabelli Funds, LLC since 1996.
Gus Coutsouros Since -- Vice President and Chief
Vice President and 2003 Financial Officer of Gabelli
Treasurer Funds, LLC since 1998 and an
Age: 40 officer of all mutual funds
advised by Gabelli Funds and
its affiliates and Chief
Financial Officer of Gabelli
Advisers, Inc. Prior to 1998,
Treasurer of Lazard Funds.
Peter W. Latartara Since -- Vice President at the Fund
Vice President 2003 since 2003. Vice President
Age: 34 of Gabelli Funds, LLC
since 1996. Vice President
of Gabelli Asset
Management, Inc. since 2000.
James E. McKee Since 1995 -- Vice President General
Secretary Counsel and Secretary of
Age: 40 Gabelli Asset Management,
Inc. since 1999 and GAMCO
Investors, Inc. since 1993;
Secretary of all mutual funds
advised by Gabelli Advisers,
Inc.and Gabelli Funds, LLC.
_______________________
[1] Address: One Corporate Center, Rye, NY 10580, unless otherwise noted.
[2] The Fund's Board of Directors is divided into three classes, each
class having a term of three years. Each year the term of office of
one class expires and the successor or successors elected to such
class serve for a three year term. The three year term for each class
expires as follows:
B-15
* - Term expires at the Fund's 2004 Annual Meeting of Stockholders
and upon the election and due qualification of their successors.
** - Term expires at the Fund's 2005 Annual Meeting of Stockholders
and upon the election and due qualification of their successors.
*** - Term expires at the Fund's 2006 Annual Meeting of Stockholders
and upon the election and due qualification of their successors.
[3] "Interested person" of the Fund as defined in the 1940 Act. Messrs.
Gabelli and Pohl are each considered an "interested person" because of
their affiliation with Gabelli Funds, LLC which acts as the Fund's
investment adviser.
[4] Represents holders of shares of the Fund's Series B Preferred and
Series C Auction Rate Preferred.
The following table reflects the beneficial ownership of Directors of
the Fund in securities of the Fund and in securities of other Gabelli fund
complex registered investment companies overseen by such Director.
--------------------------------------------------------------------------------
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund(1) Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of
Investment Companies (1)
--------------------------------------------------------------------------------
INTERESTED DIRECTORS
-------------------------------------------------------------------------------
Mario J. Gabelli Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Karl Otto Pohl None None
-------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
-------------------------------------------------------------------------------
Thomas E. Bratter Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Anthony J. Colavita $10,001 - $50,000 Over $100,000
-------------------------------------------------------------------------------
James P. Conn Over $100,000 Over $100,000
-------------------------------------------------------------------------------
Frank J. Fahrenkopf, Jr. None $1-$10,000
-------------------------------------------------------------------------------
Arthur V. Ferrara None Over $100,000
-------------------------------------------------------------------------------
Anthony R. Pustorino $50,001-100,000 Over $100,000
-------------------------------------------------------------------------------
Salvatore J. Zizza Over $100,000 Over $100,000
-------------------------------------------------------------------------------
(1) This information has been furnished by each Director as of December
31, 2002. "Beneficial Ownership" is determined in accordance with
Section 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended.
The Directors serving on the Fund's Nominating Committee are
Messrs.Colavita (Chairman) and Zizza. The Nominating Committee is responsible
for recommending qualified candidates to the Board in the event that a position
is vacated or created. The Nominating Committee would consider recommendations
B-16
by stockholders if a vacancy were to exist. Such recommendations should be
forwarded to the Secretary of the Fund. The Nominating Committee did not meet
during the year ended December 31, 2002. The Fund does not have a standing
compensation committee.
Messrs. Pustorino (Chairman), Colavita and Zizza, who are not
"interested persons" of the Fund as defined in the 1940 Act, serve on the
Fund's Audit Committee. The Audit Committee is generally responsible for
reviewing and evaluating issues related to the accounting and financial
reporting policies and internal controls of the Fund and, as appropriate, the
internal controls of certain service providers, overseeing the quality and
objectivity of the Fund's financial statements and the audit thereof. The
Audit Committee also acts as a liaison between the Board of Directors and the
Fund's independent accountants. During the year ended December 31, 2002, the
Audit Committee met twice.
The Fund and the Investment Adviser have adopted a code of ethics
(the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics
permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics can be reviewed and copied
at the United States SEC's Public Reference Room in Washington, D.C.
Information on the operations of the Reference Room may be obtained by calling
the SEC at (202) 942-8090. The Code of Ethics is also available on the EDGAR
database on the SEC's Internet Site at http://www.sec.gov. Copies of the Code
of Ethics may also be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
SEC's Public Reference Room Section, Washington, D.C. 20549- 0102.
Remuneration of Directors and Officers
The Fund pays each Director who is not affiliated with the Investment
Adviser or its affiliates a fee of $12,000 per year plus $1,500 per meeting
attended in person and $500 per telephonic meeting, together with each
Director's actual out-of-pocket expenses relating to attendance at such
meetings.
The following table shows certain compensation information for the
Directors and officers of the Fund for the fiscal year ended December 31,
2002. Mr. Austin and Mr. Latartara are employed by the Fund and their
compensation is evaluated and approved by the Directors. Other officers who
are employed by the Investment Adviser receive no compensation or expense
reimbursement from the Fund.
B-17
Compensation Table
For the Fiscal Year Ended December 31, 2002
TOTAL
COMPENSATION
FROM THE FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF PERSON AND FROM THE TO DIRECTORS/
POSITION FUND* OFFICERS*
Mario J. Gabelli, Chairman of the Board $0 $ 0 (23)
Karl Otto Pohl, Director $0 $ 0 (33)
Thomas E. Bratter, Director $18,000 $ 31,000 (3)
Anthony J. Colavita, Director $22,000 $152,286(35)
James P. Conn, Director $19,000 $ 53,500 (11)
Frank J. Fahrenkopf, Jr., Director $18,000 $ 31,000 (3)
Arthur V. Ferrara, Director $18,500 $ 30,000 (9)
Anthony R. Pustorino, Director $23,500 $132,286(17)
Salvatore J. Zizza, Director $21,000 $ 73,750 (11)
------------
TOTAL** $140,000
(2) Represents the total compensation paid to such persons during the
calendar year ended December 31, 2002 by investment companies
(including the Fund) or portfolios thereof from which such person
receives compensation that are considered part of the same fund
complex as the Fund because they have common or affiliated investment
advisers. The number in parenthesis represents the number of such
investment companies and portfolios.
For his service as Vice President of the Fund, Mr. Austin received
compensation in 2002 of $190,000.
Indemnification of Officers and Directors; Limitations on Liability
The By-Laws of the Fund provide that the Fund, to the fullest extent
permitted by law, will indemnify its current and former Directors and Officers
and may indemnify its employees or agents against liabilities and expenses
incurred in connection with litigation in which they may be involved because
of their offices or association with the Fund. Maryland law does not permit
indemnification of present or former directors, officers, employees or agents
in connection with any proceeding to which they may be made a party by reason
of their service to the Fund if (i) the act or omission of such person or
entity, was material to the matter giving rise to the proceeding and (a) was
committed in bad faith; or (b) was the result of active and deliberate
dishonesty; (ii) the person or entity actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, person or entity had reasonable cause to believe that the act or
omission was unlawful.
B-18
Under Maryland law, the Fund is not permitted to indemnify for an
adverse judgment in a suite by or in the right of the Fund for a judgment of
liability on the basis that personal benefit was improperly received, unless
in either case a court orders indemnification and then only for expenses. The
termination of any proceeding by conviction or upon a plea of nolo contendere
or its equivalent or an entry of an order of probation prior to judgment
creates a rebuttable presumption that the director, officer, employee or agent
did not meet the requisite standard of conduct required for permitted
indemnification. The termination of any proceeding by judgment, order or
settlement, however, does not create such a presumption.
The By-Laws and Maryland law permits the Fund to advance reasonable
expenses to current or former Directors, officers, employees and agents upon
the Fund's receipt of a written affirmation by such person or entity of its
good faith belief that it has met the standard of conduct necessary for
indemnification by the Fund, and a written undertaking by such person or
entity (or on its behalf) behalf to repay the amount paid or reimbursed by the
Fund if it is ultimately determined that such person or entity did not meet
the requisite standard of conduct. The By-Laws further requires that one of
the following conditions must also be met to advance payment of expenses: (i)
the person or entity seeking indemnification shall provide a security in the
form and amount acceptable to the Fund for its undertaking; (ii) the Fund is
insured against losses arising by reason of the advance; (iii) approval by a
majority of a quorum of the Directors of the Fund who are neither "interested
persons" as defined by Section 2(a)(19) of the 1940 Act nor parties to the
proceeding, or (iv) a written opinion of independent legal counsel, based on a
review of the facts readily available to the Fund at the time the advance is
proposed to be made, to the effect that there is reason to believe that the
person or entity seeking indemnification will ultimately be found to be
entitled to indemnification.
Maryland law permits a Maryland corporation to include in its charter
a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by final
judgment as being material to the cause of action. The Charter of the Fund
provides for such a limitation, except to the extent such exemption is not
permitted by the 1940 Act, as amended from time to time.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund (the "Advisory Agreement"). The Investment
Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580. The Investment Adviser was organized in
1999 and is the successor to Gabelli Funds, Inc., which was organized in 1980.
As of June 30, 2003, the Investment Adviser acted as registered investment
advisers to 19 management investment companies with aggregate net assets of
$9.3 billion. The Investment Adviser, together with other affiliated
investment advisers set forth below, had assets under management totaling
approximately $21.9 billion, as of June 30, 2003. GAMCO Investors, Inc., an
affiliate of the Investment Adviser, acts as investment adviser for
individuals, pension trusts, profit sharing trusts and endowments and as a
sub-adviser to management investment companies, having aggregate assets of
$10.8 billion under management as of June 30, 2003. Gabelli Fixed Income LLC,
an affiliate of the Investment Adviser, acts as investment adviser for The
Treasurer's Fund and separate accounts having aggregate assets of $1.2 billion
under management as of June 30, 2003. Gabelli Advisors, Inc., an affiliate of
the Investment Adviser, acts as investment manager to the Gabelli Westwood
Funds, having aggregate assets of $493 million under management as of June 30,
2003.
B-19
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded on
the NYSE under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a
"controlling person" of the Investment Adviser on the basis of his ownership of
a majority of the stock of the Gabelli Group Capital Partners, Inc., which owns
a majority of the capital stock of Gabelli Asset Management Inc.
Under the terms of the Advisory Agreement, the Investment Adviser
manages the portfolio of the Fund in accordance with its stated investment
objectives and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and manages the Fund's
other business and affairs, all subject to the supervision and direction of
the Fund's Board of Directors. In addition, under the Advisory Agreement, the
Investment Adviser oversees the administration of all aspects of the Fund's
business and affairs and provides, or arranges for others to provide, at the
Investment Adviser's expense, certain enumerated services, including
maintaining the Fund's books and records, preparing reports to the Fund's
stockholders and supervising the calculation of the net asset value of its
stock. All expenses of computing the net asset value of the Fund, including
any equipment or services obtained solely for the purpose of pricing shares of
stock or valuing the Fund's investment portfolio, will be an expense of the
Fund under the Advisory Agreement unless the Investment Adviser voluntarily
assumes responsibility for such expense.
The Advisory Agreement combines investment advisory and
administrative responsibilities in one agreement. For services rendered by the
Investment Adviser on behalf of the Fund under the Advisory Agreement, the
Fund pays the Investment Adviser a fee computed daily and paid monthly at the
annual rate of 1.00% of the average weekly net assets of the Fund.
Notwithstanding the foregoing, the Investment Adviser has voluntarily agreed,
with respect to each series of its outstanding preferred stock and the Series
D Preferred and Series E Auction Rate Preferred, to waive the portion of its
investment advisory fee attributable to an amount of assets of the Fund equal
to the aggregate stated value of each such series for any calendar year in
which the net asset value total return of the Fund allocable to the common
stock, including distributions and the advisory fee subject to potential
waiver, is less than (i) in the case of the Fund's fixed rate preferred stock,
the stated annual dividend rate of such series and (ii) in the case of the
Fund's auction rate preferred stock, the net cost of capital to the Fund with
respect to such series for such year expressed as a percentage (including,
without duplication, dividends paid by the Fund on such series and the net
cost to the Fund of any associated swap or cap transaction if the Fund hedges
its dividend obligations). This waiver will apply to the portion of the Fund's
assets attributable to each such series of preferred stock for so long as any
shares of such series remain outstanding. The Fund has voluntarily agreed to
similar waivers with respect to its outstanding Series B Preferred and Series
C Auction Rate Preferred.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties thereunder, the Investment Adviser is not liable for
any error or judgment or mistake of law or for any loss suffered by the Fund.
As part of the Advisory Agreement, the Fund has agreed that the name "Gabelli"
is the Investment Adviser's property, and that in the event the Investment
Adviser ceases to act as an investment adviser to the Fund, the Fund will
change its name to one not including "Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in effect
with respect to the Fund until the second anniversary its initial approval by
the Fund's stockholders, and from year to year thereafter if approved annually
(i) by the Fund's Board of Directors or by the holders of a majority of the
Fund's outstanding voting securities and (ii) by a majority of the Directors
who are not "interested persons" (as defined in the 1940 Act) of any party to
the Advisory Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement was initially
approved by the
B-20
Board of Directors at a meeting held on July 17, 1986 and was approved most
recently by the Board of Directors on May 14, 2003.
In considering whether to approve the Advisory Agreement, the Fund's
non-interested Directors considered, among other factors, (i) the services
provided to the Fund by the Investment Adviser and the sub-administrator, (ii)
the Fund's absolute and comparative investment performance, (iii) the Fund's
fee and expense data as compared to a peer group of closed-end equity funds in
the same asset range as the Fund and (iv) the Investment Adviser's
profitability with respect to its management of the Fund. The non-interested
Directors indicated that the primary factors in their determination to approve
the Advisory Agreement were the level of the Fund's advisory fee rate and
actual expenses borne by the Fund, the high quality of service provided by the
Investment Adviser, based in large part upon the experience of the Fund's
portfolio manager, and the Fund's absolute and comparative investment
performance within its peer group.
The Advisory Agreement terminates automatically on its assignment and
may be terminated without penalty on 60 days written notice at the option of
either party thereto or by a vote of a majority (as defined in the 1940 Act)
of the Fund's outstanding stock.
For each of the years ended December 31, 2000, December 31, 2001 and
December 31, 2002, the Investment Adviser was paid $13,085,773, $12,063,874,
$9,835,224, and respectively, for advisory and administrative services
rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is responsible for placing purchase and sale
orders and the allocation of brokerage on behalf of the Fund. Transactions in
equity securities are in most cases effected on U.S. stock exchanges and
involve the payment of negotiated brokerage commissions. In general, there may
be no stated commission in the case of securities traded in over-the-counter
markets, but the prices of those securities may include undisclosed
commissions or mark-ups. Principal transactions are not entered into with
affiliates of the Fund. However, Gabelli & Company, Inc. may execute
transactions in the over-the-counter markets on an agency basis and receive a
stated commission therefrom. To the extent consistent with applicable
provisions of the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, as well as other regulatory requirements, the Fund's Board of
Directors have determined that portfolio transactions may be executed through
Gabelli & Company, Inc. and its broker-dealer affiliates if, in the judgment
of the Investment Adviser, the use of those broker-dealers is likely to result
in price and execution at least as favorable as those of other qualified
broker-dealers, and if, in particular transactions, those broker-dealers
charge the Fund a rate consistent with that charged to comparable unaffiliated
customers in similar transactions. The Fund has no obligations to deal with
any broker or group of brokers in executing transactions in portfolio
securities. In executing transactions, the Investment Adviser seeks to obtain
the best price and execution for the Fund, taking into account such factors as
price, size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission available.
B-21
Subject to obtaining the best price and execution, brokers who
provide supplemental research, market and statistical information to the
Investment Adviser or its affiliates may receive orders for transactions by
the Fund. The term "research, market and statistical information" includes
advice as to the value of securities, and advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Advisory Agreement and the
expenses of the Investment Adviser will not necessarily be reduced as a result
of the receipt of such supplemental information. Such information may be
useful to the Investment Adviser and its affiliates in providing services to
clients other than the Fund, and not all such information is used by the
Investment Adviser in connection with the Fund. Conversely, such information
provided to the Investment Adviser and its affiliates by brokers and dealers
through whom other clients of the Investment Adviser and its affiliates effect
securities transactions may be useful to the Investment Adviser in providing
services to the Fund.
Although investment decisions for the Fund are made independently
from those of the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made by those
other accounts. When the same securities are purchased for or sold by the Fund
and any of such other accounts, it is the policy of the Investment Adviser and
its affiliates to allocate such purchases and sales in the manner deemed fair
and equitable to all of the accounts, including the Fund.
For the fiscal years ended December 31, 2000, December 31, 2001 and
December 31, 2002, the Fund paid a total of $845,483, $987,659 and $487,920,
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $586,533, $664,606, and $337,437, respectively. The
amount received by Gabelli & Company, Inc. and its affiliates from the Fund in
respect of brokerage commissions for the fiscal year ended December 31, 2002
represented approximately 69.16% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately 35.92% of the
aggregate dollar amount of transactions by the Fund for such period. The
variance between the percentage of brokerage commissions received by Gabelli &
Company, Inc. and the percentage of transactions executed by Gabelli & Company,
Inc. reflects a series of block trades conducted at the end of the year through
an unaffiliated broker-dealer at below market fixed rates to facilitate
year-end capital gains by the Fund.
REPURCHASE OF COMMON STOCK
The Fund is a closed-end, non-diversified, management investment
company and as such its stockholders do not, and will not, have the right to
require the Fund to repurchase their stock. The Fund, however, may repurchase
its common stock from time to time as and when it deems such a repurchase
advisable. Such repurchases will be made when the Fund's common stock is
trading at a discount of 10% or more (or such other percentage as the Board of
Directors of the Fund may determine from time to time) from net asset value.
Pursuant to the 1940 Act, the Fund may repurchase its common stock on a
securities exchange (provided that the Fund has informed its stockholders
within the preceding six months of its intention to repurchase such stock) or
pursuant to tenders or as otherwise permitted in accordance with Rule 23c-1
under the 1940 Act. Under that Rule, certain conditions must be met regarding,
among other things, distribution of net income for the preceding fiscal year,
status of the seller, price paid, brokerage commissions, prior notice to
stockholders of an intention to purchase stock and purchasing in a manner and
on a basis that does not discriminate unfairly against the other stockholders
through their interest in the Fund.
B-22
When the Fund repurchases its common stock for a price below net
asset value, the net asset value of the common stock that remains outstanding
will be enhanced, but this does not necessarily mean that the market price of
the outstanding common stock will be affected, either positively or
negatively.
PORTFOLIO TURNOVER
The portfolio turnover rates of the Fund for the fiscal years ending
December 31, 2002, December 31, 2001 and December 31, 2000 were 27.1%, 23.9%
and 32.1%, respectively. Portfolio turnover rate is calculated by dividing the
lesser of an investment company's annual sales or purchases of portfolio
securities by the monthly average value of securities in its portfolio during
the year, excluding portfolio securities the maturities of which at the time
of acquisition were one year or less. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expense than a lower
rate, which expense must be borne by the Fund and indirectly by its
stockholders, as applicable. A higher rate of portfolio turnover may also
result in greater taxable gains being passed to stockholders than would
otherwise be the case.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a stockholder whose shares of the Fund's common
stock is registered in his own name will have all distributions reinvested
automatically by EquiServe, which is agent under the Plan, unless the
stockholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker- dealer or other nominee (that is, in
"street name") will be reinvested by the broker or nominee in additional
shares under the Plan, unless the service is not provided by the broker or
nominee or the stockholder elects to receive distributions in cash. Investors
who own common stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
investors who do not participate in the Plan will be paid by check mailed
directly to the record holder by EquiServe as dividend disbursing agent.
Under the Plan, whenever the market price of the common stock is
equal to or exceeds net asset value at the time shares are valued for purposes
of determining the number of shares equivalent to the cash dividend or capital
gains distribution, participants in the Plan are issued shares of common
stock, valued at the greater of (i) the net asset value as most recently
determined or (ii) 95% of the then-current market price of the common stock.
The valuation date is the dividend or distribution payment date or, if that
date is not a NYSE trading day, the next preceding trading day. If the net
asset value of the common stock at the time of valuation exceeds the market
price of the common stock, participants will receive shares from the Fund,
valued at market price. If the Fund should declare a dividend or capital gains
distribution payable only in cash, EquiServe will buy the common stock for
such Plan in the open market, on the NYSE or elsewhere, for the participants'
accounts, except that EquiServe will endeavor to terminate purchases in the
open market and cause the Fund to issue shares at the greater of net asset
value or 95% or market value if, following the commencement of such purchases,
the market value of the common stock exceeds net asset value.
Participants in the Plan have the option of making additional cash
payments to EquiServe, monthly, for investment in the shares as applicable.
Such payments may be made in any amount from $250 to $10,000. EquiServe will
use all funds received from participants to purchase shares of the Fund
B-23
in the open market on or about the 15th of each month. EquiServe will charge
each stockholder who participates $0.75, plus a pro rata share of the
brokerage commissions. Brokerage charges for such purchases are expected to be
less than the usual brokerage charge for such transactions. It is suggested
that participants send voluntary cash payments to EquiServe in a manner that
ensures that EquiServe will receive these payments approximately 10 days
before the 15th of the month. A participant may without charge withdraw a
voluntary cash payment by written notice, if the notice is received by
EquiServe at least 48 hours before such payment is to be invested.
EquiServe maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the account, including
information needed by stockholders for personal and tax records. Shares in the
account of each Plan participant will be held by EquiServe in noncertificated
form in the name of the participant. A Plan participant may send its share
certificates to EquiServe so that the shares represented by such certificates
will be held by EquiServe in the participant's stockholder account under the
Plan.
In the case of stockholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, EquiServe will
administer the Plan on the basis of the number of shares certified from time
to time by the stockholder as representing the total amount registered in the
stockholder's name and held for the account of beneficial owners who
participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate its Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the members of such
Plan at least 90 days before the record date for such dividend or
distribution. The Plan also may be amended or terminated by EquiServe on at
least 90 days written notice to the participants in such Plan. All
correspondence concerning the Plan should be directed to EquiServe at P.O. Box
43025, Providence, RI 02940-3025.
TAXATION
The following discussion is a brief summary of certain United States
federal income tax considerations affecting the Fund and its stockholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign tax concerns affecting the Fund and its stockholders (including
stockholders owning a large position in the Fund), and the discussions set
forth here and in the Prospectus do not constitute tax advice. Investors are
urged to consult their own tax advisers with any specific questions relating
to federal, state, local and foreign taxes. The discussion reflects applicable
tax laws of the United States as of the date of this SAI, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively.
Taxation of the Fund
The Fund has qualified as and intends to continue to qualify as a
regulated investment company (a "RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
will not be subject to U.S. federal income tax on the portion of its
investment company taxable income (as defined in the Code) without regard to
the deduction for dividends paid and on its net capital gain (i.e., the excess
of its net realized long-term capital gain over its net realized short-term
capital loss), if any, which it distributes to its stockholders in each
taxable year, provided that an amount equal to
B-24
at least 90% of the sum of its investment company taxable income and any net
tax-exempt interest income for the taxable year is distributed to its
stockholders.
Qualification as a RIC requires, among other things, that the Fund:
(i) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies or other
income (including gains from options, futures or forward contracts) derived
with respect to its business of investing in stock, securities or currencies
and (ii) diversify its holdings so that, at the end of each quarter of each
taxable year, subject to certain exceptions, (a) at least 50% of the market
value of the Fund's assets is represented by cash, cash items, U.S. Government
Obligations, securities of other RICs and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its
assets is invested in the securities (other than U.S. Government Obligations
or the securities of other RICs) of any one issuer or any two or more issuers
that the Fund controls and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses.
If the Fund were unable to satisfy the 90% distribution requirement
or otherwise were to fail to qualify as a RIC in any year, it would be taxed
in the same manner as an ordinary corporation and distributions to the Fund's
stockholders would not be deductible by the Fund in computing its taxable
income. To qualify again to be taxed as a RIC in a subsequent year, the Fund
would be required to distribute to preferred stockholders and common
stockholders its earnings and profits attributable to non-RIC years reduced by
an interest charge on 50% of such earnings and profits payable by the Fund to
the IRS. In addition, if the Fund failed to qualify as a RIC for a period
greater than one taxable year, then the Fund would be required to recognize
and pay tax on any net built-in gains (the excess of aggregate gains,
including items of income, over aggregate losses that would have been realized
if the Fund had been liquidated) or, alternatively, to elect to be subject to
taxation on such built-in gains recognized for a period of ten years, in order
to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount at least equal to the sum of (i) 98% of its ordinary income
for the calendar year, (ii) 98% of its capital gain net income (both long-term
and short-term) for the one year period ending on October 31 of such year
(unless an election is made to use the Fund's fiscal year), and (iii) all
ordinary income and capital gain net income for previous years that were not
previously distributed or subject to tax under Subchapter M of the Code. A
distribution will be treated as paid during the calendar year if it is paid
during the calendar year or declared by the Fund in October, November or
December of the year, payable to stockholders of record on a date during such
a month and paid by the Fund during January of the following year. Any such
distributions paid during January of the following year will be deemed to be
received on December 31 of the year the distributions are declared, rather
than when the distributions are received. While the Fund intends to distribute
its ordinary income and capital gain net income in the manner necessary to
minimize imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's ordinary income and capital gain net income
will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be long-term
capital gain or loss if the securities have been held by the Fund for more
than one year. Gain or loss on the sale of securities held for one year or
less will be short-term capital gain or loss.
B-25
Foreign currency gain or loss on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not section 1256
contracts (as defined below) generally will be treated as ordinary income and
loss.
Investment by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject the Fund to federal income tax (including
interest charges) on certain distributions or dispositions with respect to
those investments which cannot be eliminated by making distributions to
stockholders. Elections may be available to the Fund to mitigate the effect of
this tax but such elections generally accelerate the recognition of income
without the receipt of cash. Dividends paid by PFICs will not qualify for the
reduced tax rates discussed below under "Taxation of Stockholders."
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income for federal income
tax purposes before amounts due under the obligations are paid. The Fund may
also invest in securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated securities ("high
yield securities"). A portion of the interest payments on such high yield
securities may be treated as dividends for federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at
a discount or any other investment that produces income that is not matched by
a corresponding cash distribution to the Fund, the Fund could be required to
include, in current income, income it has not yet received. Any such income
would be treated as income earned by the Fund and therefore would be subject
to the distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or
might prevent the Fund from distributing enough ordinary income and capital
gain net income to avoid completely the imposition of the excise tax. To avoid
this result, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its stockholders.
If the Fund does not meet the asset coverage requirements of the 1940
Act and the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage is
restored. Such a suspension of distributions might prevent the Fund from
distributing 90% of its investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or
might prevent the Fund from distributing enough income and capital gain net
income to avoid completely imposition of the excise tax. Upon any failure to
meet the asset coverage requirements of the 1940 Act or the Articles
Supplementary, the Fund may, and in certain circumstances will be required to
partially redeem shares of Preferred Stock in order to restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
stockholders of failing to qualify as a RIC. If asset coverage were restored,
the Fund would again be able to pay dividends and would generally be able to
avoid Fund-level federal income taxation on the income that it distributes.
Hedging Transactions
Certain options, futures contracts and options on futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
are generally considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of
each taxable year are "marked-to-market" with the result that unrealized gains
or losses are treated as though they were realized and the resulting gain or
loss is treated as 60/40 gain or loss.
B-26
Hedging transactions undertaken by the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character
of gains (or losses) realized by the Fund. In addition, losses realized by the
Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such losses are realized.
Further, the Fund may be required to capitalize, rather than deduct currently,
any interest expense on indebtedness incurred or continued to purchase or
carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions may be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections accelerate the recognition of gain or loss from the affected
straddle positions.
Because application of the straddle rules may affect the character
and timing of the Fund's gains, losses and deductions, the amount which must
be distributed to stockholders, and which will be taxed to stockholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund will not be eligible to
elect to "pass-through" to stockholders of the Fund the ability to use the
foreign tax deduction or foreign tax credit for foreign taxes paid with
respect to qualifying taxes.
Taxation of Stockholders
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its stockholders, each of whom (i) will be
required to include in income for tax purposes as long-term capital gains its
share of such undistributed amounts, (ii) will be entitled to credit its
proportionate share of the tax paid by the Fund against its federal income tax
liability and to claim refunds to the extent that the credit exceeds such
liability and (iii) will increase its basis in its shares of the Fund by an
amount equal to 65% of the amount of undistributed capital gains included in
such stockholder's gross income.
Distributions paid by the Fund from its net investment income or
from an excess of net short-term capital gains over net-long term capital
losses generally are taxable as ordinary income to the extent of the Fund's
earnings and profits. Such distributions (if designated by the Fund) may,
however, qualify (provided holding period and other requirements are met at
the Fund and stockholder level) (i) for the dividends received deduction
available to corporations, but only to the extent that the Fund's income
consists of dividends received from U.S. corporations and (ii) under the
recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003
(effective for taxable years after December 31, 2002 through December 31,
2008) ("2003 Tax Act"), as qualified dividend income eligible for the reduced
maximum rate to individuals of generally 15% (5% for individuals in lower tax
brackets) to the extent that the Fund receives qualified dividend income.
Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., generally,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty
B-27
with the United States, or the stock of which is readily tradable on an
established securities market in the United States). Distributions of net
capital gain designated as capital gain dividends, if any, are taxable to
stockholders at rates applicable to long-term capital gains regardless of how
long the stockholder has held shares of the Fund's stock, and are not eligible
for the dividends received deduction. Under the 2003 Tax Act, the tax rate on
net long-term capital gain of individuals is reduced generally from 20% to 15%
(5% for individuals in lower brackets) for such gain realized after May 6,
2003 and before January 1, 2009. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gain to such holder (assuming the stock is held as a capital asset).
For non-corporate taxpayers, under the 2003 Tax Act, investment company
taxable income (other than qualified dividend income) will currently be taxed
at a maximum rate of 35%. For corporate taxpayers, both investment company
taxable income and net capital gain are taxed at a maximum rate of 35%.
Stockholders may be entitled to offset their capital gain dividends
with capital losses. There are a number of statutory provisions affecting when
capital losses may be offset against capital gains, and limiting the use of
losses from certain investments and activities. Accordingly, stockholders with
capital losses are urged to consult their tax advisers.
The price of stock purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing stock just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale or exchange of stock, a stockholder will realize a
taxable gain or loss depending upon his or her basis in the stock. Such gain
or loss will be treated as long-term capital gain or loss if the stock has
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the stock disposed of is replaced within a 61-day
period beginning 30 days before and ending 30 days after the date that the
stock is disposed of. In such a case, the basis of the stock acquired will be
adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund stock held by
the stockholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain dividends received by
the stockholder (or amounts credited to the stockholder as an undistributed
capital gain) with respect to such stock.
Ordinary income dividends (but not capital gain dividends) paid to
stockholders who are non- resident aliens or foreign entities will be subject
to a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities, unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty
law. Non-resident stockholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the Series E Auction Rate Preferred at any time in the
future, the Fund intends to take the position that under present law the
Series E Auction Rate Preferred will constitute stock, rather than debt of the
Fund. It is possible, however, that the IRS could take a contrary position
asserting, for example, that the Series E Auction Rate Preferred constitute
debt of the Fund. If that position were upheld, distributions on the Series E
Auction Rate Preferred would be considered interest, taxable as ordinary
income regardless of the taxable income of the Fund. The Fund believes this
position, if asserted, would be unlikely to prevail.
B-28
The IRS has taken the position that if a RIC has two classes of
stock, it may designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of particular
types of income, such as long-term capital gain. A class's proportionate share
of a particular type of income is determined according to the percentage of
total dividends paid by the RIC during such year that was paid to such class.
Consequently, the Fund will designate distributions made to the common
stockholders and preferred stockholders as consisting of particular types of
income in accordance with the classes' proportionate shares of such income.
Because of this rule, the Fund is required to allocate a portion of its net
capital gain, qualified dividend income and dividends qualifying for the
dividends received deduction to common stockholders and preferred
stockholders. The amount of net capital gain, qualified dividend income and
dividends qualifying for the dividends received deduction allocable between
the common stockholders and the preferred stockholders will depend upon the
amount of such net capital gain, qualified dividend income and dividends
qualifying for the dividends received deduction realized by the Fund, and the
total dividends paid by the Fund on the Common Stock and Preferred Stock
during a taxable year.
Ordinary income dividends and capital gain dividends also may be
subject to state and local taxes. Stockholders are urged to consult their own
tax advisers regarding specific questions about the U.S. federal (including
the application of the alternative minimum tax rules), state, local or foreign
tax consequences to them of investing in the Fund.
Backup Withholding
The Fund may be required to withhold federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
stockholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such stockholder's federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in Series D Preferred or Series E Auction Rate Preferred should
consult their own tax advisers regarding the purchase, ownership and
disposition of Series D Preferred or Series E Auction Rate Preferred.
ADDITIONAL INFORMATION
CONCERNING AUCTIONS FOR SERIES E AUCTION RATE PREFERRED
General
The Articles Supplementary provide that the Applicable Rate for each
Dividend Period of the Series E Auction Rate Preferred will be equal to the
rate per annum that the Auction Agent advises has resulted on the Business Day
preceding the first day of a Dividend Period (an "Auction Date") from
implementation of the Auction Procedures set forth in the Articles
Supplementary, and summarized below, in which persons determine to hold or
offer to sell or, based on dividend rates bid by them, offer to purchase or
sell stock of such Series. Each periodic implementation of the Auction
Procedures is referred
B-29
to herein as an "Auction." The following summary is qualified by reference to
the Auction Procedures set forth in the Articles Supplementary.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for Series E Auction Rate Preferred so long as the Applicable
Rate is to be based on the results of the Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker- Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those Broker-
Dealers in Auctions for Series E Auction Rate Preferred. See "Broker-Dealers"
below.
Securities Depository. DTC will act as the Securities Depository for
the Agent Members with respect to the Series E Auction Rate Preferred. One
certificate for all of the shares of Series E Auction Rate Preferred will be
registered in the name of Cede & Co., as nominee of the Securities Depository.
Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of
Series E Auction Rate Preferred contained in the Articles Supplementary. The
Fund will also issue stop-transfer instructions to the transfer agent for the
Series E Auction Rate Preferred. Prior to the commencement of the right of
Holders of the Preferred Stock to elect a majority of the Fund's Directors, as
described under "Description of the Series D Preferred and Series E Auction
Rate Preferred -- Voting Rights" in the Prospectus, Cede & Co. will be the
Holder of all the Series E Auction Rate Preferred and owners of such shares
will not be entitled to receive certificates representing their ownership
interest in such shares.
DTC, a New York chartered limited purpose trust company, performs
services for its participants (including Agent Members), some of whom (and/or
their representatives) own DTC. DTC maintains lists of its participants and
will maintain the positions (ownership interests) held by each such Agent
Member in Series E Auction Rate Preferred, whether for its own account or as a
nominee for another person.
Orders by Existing Holders and Potential Holders
On or prior to the Submission Deadline on each Auction Date for the
Series E Auction Rate Preferred:
(i) each Beneficial Owner of Series E Auction Rate Preferred may
submit to its Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding
shares of Series E Auction Rate Preferred, if any, that
such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for such shares
for the next succeeding Dividend Period of such shares;
(b) "Bid" - indicating the number of Outstanding shares of
Series E Auction Rate Preferred, if any, that such
Beneficial Owner offers to sell if the Applicable Rate
for such Series E Auction Rate Preferred for the next
succeeding Dividend Period is less than the rate per
annum specified by such Beneficial Owner in such Bid;
and/or
B-30
(c) "Sell Order" - indicating the number of Outstanding
shares of Series E Auction Rate Preferred, if any, that
such Beneficial Owner offers to sell without regard to
the Applicable Rate for such Series E Auction Rate
Preferred for the next succeeding Dividend Period; and
(ii) Broker-Dealers will contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine
whether such customers desire to submit Bids, in which case
they will indicate the number of shares of Series E Auction
Rate Preferred that they offer to purchase if the Applicable
Rate for Series E Auction Rate Preferred for the next
succeeding Dividend Period is not less than the rate per annum
specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
herein referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer
is herein referred to as a "Bidder" and collectively as "Bidders." The
submission by a Broker-Dealer of an Order to the Auction Agent is referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent is referred to herein as a "Bidder"
and collectively as "Bidders."
A Bid placed by a Beneficial Owner specifying a rate higher than the
Applicable Rate determined in the Auction will constitute an irrevocable offer
to sell the shares subject thereto. A Beneficial Owner that submits a Bid to
its Broker-Dealer having a rate higher than the Maximum Rate on the Auction
Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Sell Order will constitute an irrevocable offer to sell
Series E Auction Rate Preferred subject thereto at a price per share equal to
$25,000.
A Beneficial Owner that fails to submit to its Broker-Dealer prior to
the Submission Deadline for the Series E Auction Rate Preferred an Order or
Orders covering all the Outstanding Series E Auction Rate Preferred held by
such Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of Outstanding Series E Auction Rate
Preferred shares held by such Beneficial Owner and not subject to Orders
submitted to its Broker-Dealer; provided, however, that if a Beneficial Owner
fails to submit to its Broker-Dealer prior to the Submission Deadline for the
Series E Auction Rate Preferred an Order or Orders covering all of the
Outstanding Series E Auction Rate Preferred held by such Beneficial Owner for
an Auction relating to a Special Dividend Period consisting of more than 28
Dividend Period days, such Beneficial Owner will be deemed to have submitted a
Sell Order to its Broker-Dealer covering the number of Outstanding shares of
Series E Auction Rate Preferred held by such Beneficial Owner and not subject
to Orders submitted to its Broker-Dealer.
A Potential Beneficial Owner of Series E Auction Rate Preferred may
submit to its Broker-Dealer Bids in which it offers to purchase Series E
Auction Rate Preferred if the Applicable Rate for the next Dividend Period is
not less than the rate specified in such Bid. A Bid placed by a Potential
Beneficial Owner specifying a rate not higher than the Maximum Rate will
constitute an irrevocable offer to purchase the number of shares of Series E
Auction Rate Preferred specified in such Bid if the rate determined in the
Auction is equal to or greater than the rate specified in such Bid. A
Beneficial Owner of Series E Auction Rate Preferred that offers to become the
Beneficial Owner of additional Series E Auction Rate Preferred is, for
purposes of such offer, a Potential Beneficial Owner.
As described more fully below under "-- Orders by Existing Holders
and Potential Holders," the Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and
B-31
Potential Beneficial Owners to the Auction Agent, designating themselves
(unless otherwise permitted by the Fund) as Existing Holders in respect of
Series E Auction Rate Preferred subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
Series E Auction Rate Preferred subject to Orders submitted to them by
Potential Beneficial Owners. However, neither the Fund nor the Auction Agent
will be responsible for a Broker-Dealer's failure to comply with the
foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of an Existing Holder or a Potential Holder will be treated in the same
manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner, as described above. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any Series
E Auction Rate Preferred held by it or its customers who are Beneficial Owners
will be treated in the same manner as a Beneficial Owner's failure to submit
to its Broker-Dealer an Order in respect of Series E Auction Rate Preferred
held by it, as described in the second preceding paragraph. For information
concerning the priority given to different types of Orders placed by Existing
Holders, see "-- Orders by Existing Holders and Potential Holders" below.
The Fund may not submit an Order in any Auction.
The Auction Procedures include a pro rata allocation of stock for
purchase and sale, which may result in an Existing Holder continuing to hold
or selling, or a Potential Holder purchasing, a number of shares of Series E
Auction Rate Preferred that is fewer than the number of shares of Series E
Auction Rate Preferred specified in its Order. See "-- Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares" below. To the extent the allocation procedures have that result,
Broker- Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. Each
purchase or sale will be made for settlement on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See "--
Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum
Rate will (i) be treated as a Sell Order if submitted by a Beneficial Owner or
an Existing Holder and (ii) not be accepted if submitted by a Potential
Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures
establish the Maximum Rate as a maximum rate per annum that can result from an
Auction up to the Maximum Rate. See "Determination of Sufficient Clearing
Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and Rejection of
Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
Concerning the Auction Agent
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its
part, the Auction Agent will not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its
duties under the Auction Agency Agreement and will not be liable for any error
of judgment resulting from the use of or reliance on a source of information
used in good faith unless the Auction Agent will have been grossly negligent
with respect to a determination, calculation or declaration thereunder.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Series E Auction Rate Preferred, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other person, if permitted by the Fund) with respect to
transfers described under "The Auction of Series E Auction Rate Preferred --
Secondary Market Trading and Transfer of Series E Auction Rate Preferred" in
the Prospectus and notices from the Fund. The Auction
B-32
Agent is not required to accept any such notice for an Auction unless it is
received by the Auction Agent by 3:00 p.m., New York City time, on the
Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
written notice to the Fund on a date no earlier than 30 days after the date of
delivery of such notice. If the Auction Agent should resign or for any reason
its appointment is terminated during any period when the Series E Auction Rate
Preferred are outstanding, the Fund will use its best efforts promptly
thereafter to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agency
Agreement. The Fund may remove the Auction Agent, provided that prior to such
removal, the Fund has entered into such an agreement in substantially the form
of the Auction Agency Agreement with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for Series E Auction Rate
Preferred will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge equal to, in the case of any auction immediately preceding a
dividend period of less than 365 days the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of shares of Series E Auction Rate Preferred placed
by such Broker-Dealer at such auction or, in the case of any auction
immediately preceding a dividend period of one year or longer, a percentage of
the purchase price of the Series E Auction Rate Preferred placed by the
Broker-Dealers at the auction agreed to by the Fund and the Broker-Dealers.
For the purposes of the preceding sentence, Series E Auction Rate Preferred
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been submitted to the Auction Agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its customers who are Beneficial
Owners or (ii) the subject of an Order submitted by such Broker-Dealer that is
(a) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction, (b) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (c) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer may submit
Orders in Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they may no longer do so, in which case Broker-Dealers may
continue to submit Hold Orders and Sell Orders for their own accounts. If a
Broker- Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction. Such Broker- Dealer, however, would
not have knowledge of Orders submitted by other Broker-Dealers in that
Auction.
Orders by Existing Holders and Potential Holders
Prior to 1:00 p.m., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (i.e., the
Submission Deadline), each Broker-Dealer will submit to the Auction Agent in
writing all Orders obtained by it for the Auction to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as
the Existing Holder or Potential Holder, as the case may be, in respect of
Series E Auction Rate Preferred subject to such Orders. Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
B-33
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, will be irrevocable.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to the
next highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Series E Auction Rate Preferred subject to an Auction held by such
Existing Holder, such Orders will be considered valid in the following order
of priority:
(i) all Hold Orders for Series E Auction Rate Preferred will be
considered valid, but only up to and including in the aggregate
the number of Outstanding shares of Series E Auction Rate
Preferred held by such Existing Holder, and, if the number of
shares of Series E Auction Rate Preferred subject to such Hold
Orders exceeds the number of shares of Outstanding Series E
Auction Rate Preferred held by such Existing Holder, the number
of shares subject to each such Hold Order will be reduced pro
rata to cover the number of Outstanding shares held by such
Existing Holder;
(ii) (a) any Bid for Series E Auction Rate Preferred will be
considered valid up to and including the excess of the
number of Outstanding shares of Series E Auction Rate
Preferred held by such Existing Holder over the number
of shares of Series E Auction Rate Preferred subject to
any Hold Orders referred to in clause (i) above;
(b) subject to subclause (a), if more than one Bid of an
Existing Holder for Series E Auction Rate Preferred is
submitted to the Auction Agent with the same rate and
the number of Outstanding shares of Series E Auction
Rate Preferred subject to such Bids is greater than such
excess, such Bids will be considered valid up to and
including the amount of such excess, and the number of
shares of Series E Auction Rate Preferred subject to
each Bid with the same rate will be reduced pro rata to
cover the number of shares of Series E Auction Rate
Preferred equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid
of an Existing Holder for Series E Auction Rate
Preferred is submitted to the Auction Agent with
different rates, such Bids will be considered valid in
the ascending order of their respective rates up to and
including the amount of such excess; and
(d) in any such event, the number, if any, of such
Outstanding shares of Series E Auction Rate Preferred
subject to any portion of Bids considered not valid in
whole or in part under this clause (ii) will be treated
as the subject of a Bid for Series E Auction Rate
Preferred by or on behalf of a Potential Holder at the
rate specified therein; and
(iii) all Sell Orders for Series E Auction Rate Preferred will be
considered valid up to and including the excess of the number
of Outstanding shares of Series E Auction Rate Preferred held
by such Existing Holder over the sum of shares subject to valid
Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
B-34
If more than one Bid of a Potential Holder for Series E Auction Rate Preferred
is submitted to the Auction Agent by or on behalf of any Potential Holder,
each such Bid submitted will be a separate Bid with the rate and number of
shares of Series E Auction Rate Preferred specified therein.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date for
Series E Auction Rate Preferred, the Auction Agent will assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers (each such
Hold Order, Bid or Sell Order as submitted or deemed submitted by a Broker-
Dealer being herein referred to as a "Submitted Hold Order," a "Submitted Bid"
or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and will determine the
excess of the number of Outstanding shares of Series E Auction Rate Preferred
over the number of Outstanding shares of Series E Auction Rate Preferred
subject to Submitted Hold Orders (such excess being herein referred to as the
"Available Series E Auction Rate Preferred") and whether Sufficient Clearing
Bids have been made in the Auction. "Sufficient Clearing Bids" will have been
made if the number of Outstanding shares of Series E Auction Rate Preferred
that are the subject of Submitted Bids of Potential Holders specifying rates
not higher than the Maximum Rate equals or exceeds the number of Outstanding
shares of Series E Auction Rate Preferred that are the subject of Submitted
Sell Orders (including the number of shares of Series E Auction Rate Preferred
subject to Bids of Existing Holders specifying rates higher than the Maximum
Rate).
If Sufficient Clearing Bids for Series E Auction Rate Preferred have
been made, the Auction Agent will determine the lowest rate specified in such
Submitted Bids (the Winning Bid Rate for shares of such Series) which, taking
into account the rates in the Submitted Bids of Existing Holders, would result
in Existing Holders continuing to hold an aggregate number of Outstanding
Series E Auction Rate Preferred which, when added to the number of Outstanding
Series E Auction Rate Preferred shares to be purchased by Potential Holders,
based on the rates in their Submitted Bids, would equal not less than the
Available Series E Auction Rate Preferred. In such event, the Winning Bid Rate
will be the Applicable Rate for the next Dividend Period for all shares of
such Series.
If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding Series E Auction Rate Preferred is subject to Submitted
Hold Orders), the Applicable Rate for the next Dividend Period for all Series
E Auction Rate Preferred will be equal to the Maximum Rate. In such a case,
Beneficial Owners that have submitted or that are deemed to have submitted
Sell Orders may not be able to sell in the Auction all Series E Auction Rate
Preferred subject to such Sell Orders but will continue to own Series E
Auction Rate Preferred for the next Dividend Period. See "-- Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares" below.
If all of the Outstanding Series E Auction Rate Preferred is subject
to Submitted Hold Orders, the Applicable Rate for all Series E Auction Rate
Preferred for the next succeeding Dividend Period will be the All Hold Rate.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares
Based on the determinations made under " - Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above and,
subject to the discretion of the Auction Agent to round and allocate certain
shares as described below, Submitted Bids and Submitted Sell Orders will be
accepted or rejected in the order of priority set forth in the Auction
Procedures, with the result that Existing Holders
B-35
and Potential Holders of Series E Auction Rate Preferred will sell, continue
to hold and/or purchase such shares as set forth below. Existing Holders that
submitted or were deemed to have submitted Hold Orders (or on whose behalf
Hold Orders were submitted or deemed to have been submitted) will continue to
hold the Series E Auction Rate Preferred subject to such Hold Orders.
If Sufficient Clearing Bids for Series E Auction Rate Preferred
shares have been made:
(i) Each Existing Holder that placed or on whose behalf was placed
a Submitted Sell Order or Submitted Bid specifying any rate
higher than the Winning Bid Rate will sell the Outstanding
Series E Auction Rate Preferred subject to such Submitted Sell
Order or Submitted Bid;
(ii) Each Existing Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate lower than the Winning Bid
Rate will continue to hold the Outstanding Series E Auction
Rate Preferred subject to such Submitted Bid;
(iii) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate lower than the
Winning Bid Rate will purchase the number of Outstanding
Series E Auction Rate Preferred shares subject to such
Submitted Bid;
(iv) Each Existing Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to the Winning Bid
Rate will continue to hold Series E Auction Rate Preferred
subject to such Submitted Bid, unless the number of
Outstanding Series E Auction Rate Preferred shares subject to
all such Submitted Bids is greater than the number of Series E
Auction Rate Preferred shares ("remaining shares") in excess
of the Available Series E Auction Rate Preferred over the
number of Series E Auction Rate Preferred shares accounted for
in clauses (ii) and (iii) above, in which event each Existing
Holder with such a Submitted Bid will continue to hold Series
E Auction Rate Preferred subject to such Submitted Bid
determined on a pro rata basis based on the number of
Outstanding Series E Auction Rate Preferred shares subject to
all such Submitted Bids of such Existing Holders; and
(v) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to the Winning
Bid Rate for Series E Auction Rate Preferred will purchase any
Available Series E Auction Rate Preferred not accounted for in
clauses (ii) through (iv) above on a pro rata basis based on
the Outstanding Series E Auction Rate Preferred shares subject
to all such Submitted Bids.
If Sufficient Clearing Bids for Series E Auction Rate Preferred
shares have not been made (unless this results because all Outstanding Series
E Auction Rate Preferred shares are subject to Submitted Hold Orders):
(i) Each Existing Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate equal to or lower than the
Maximum Rate will continue to hold the Series E Auction Rate
Preferred subject to such Submitted Bid;
(ii) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to or lower
than the Maximum Rate will purchase the number of Series E
Auction Rate Preferred shares subject to such Submitted Bid;
and
B-36
(iii) Each Existing Holder that placed or on whose behalf was placed
a Submitted Bid specifying a rate higher than the Maximum Rate
or a Submitted Sell Order will sell a number of Series E
Auction Rate Preferred shares subject to such Submitted Bid or
Submitted Sell Order determined on a pro rata basis based on
the number of Outstanding Series E Auction Rate Preferred
shares subject to all such Submitted Bids and Submitted Sell
Orders.
If, as a result of the pro rata allocation described in clauses (iv)
or (v) of the second preceding paragraph or clause (iii) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
Series E Auction Rate Preferred share, the Auction Agent will, in such manner
as, in its sole discretion, it determines, round up or down to the nearest
whole share the number of Series E Auction Rate Preferred shares being sold or
purchased on such Auction Date so that the number of Series E Auction Rate
Preferred shares sold or purchased by each Existing Holder or Potential Holder
will be whole shares of such Series. If as a result of the pro rata allocation
described in clause (v) of the second preceding paragraph, any Potential
Holder would be entitled or required to purchase less than a whole Series E
Auction Rate Preferred share, the Auction Agent will, in such manner as, in
its sole discretion, it will determine, allocate Series E Auction Rate
Preferred for purchase among Potential Holders so that only whole Series E
Auction Rate Preferred shares are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing shares of such Series.
Notification of Results; Settlement
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 p.m., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an
Order for the account of a customer will then be required to advise such
customer of the Applicable Rate for the next Dividend Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, will be required to confirm purchases and
sales with each customer purchasing or selling Series E Auction Rate Preferred
as a result of the Auction and will be required to advise each customer
purchasing or selling Series E Auction Rate Preferred as a result of the
Auction to give instructions to its Agent Member of the Securities Depository
to pay the purchase price against delivery of such shares or to deliver such
shares against payment therefor, as appropriate. The Auction Agent will be
required to record each transfer of Series E Auction Rate Preferred shares on
the registry of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited and shares delivered as necessary to effect the purchases and sales
of Series E Auction Rate Preferred as determined in the Auction. Purchasers
will make payment through their Agent Members in same-day funds to the
Securities Depository against delivery through their Agent Members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment against delivery by their Agent
Members in same-day funds.
If any Existing Holder selling Series E Auction Rate Preferred in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased such shares in such Auction may deliver to such person a
number of whole Series E Auction Rate Preferred shares that is less than the
B-37
number of Series E Auction Rate Preferred shares that otherwise was to be
purchased by such person. In such event, the number of Series E Auction Rate
Preferred shares to be so delivered will be determined by the Broker-Dealer.
Delivery of such lesser number of Series E Auction Rate Preferred shares will
constitute good delivery.
ADDITIONAL INFORMATION CONCERNING THE
SERIES D PREFERRED AND SERIES E AUCTION RATE PREFERRED
The additional information concerning the Series D Preferred and
Series E Auction Rate Preferred contained in this SAI does not purport to be
complete a complete description of those Series and should be read in
conjunction with the description of the Series D Preferred and Series E
Auction Rate Preferred contained in the Prospectus under "Description of the
Series D Preferred and Series E Auction Rate Preferred." This description is
subject to and qualified in its entirety by reference to the Fund's Charter,
including the provisions of the Articles Supplementary establishing,
respectively, the Series D Preferred and the Series E Auction Rate Preferred.
Copies of these Articles Supplementary are filed as exhibits to the
registration statement of which the Prospectus and this SAI are a part and may
be inspected, and a copy thereof may be obtained, as described under
"Additional Information" in the Prospectus.
Dividends and Dividend Periods For the Series E Auction Rate Preferred
Holders of Series E Auction Rate Preferred will be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as described under " -- Determination of Dividend
Rate," payable as and when set forth below. Dividends so declared and payable
will be paid to the extent permitted under the Code, and to the extent
available and in preference to and priority over any dividend declared and
payable on shares of the Fund's Common Stock.
By 12:00 noon, New York City time, on the Business Day immediately
preceding each Dividend Payment Date, the Fund is required to deposit with the
Paying Agent sufficient same-day funds for the payment of declared dividends.
The Fund does not intend to establish any reserves for the payment of
dividends.
Each dividend will be paid by the Paying Agent to the Holder, which
Holder is expected to be the nominee of the Securities Depository. The
Securities Depository will credit the accounts of the Agent Members of the
beneficial owners in accordance with the Securities Depository's normal
procedures. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to Agent Members who are in turn
expected to distribute such dividends to the persons for whom they are acting
as agents. The Agent Member of a beneficial owner will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such beneficial owner in accordance with the instructions of such beneficial
owner.
Holders of Series E Auction Rate Preferred will not be entitled to
any dividends, whether payable in cash, property or shares, in excess of full
cumulative dividends. No interest will be payable in respect of any dividend
payment or payments that may be in arrears. See " -- Default Period."
The amount of dividends per Outstanding Series E Auction Rate
Preferred share payable (if declared) on each Dividend Payment Date of each
Dividend Period of less than one year (or in respect of dividends on another
date in connection with a redemption during such Dividend Period) will be
B-38
computed by multiplying the Applicable Rate (or the Default Rate) for such
Dividend Period (or a portion thereof) by a fraction, the numerator of which
will be the number of days in such Dividend Period (or portion thereof) such
share was Outstanding and for which the Applicable Rate or the Default Rate
was applicable (but in no event will the numerator exceed 360) and the
denominator of which will be 360, multiplying the amount so obtained by the
$25,000, and rounding the amount so obtained to the nearest cent. During any
Dividend Period of one year or more, the amount of dividends per Series E
Auction Rate Preferred share payable on any Dividend Payment Date (or in
respect of dividends on another date in connection with a redemption during
such Dividend Period) will be computed as described in the preceding sentence
except that the numerator, with respect to any full twelve month period, will
be 360.
Determination of Dividend Rate. The dividend rate for the initial
Dividend Period (i.e., the period from and including the Date of Original
Issue to and including the initial Auction Date) and the initial Auction Date
for the Series E Auction Rate Preferred is set forth in the Prospectus. See
"The Auction of Series E Auction Rate Preferred -- Summary of Auction
Procedures" in the Prospectus. For each subsequent Dividend Period, subject to
certain exceptions, the dividend rate will be the Applicable Rate that the
Auction Agent advises the Fund has resulted from an Auction.
Dividend Periods after the initial Dividend Period will either be
Standard Dividend Periods (generally seven days) or, subject to certain
conditions and with notice to Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient
Clearing Bids exist at the Auction in respect of such Special Dividend Period
(that is, in general, the number of shares subject to Bids by Potential
Beneficial Owners is at least equal to the number of shares subject to Sell
Orders by Existing Holders). If Sufficient Clearing Bids do not exist at any
Auction in respect of a Special Dividend Period, the Dividend Period
commencing on the Business Day succeeding such Auction will be the Standard
Dividend Period, and the Holders of the Series E Auction Rate Preferred will
be required to continue to hold such shares for such Standard Dividend Period.
The designation of a Special Dividend Period is also subject to additional
conditions. See " -- Notification of Dividend Period" below.
Dividends will accumulate at the Applicable Rate from the Date of
Original Issue and will be payable on each Dividend Payment Date thereafter.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Applicable Rate resulting from an Auction will not be
greater than the Maximum Rate. The Maximum Rate is subject to upward, but not
downward, adjustment in the discretion of the Board of Directors after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the Series E Auction Rate
Preferred Basic Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for
Series E Auction Rate Preferred in which Sufficient Clearing Bids have not
been made (other than because all Series E Auction Rate Preferred were subject
to Submitted Hold Orders) or following the failure to hold an Auction for any
reason on the Auction Date scheduled to occur (except for (i) circumstances in
which the Dividend Rate is the Default Rate, as described below or (ii) in the
event an auction is not held because an unforeseen event or unforeseen events
cause a day that otherwise would have been an Auction Date not to be a
Business Day, in which case the length of the then-current dividend period
will be extended by seven days, or a multiple thereof if necessary because of
such unforeseen event or events, the applicable rate for such period will be
the applicable rate for the then-current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
next succeeding the end of such period). The All Hold Rate will apply
automatically following an Auction in which all of the Outstanding Series E
Auction Rate Preferred shares are subject (or are deemed to be subject) to
Hold Orders.
B-39
Prior to each Auction, Broker-Dealers will notify Holders of the term
of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for
the next succeeding Dividend Period and of the Auction Date of the next
succeeding Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods of the Series E Auction Rate Preferred; provided, however,
that no such designation is necessary for a Standard Dividend Period and that
any designation of a Special Dividend Period will be effective only if (i)
notice thereof has been given as provided herein, (ii) any failure to pay in
the timely manner to the Auction Agent the full amount of any dividend on, or
the redemption price of, the Series E Auction Rate Preferred has been cured as
set forth under " -- Default Period," (iii) Sufficient Clearing Orders existed
in an Auction held on the Auction Date immediately preceding the first day of
such proposed Special Dividend Period, (iv) if the Fund mailed a notice of
redemption with respect to any shares, the Redemption Price with respect to
such shares has been deposited with the Paying Agent, and (v) the Fund has
confirmed that, as of the Auction Date next preceding the first day of such
Special Dividend Period, it has Eligible Assets with an aggregate Discounted
Value at least equal to the Series E Auction Rate Preferred Basic Maintenance
Amount and has consulted with the Broker-Dealers and has provided notice and a
Series E Auction Rate Preferred Basic Maintenance Report to each Rating Agency
which is then rating the Series E Auction Rate Preferred and so requires.
If the Fund proposes to designate any Special Dividend Period, not
fewer than seven Business Days (or two Business Days in the event the duration
of the Special Dividend Period is fewer than eight days) nor more than 30
Business Days prior to the first day of such Special Dividend Period, notice
will be made by press release and communicated by the Fund by telephonic or
other means to the Auction Agent and confirmed in writing promptly thereafter.
Each such notice will state (x) that the Fund proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and
last days thereof and (y) that the Fund will, by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such Special
Dividend Period, notify the Auction Agent, who will promptly notify the
Broker-Dealers, of either its determination, subject to certain conditions, to
proceed with such Special Dividend Period, in which case the Fund may specify
the terms of any Specific Redemption Provisions, or its determination not to
proceed with such Special Dividend Period, in which case the succeeding
Dividend Period will be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of any proposed Special Dividend Period, the
Fund will deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(a) a notice stating (1) that the Fund has determined to designate
the immediately succeeding Dividend Period as a Special
Dividend Period, specifying the first and last days thereof
and (2) the terms of the Specific Redemption Provisions, if
any; or
(b) a notice stating that the Fund has determined not to exercise
its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m.,
B-40
New York City time, on the second Business Day next preceding the first day of
such proposed Special Dividend Period, the Fund will be deemed to have
delivered a notice to the Auction Agent with respect to such Dividend Period
to the effect set forth in clause (b) above, thereby resulting in a Standard
Dividend Period.
Default Period. A "Default Period" with respect to the Outstanding
Series E Auction Rate Preferred will commence on any date upon which the Fund
fails to deposit irrevocably in trust in same- day funds with the Paying Agent
by 12:00 noon, New York City time, on the Business Day immediately preceding
the relevant Dividend Payment Date or Redemption Date, as the case may be, (i)
the full amount of any declared dividend on the Series E Auction Rate
Preferred payable on such Dividend Payment Date (a "Dividend Default") or (ii)
the full amount of any redemption price (the "Redemption Price") payable on
the Series E Auction Rate Preferred being redeemed on such Redemption Date (a
"Redemption Default" and, together with a Dividend Default, a "Default").
A Default Period with respect to a Dividend Default or a Redemption
Default will end by 12:00 noon, New York City time, on the Business Day on
which all unpaid dividends and any unpaid Redemption Price will have been
deposited irrevocably in trust in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a
Default Period applicable to the Series E Auction Rate Preferred, and the
dividend rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate; provided, however, that if a Default Period is
deemed not to have occurred because the Default has been cured, then the
dividend rate for the period shall be the Applicable Rate set at the auction
for such period.
Each subsequent Dividend Period commencing after the beginning of a
Default Period will be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of
a new Dividend Period. No Auction will be held during a Default Period
applicable to such Series; provided, however, that if a Default Period shall
end prior to the end of Standard Dividend Period that had commenced during the
Default Period, an Auction shall be held on the last day of such Standard
Dividend Period.
In the event the Fund fully pays all default amounts due during a
Dividend Period, the dividend rate for the remainder of that Dividend Period
will be, as the case may be, the Applicable Rate (for the first Dividend
Period following a Dividend Default) or the Maximum Rate (for any subsequent
Dividend Period for which such Default is continuing).
No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such Default is not solely due to the willful failure
of the Fund) is deposited irrevocably in trust, in same-day funds with the
Paying Agent by 12:00 noon, New York City time, within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with
an amount equal to the Default Rate applied to the amount of such non-payment
based on the actual number of days comprising such period divided by 360. The
Default Rate will be equal to the Reference Rate multiplied by three.
Restrictions on Dividends, Redemption and Other Payments
Under the 1940 Act, the Fund may not declare any dividend (except a
dividend payable in stock of the issuer) or other distributions upon any of
its outstanding Common Stock, or purchase any such Common Stock, if at the
time of the declaration, distribution or purchase, as applicable (and after
giving effect thereto), asset coverage with respect to the Fund's outstanding
Preferred Stock, including the Series D Preferred or Series E Auction Rate
Preferred, would be less than 200%.
B-41
For so long as the Series D Preferred or Series E Auction Rate
Preferred is Outstanding, except as otherwise provided in the Articles
Supplementary, the Fund will not pay any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, shares of Common Stock or other stock, if
any, ranking junior to the Series D Preferred and/or Series E Auction Rate
Preferred as to dividends or upon liquidation) with respect to shares of
Common Stock or any other stock of the Fund ranking junior to the Series D
Preferred and/or Series E Auction Rate Preferred as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of Common Stock or other stock ranking junior to the
Series D Preferred and/or Series E Auction Rate Preferred (except by
conversion into or exchange for shares of the Fund ranking junior to the
Series D Preferred and/or Series E Auction Rate Preferred as to dividends and
upon liquidation), unless, in each case, (x) immediately after such
transaction, the Fund would have Eligible Assets with an aggregate Discounted
Value at least equal to the Basic Maintenance Amount applicable to, as the
case may be, the Series D Preferred or Series E Auction Rate Preferred and the
1940 Act Asset Coverage with respect to the Fund's Outstanding Preferred
Stock, including the Series D Preferred and/or Series E Auction Rate
Preferred, would be achieved, (y) all cumulative and unpaid dividends due on
or prior to the date of the transaction have been declared and paid in full
with respect to the Preferred Stock, including the Series D Preferred and/or
Series E Auction Rate Preferred (or will have been declared and sufficient
funds for the full payment thereof will have been deposited with the Paying
Agent or the dividend-disbursement agent, as applicable) and (z) the Fund has
redeemed the full number of shares of Preferred Stock to be redeemed pursuant
to any provision for mandatory redemption contained in the Articles
Supplementary, including any Series D Preferred and/or Series E Auction Rate
Preferred required or determined to be redeemed pursuant to any such
provision.
No full dividend will be declared or paid on the Series D
Preferred or Series E Auction Rate Preferred for any Dividend Period or
part thereof, unless full cumulative dividends due through the most recent
Dividend Payment Dates of the Outstanding Preferred Stock (including the
Series D Preferred and/or Series E Auction Rate Preferred) have been or
contemporaneously are declared and paid. If full
B-42
cumulative dividends due have not been paid on all such shares of Preferred
Stock, any dividends being paid on such shares of Preferred Stock (including
the Series D Preferred and/or Series E Auction Rate Preferred) will be paid as
nearly pro rata as possible in proportion to the respective amounts of
dividends accumulated but unpaid on each such series of Preferred Stock on the
relevant Dividend Payment Date.
Asset Maintenance
The Fund is required to satisfy two separate asset maintenance
requirements in respect of its Preferred Stock, including the Series D
Preferred and/or Series E Auction Rate Preferred: (i) the Fund must maintain
assets in its portfolio that have a value, discounted in accordance with the
Rating Agency Guidelines, at least equal to the aggregate liquidation
preference of each of the series of Preferred Stock, including Series D
Preferred and/or Series E Auction Rate Preferred, plus specified liabilities,
payment obligations and other amounts; and (ii) the Fund must maintain asset
coverage for its Outstanding Preferred Stock, including for the Series D
Preferred and/or Series E Auction Rate Preferred, of at least 200%.
Basic Maintenance Amount. The Fund is required to maintain, as of
each Valuation Date, Eligible Assets having in the aggregate a Discounted
Value at least equal to the Basic Maintenance Amount, calculated separately
for Moody's (if Moody's is then rating the Series D Preferred or Series E
Auction Rate Preferred at the request of the Fund) and S&P (if S&P is then
rating the Series D Preferred or Series E Auction Rate Preferred at the
request of the Fund). For this purpose, the value of the Fund's portfolio
securities will be the Market Value. If the Fund fails to meet such
requirement on any Valuation Date and such failure is not cured by the related
Cure Date, the Fund will be required under certain circumstances to redeem
some or all of the Series D Preferred or Series E Auction Rate Preferred.
The "Basic Maintenance Amount" means, as of any Valuation Date, the
dollar amount equal to (i) the sum of (a) the product of the number of shares
of each class or series of Preferred Stock Outstanding on such Valuation Date
multiplied by the Liquidation Preference per share; (b) to the extent not
included in (a) the aggregate amount of cash dividends (whether or not earned
or declared) that will have accumulated for each Outstanding share of
Preferred Stock from the most recent Dividend Payment Date to which dividends
have been paid or duly provided for (or, in the event the Basic Maintenance
Amount is calculated on a date prior to the initial Dividend Payment Date with
respect to a class or series of the Preferred Stock, then from the date of
original issue) through the Valuation Date plus all dividends to accumulate on
the Preferred Stock then Outstanding during the 70 days following such
Valuation Date or, if less, during the number of days following such Valuation
Date that shares of Preferred Stock called for redemption are scheduled to
remain Outstanding; (c) the Fund's other liabilities due and payable as of
such Valuation Date (except that dividends and other distributions payable by
the Fund on Common Stock will not be included as a liability) and such
liabilities projected to become due and payable by the Fund during the 90 days
following such Valuation Date (excluding liabilities for investments to be
purchased and for dividends and other distributions not declared as of such
Valuation Date); and (d) any current liabilities of the Fund as of such
Valuation Date to the extent not reflected in (or specifically excluded by)
any of (i)(a) through (i)(c) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund pursuant to
reverse repurchase agreements and any payables for assets purchased as of such
Valuation Date) less (ii) (a) the adjusted value of any of the Fund's assets
or (b) the face value of any of the Fund's assets if, in the case of both
(ii)(a) and (ii)(b), such assets are either cash or evidences of indebtedness
which mature prior to or on the date of redemption or repurchase of shares of
Preferred Stock or payment of another liability and are either U.S. Government
Obligations or evidences of indebtedness which have a rating assigned by Moody's
of at least "Aaa","P-1", "VMIG-1" or "MIG-1" or by S&P of at least "AAA",
"SP-1+" or "A-1+", and are irrevocably held by the Fund's
B-43
custodian bank in a segregated account or deposited by the Fund with the
dividend-disbursing agent or Paying Agent, as the case may be, for the
payment of the amounts needed to redeem or repurchase Preferred Stock
subject to redemption or repurchase or any of (i)(b) through (i)(d); and
provided that in the event the Fund has repurchased Preferred Stock and
irrevocably segregated or deposited assets as described above with its
custodian bank or the dividend-disbursing agent or Paying Agent for the
payment of the repurchase price the Fund may deduct 100% of the Liquidation
Preference of such Preferred Stock to be repurchased from (i) above.
The Discount Factors - the criteria used to determine the Discounted
Value of the Fund's portfolio holdings for purposes of determining compliance
with the Basic Maintenance Amount - are based on the criteria established by
each Rating Agency in connection with rating, as the case may be, the Series D
Preferred or Series E Auction Rate Preferred. These factors include, but are
not limited to, the sensitivity of the market value of the relevant asset to
changes in interest rates, the liquidity and depth of the market for the
relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a debt obligation, the higher the related discount factor)
and the frequency with which the relevant asset is marked to market. In no
event will the Discounted Value of any asset of the Fund exceed its unpaid
principal balance or face amount as of the date of calculation. Upon any
failure to maintain the required Eligible Assets, the Fund will seek to alter
the composition of its portfolio to re-attain the Basic Maintenance Amount on
or prior to the applicable Cure Date, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of portfolio
securities.
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's or S&P.
Failure to adopt any such modifications, however, may result in a change in
the relevant rating agency's ratings or a withdrawal of such ratings
altogether. In addition, any rating agency providing a rating for the Series D
Preferred or the Series E Auction Rate Preferred at the request of the Fund
may, at any time, change or withdraw any such rating. The Board of Directors,
without further action by the stockholders, may amend, alter, add to or repeal
certain of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines if the Board determines that
such modification is necessary to prevent a reduction in rating of the shares
of preferred stock by Moody's and/or S&P, as the case may be, is in the best
interests of the holders of shares of common stock and is not adverse to the
holders of preferred stock in view of advice to the Fund by Moody's and/or S&P
(or such other rating agency then rating the Series D Preferred and/or Series
E Auction Rate Preferred at the request of the Fund) that such modification
would not adversely affect, as the case may be, its then current rating of the
Series D Preferred and/or the Series E Auction Rate Preferred.
The Board of Directors may amend the Articles Supplementary
definition of "Maximum Rate" (the "maximum rate" as defined below under " --
Dividends on the Series E Auction Rate Preferred -- Maximum Rate") to increase
the percentage amount by which the applicable reference rate is multiplied to
determine the maximum rate without the vote or consent of the holders of
Series E Auction Rate Preferred or any other stockholder of the Fund, but only
after consultation with the broker-dealers and with confirmation from each
applicable rating agency that the Fund could meet applicable rating agency
asset coverage tests immediately following any such increase
1940 Act Asset Coverage. As of each Valuation Date, the Fund will
determine whether the 1940 Act Asset Coverage is met as of that date. The Fund
will deliver, with respect to the Series E Auction Rate Preferred, to the
Auction Agent and each Rating Agency a 1940 Act Asset Coverage Certificate
B-44
which sets forth the determination of the preceding sentence (i) as of the
Date of Original Issue and, thereafter, (ii) as of (x) the last Business Day
of each March, June, September and December and (y) a Business Day on or
before any 1940 Act Asset Coverage Cure Date following a failure to meet 1940
Act Asset Coverage. Such 1940 Act Asset Coverage Certificate will be delivered
in the case of clause (i) on the Date of Original Issue and in the case of
clause (ii) on or before the seventh Business Day after the last Business Day
of such March, June, September and December, as the case may be, or the
relevant Cure Date.
Notices. The Fund must deliver a Basic Maintenance Report to each
applicable Rating Agency and the Auction Agent, if any, which sets forth, as
of the related Monthly Valuation Date, Eligible Assets sufficient to meet or
exceed the applicable Basic Maintenance Amount, the Market Value and
Discounted Value thereof (in a series and in the aggregate) and the applicable
Basic Maintenance Amount. Such Basic Maintenance Reports must be delivered as
of the applicable Date of Original Issue and thereafter upon the occurrence of
specified events on or before the fifth Business Day after the relevant
Monthly Valuation Date or Cure Date.
As for any Valuation Date for the Series E Auction Rate Preferred for
which the Fund's ratio of the Discounted Value of Eligible Assets in respect
of any Rating Agency to the Basic Maintenance Amount is less than or equal to
110%, the Fund shall deliver, by fax or email before 5:00 p.m. New York City
time on the first Business Day following such Valuation Date, notice of such
ratio to each Rating Agency.
Deposit Assets Requirements Relating to the Series E Auction Rate Preferred
The Fund is obligated to deposit in a segregated custodial account a
specified amount of Deposit Assets not later than 12:00 noon, New York City
time, on each Dividend Payment Date and each Redemption Date relating to the
Series E Auction Rate Preferred. These Deposit Assets, in all cases, will have
an initial combined value greater than or equal to the cash amounts payable on
the applicable Dividend Payment Date or Redemption Date, and will mature prior
to such date.
Restrictions on Transfer Relating to the Series E Auction Rate Preferred
Series E Auction Rate Preferred may be transferred only (i) pursuant
to an Order placed in an Auction, (ii) to or through a Broker-Dealer, or (iii)
to the Fund or any Affiliate. Notwithstanding the foregoing, a transfer other
than pursuant to an Auction will not be effective unless the selling Existing
Holder or the Agent Member of such Existing Holder, in the case of an Existing
Holder whose shares are listed in its own name on the books of the Auction
Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in the case
of a transfer between persons holding Series E Auction Rate Preferred through
different Broker-Dealers, advises the Auction Agent of such transfer. Any
certificates representing the Series E Auction Rate Preferred shares issued to
the Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the Transfer
Agent and/or Registrar.
MOODY'S AND S&P GUIDELINES
The descriptions of the Moody's and S&P Guidelines contained in this
SAI do not purport to be complete and are subject to and qualified in their
entireties by reference to the applicable Articles Supplementary. Copies of
the Articles Supplementary are filed as an exhibit to the registration
statement
B-45
of which the Prospectus and this SAI are a part and may be inspected, and
copies thereof may be obtained, as described under "Additional Information" in
the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by Moody's and S&P,
each a Rating Agency, in connection with the Fund's receipt of a rating of
"Aaa" from Moody's and "AAA" from S&P, for the Series E Auction Rate Preferred
and a rating of "Aaa" from Moody's for the Series D Preferred. These Rating
Agency Guidelines relate, among other things, to industry and credit quality
characteristics of issuers and diversification requirements and specify
various Discount Factors for different types of securities (with the level of
discount greater as the rating of a security becomes lower). Under the Rating
Agency Guidelines, certain types of securities in which the Fund may otherwise
invest consistent with its investment strategy are not eligible for inclusion
in the calculation of the Discounted Value of the Fund's portfolio. Such
instruments include, for example, private placements (other than Rule 144A
Securities) and other securities not within the Rating Agency Guidelines.
Accordingly, although the Fund reserves the right to invest in such securities
to the extent set forth herein, such securities have not and it is anticipated
that they will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of such
guidelines, greater than the aggregate liquidation preference of the
Outstanding shares of Series D Preferred, Series E Auction Rate Preferred and
other Preferred Stock plus specified liabilities, payment obligations and
other amounts, as of periodic Valuation Dates. The Rating Agency Guidelines
also require the Fund to maintain asset coverage for the Outstanding Shares of
Series D Preferred, Series E Auction Rate Preferred and other Preferred Stock
on a non-discounted basis of at least 200% as of the end of each month, and
the 1940 Act requires this asset coverage as a condition to paying dividends
or other distributions on Common stock. See "Additional Information Concerning
The Series D Preferred and Series E Auction Rate Preferred - Asset
Maintenance." The effect of compliance with the Rating Agency Guidelines may
be to cause the Fund to invest in higher quality assets and/or to maintain
relatively substantial balances of highly liquid assets or to restrict the
Fund's ability to make certain investments that would otherwise be deemed
potentially desirable by the Investment Adviser, including private placements
of other than Rule 144A Securities (as defined herein). The Rating Agency
Guidelines are subject to change from time to time with the consent of the
relevant Rating Agency and will apply to the Series D Preferred or Series E
Auction Rate Preferred only so long as the relevant Rating Agency is rating
such stock at the request of the Fund. If in the future the Fund elected to
issue senior securities rated by a rating agency other than Moody's or S&P,
other similar arrangements might apply with respect to those securities.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each Rating Agency
(the "Basic Maintenance Amount"), the determination of which is as set forth
under "Additional Information Concerning The Series D Preferred and Series E
Auction Rate Preferred -- Asset Maintenance." Moody's and S&P have each
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable Rating
Agency's Guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such Rating
Agency).
Upon any failure to maintain the required Discounted Value, the Fund
may seek to alter the composition of its portfolio to reestablish required
asset coverage within the specified ten Business Day cure period, thereby
incurring additional transaction costs and possible losses and/or gains on
dispositions of portfolio securities.
B-46
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
A rating of preferred stock as "Aaa" (as described by Moody's or
"AAA" (as described by S&P) indicates strong asset protection, conservative
balance sheet ratios and positive indications of continued protection of
preferred dividend requirements. A "Aaa" or "AAA" credit rating of preferred
stock does not address the likelihood that a resale mechanism (such as the
Auction) will be successful. As described respectively by Moody's and S&P, an
issue of preferred stock which is rated "Aaa" or "AAA" is considered to be
top-quality preferred stock with good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
The Fund will pay certain fees to Moody's and S&P for rating, as the
case may be, the Series D Preferred or Series E Auction Rate Preferred . Such
ratings may be subject to revision or withdrawal by the assigning Rating
Agency for any time. Any rating of the Series D Preferred or Series E Auction
Rate Preferred should be evaluated independently of any other ratings. Ratings
are not recommendations to purchase, hold or sell Series D Preferred or Series
E Auction Rate Preferred, inasmuch as the rating does not comment as to market
price or suitability for a particular investor. The rating is based on current
information furnished to Moody's and S&P by the Fund and obtained by Moody's
and S&P from other sources. The rating may be changed, suspended or withdrawn
as a result of changes in, or unavailability of, such information. The Fund
has no current intention to file a voluntary application for relief under
federal bankruptcy law or any similar application under state law for so long
as the Fund is solvent and does not foresee becoming insolvent.
MOODY'S GUIDELINES
Under the Moody's guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Preferred
Basic Maintenance Amount. To the extent any particular portfolio holding does
not meet the applicable guidelines, it is not included for purposes of
calculating the Discounted Value of the Fund's portfolio.
The following Discount Factors apply to portfolio holdings as
described below, subject to diversification, issuer size and other
requirements, in order to constitute Moody's Eligible Assets includable within
the calculation of Discounted Value:
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------- ----------------
Short Term Money Market Instruments (other than U.S. Government Obligations set
forth below) and other commercial paper:
U.S. Treasury Securities with final maturities that are
less than or equal to 60 days.................................................. 1.00
Demand or time deposits, certificates of deposit and bankers' acceptances
includable in Moody's Short Term Money Market Instruments...................... 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or less................ 1.00
Commercial paper rated P-1 by Moody's maturing in more than
30 days but in 270 days or less............................................... 1.15
B-47
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------- ----------------
Commercial paper rated A-1+ by S&P maturing in 270 days or less....................... 1.25
Repurchase obligations includable in Moody's Short Term Money Market
Instruments if term is less than 30 days and counterparty is rated
at least A2...................................................................... 1.00
Other repurchase obligations.......................................................... **
U.S. Common Stock and Common Stock of foreign issuers for which ADRs
are traded
Utility............................................................................... 1.70
Industrial............................................................................ 2.64
Financial............................................................................. 2.41
Transportation...................................................................... 3.4
Common Stock of foreign issuers (in existence for at least five years) for which no
ADRs are traded......................................................................... 4.00
Convertible preferred stocks............................................................... 3.00
Preferred stocks:
Auction rate preferred stocks
Cumulative......................................................... 3.50
Non-Cumulative..................................................... 3.60
Other preferred stocks issued by issuers in the financial and industrial industries
Cumulative......................................................... 1.97
Non-Cumulative..................................................... 2.07
Other preferred stocks issued by issuers in the utilities industry
Cumulative......................................................... 1.55
Non-Cumulative..................................................... 1.65
U.S. Government Obligations (other than U.S. Treasury Securities set forth above or
U.S. Treasury Securities Strips set forth below)........................................ 1.04-1.26
U.S. Treasury Securities Strips............................................................ 1.04-1.66
Corporate Debt:
Non-convertible corporate debt rated Aaa................................................ 1.09-1.50
Non-convertible corporate debt rated at least Aa3....................................... 1.12-1.55
Non-convertible corporate debt rated at least A3........................................ 1.15-1.60
Non-convertible corporate debt rated at least Baa3...................................... 1.18-1.65
Non-convertible corporate debt rated at least Ba3....................................... 1.37-1.96
Non-convertible corporate debt rated at least B1and B2.................................. 1.50-2.29
Non-convertible unrated corporate debt.................................................. 2.50
Convertible corporate debt rated at least Aa3 issued by the following type of
issuers:
Utility............................................................................... 1.67
__________________
** Discount factor applicable to the underlying assets.
B-48
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------- ----------------
Industrial............................................................................ 2.61
Financial............................................................................. 2.38
Transportation........................................................................ 2.65
Convertible corporate debt rated at least A3 issued by the following type
of issuers:
Utility............................................................................... 1.72
Industrial............................................................................ 2.66
Financial............................................................................. 2.43
Transportation........................................................................ 2.75
Convertible corporate debt rated at least Baa3 issued by the following type
of issuers:
Utility............................................................................... 1.88
Industrial............................................................................ 2.82
Financial............................................................................. 2.59
Transportation........................................................................ 2.85
Convertible corporate debt rated at least Ba3 issued by the following type
of issuers:
Utility............................................................................... 1.95
Industrial............................................................................ 2.90
Financial............................................................................. 2.65
Transportation........................................................................ 2.90
Convertible corporate debt rated at least B2 issued by the following type
of issuers:
Utility............................................................................... 1.99
Industrial............................................................................ 2.93
Financial............................................................................. 2.70
Transportation........................................................................ 2.95
"Moody's Eligible Assets" means:
(a) cash (including, for this purpose, receivables for
investments sold to a counterparty whose senior debt securities are rated at
least "Baa3" by Moody's or a counterparty approved by Moody's and payable
within five Business Days following such Valuation Date and dividends and
interest receivable within 49 days on investments);
(b) Short-Term Money Market Instruments;
(c) commercial paper that is not includable as a Short-Term
Money Market Instrument having on the Valuation Date a rating from Moody's of
at least "P-1" and maturing within 270 days;
B-49
(d) preferred stocks (i) which either (A) are issued by
issuers whose senior debt securities are rated at least "Baa1" by Moody's or
(B) are rated at least "Baa3" by Moody's or (C) in the event an issuer's
senior debt securities or preferred stock is not rated by Moody's, which
either (1) are issued by an issuer whose senior debt securities are rated at
least "A-" by S&P or (2) are rated at least "A-" by S&P and for this purpose
have been assigned a Moody's equivalent rating of at least "Baa3", (ii) of
issuers which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market
System, (iii) which have a minimum issue size (when taken together with other
of the issuer's issues of similar tenor) of $50,000,000, (iv) which have paid
cash dividends consistently during the preceding three-year period (or, in the
case of new issues without a dividend history, are rated at least "A1" by
Moody's or, if not rated by Moody's, are rated at least "AA-" by S&P), (v)
which pay cumulative cash dividends in U.S. dollars, (vi) which are not
convertible into any other class of stock and do not have warrants attached,
(vii) which are not issued by issuers in the transportation industry and
(viii) in the case of auction rate preferred stocks, which are rated at least
"Aa3" by Moody's, or if not rated by Moody's, "AAA" by S&P, "AAA" by Fitch or
are otherwise approved in writing by Moody's and have never had a failed
auction; provided, however, that for this purpose the aggregate Market Value
of the Fund's holdings of any single issue of auction rate preferred stock
shall not be more than 1% of the Fund's total assets;
(e) common stocks (i) (A) which are traded on a nationally
recognized stock exchange or in the over-the-counter market, (B) if cash
dividend paying, pay cash dividends in U.S. dollars and (C) which may be sold
without restriction by the Fund; provided, however, that (y) common stock
which, while a Moody's Eligible Asset owned by the Fund, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
until 71 days after the date of the announcement of such cessation, unless the
issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (z) the aggregate Market Value of the Fund's holdings of the
common stock of any issuer in excess of 4% in the case of utility common stock
and 6% in the case of non-utility common stock of the aggregate Market Value
of the Fund's holdings shall not be Moody's Eligible Assets, (ii) which are
securities denominated in any currency other than the U.S. dollar or
securities of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
dollar-denominated American Depository Receipts ("ADRs") or their equivalents
which are traded in the United States on exchanges or over-the-counter and are
issued by banks formed under the laws of the United States, its states or the
District of Columbia or (iii) which are securities of issuers formed under the
laws of jurisdictions other than the United States (and in existence for at
least five years) for which no ADRs are traded; provided, however, that the
aggregate Market Value of the Fund's holdings of securities denominated in
currencies other than the U.S. dollar and ADRs in excess of (A) 6% of the
aggregate Market Value of the outstanding shares of common stock of such
issuer thereof or (B) 10% of the Market Value of the Fund's Moody's Eligible
Assets with respect to issuers formed under the laws of any single such
non-U.S. jurisdiction other than Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Spain, Sweden, Switzerland and the United Kingdom, shall not be a Moody's
Eligible Asset;
(f) ADR securities, based on the following guidelines: (i)
Sponsored ADR program or (ii) Level II or Level III ADRs. Private placement
Rule 144A ADRs are not eligible for collateral consideration. Global GDR
programs will be evaluated on a case by case basis;
(g) U.S. Government Obligations;
(h) corporate evidences of indebtedness (i) which may be
sold without restriction by the Fund which are rated at least "B3" ("Caa"
subordinate) by Moody's (or, in the event the security is not rated
by Moody's, the security is rated at least "BB-" by S&P or "BB-" by
Fitch and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), with such rating confirmed on
B-50
each Valuation Date, (ii) which have a minimum issue size of at least (A)
$100,000,000 if rated at least "Baa3" or (B) $50,000,000 if rated "B" or
"Ba3", (iii) which are not convertible or exchangeable into equity of the
issuing corporation and have a maturity of not more than 30 years and (iv)
for which, if rated below "Baa3" or not rated, the aggregate Market Value
of the Fund's holdings do not exceed 10% of the aggregate Market Value of
any individual issue of corporate evidences of indebtedness calculated at
the time of original issuance;
(i) convertible corporate evidences of indebtedness (i)
which are issued by issuers whose senior debt securities are rated at least
"B2" by Moody's (or, in the event an issuer's senior debt securities are not
rated by Moody's, which are issued by issuers whose senior debt securities are
rated at least "BB" by S&P or "BB" by Fitch and which for this purpose is
assigned a Moody's equivalent rating of one full rating category lower), (ii)
which are convertible into common stocks which are traded on the New York
Stock Exchange or the American Stock Exchange or are quoted on the Nasdaq
National Market System and (iii) which, if cash dividend paying, pay cash
dividends in U.S. dollars; provided, however, that once convertible corporate
evidences of indebtedness have been converted into common stock, the common
stock issued upon conversion must satisfy the criteria set forth in clause (e)
above and other relevant criteria set forth in this definition in order to be
a Moody's Eligible Asset; provided, however, that the Fund's investments in
auction rate preferred stocks described in clause (d) above shall be included
in Moody's Eligible Assets only to the extent that the aggregate Market Value
of such stocks does not exceed 10% of the aggregate Market Value of all of the
Fund's investments meeting the criteria set forth in clauses (a) through (g)
above less the aggregate Market Value of those investments excluded from
Moody's Eligible Assets pursuant to the proviso appearing after clause (j)
below; and
(j) no assets which are subject to any lien or irrevocably
deposited by the Fund for the payment of amounts needed to meet the following
obligations may be includable in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses
(a)-(j), the Fund's investment in preferred stock, common stock, corporate
evidences of indebtedness and convertible corporate evidences of indebtedness
shall not be treated as Moody's Eligible Assets except to the extent they
satisfy the following diversification requirements (utilizing Moody's Industry
and Sub-industry Categories) with respect to the Market Value of the Fund's
holdings:
Issuer:
Non-Utility Utility
Maximum Single Maximum Single
Moody's Rating(1)(2) Issuer(3)(4) Issuer(3)(4)
-------------------- ------------ ------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, "Baa", Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 or below 2% 2%
B-51
Industry and State:
Utility Utility
Non-Utility Maximum Maximum
Maximum Single Single Sub- Single
Moody's Rating(1) Industry(3) Industry(3)(6) State(3)
----------------- ----------- -------------- --------
Aaa 100% 100% 100%
Aa 60% 60% 20%
A 40% 50% 10%(7)
CS/CB, "Baa", Baa(5) 20% 50% 7%(7)
Ba 12% 12% 0%
B1/B2 8% 8% 0%
B3 or below 5% 5% 0%
______________
(1) Unless conclusions regarding liquidity risk as well as
estimates of both the probability and severity of default
for the Fund's assets can be derived from other sources,
securities rated below B by Moody's and unrated securities,
which are securities rated by neither Moody's, S&P nor
Fitch, are limited to 10% of Moody's Eligible Assets. If a
corporate, municipal or other debt security is unrated by
Moody's, S&P or Fitch, the Fund will use the percentage set
forth under "Below B and Unrated" in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's
at face value. However, adjustments to face value may be
made to particular categories of credits for which the S&P
and/or Fitch rating does not seem to approximate a Moody's
rating equivalent.
(2) Corporate evidences of indebtedness from issues ranging from
$50,000,000 to $100,000,000 are limited to 20% of Moody's
Eligible Assets.
(3) The referenced percentages represent maximum cumulative
totals only for the related Moody's rating category and each
lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are
considered as one name.
(5) CS/CB refers to common stock and convertible corporate
evidences of indebtedness, which are diversified
independently from the rating level.
(6) In the case of utility common stock, utility preferred
stock, utility evidences of indebtedness and utility
convertible evidences of indebtedness, the definition of
industry refers to sub-industries (electric, water, hydro
power, gas, diversified). Investments in other
sub-industries are eligible only to the extent that the
combined sum represents a percentage position of the Moody's
Eligible Assets less than or equal to the percentage limits
in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities
regulated by California, New York and Texas.
B-52
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Series E Auction
Rate Preferred Basic Maintenance Amount (as defined below). To the extent any
particular portfolio holding does not meet the applicable guidelines, it is
not included for purposes of calculating the Discounted Value of the Fund's
portfolio, and, among the requirements, the amount of such assets included in
the portfolio at any time, if any, may vary depending upon the credit quality
(and related Discounted Value) of the Fund's eligible assets at such time.
The Series E Auction Rate Preferred Basic Maintenance Amount includes
the sum of (i) $25,000 times the number of Series E Auction Rate Preferred
shares then Outstanding, (ii) the liquidation preference of each additional
series of Preferred Stock of the Fund times the number of shares of such
series then outstanding and (iii) certain accrued and projected payment
obligations of the Fund. Upon any failure to maintain the required Discounted
Value, the Fund may seek to alter the composition of its portfolio to
reestablish required asset coverage within the specified ten Business Day cure
period, thereby incurring additional transaction costs and possible losses
and/or gains on dispositions of portfolio securities.
The following Discount Factors apply to portfolio holdings as
described below in order to constitute S&P Eligible Assets includable within
the calculation of Discounted Value:
Asset Class Obligor Overcollateralization
(Collateral) Advance Rates (1) Factors (1)
------------ ----------------- -----------
Public Equity Small-Cap 46.0% 217.4%
Public Equity Mid-Cap 53.6% 186.6%
Public Equity Large-Cap 59.7% 167.6%
Cash and Other Deposit
Securities with Maturities 100.0% 100.0%
of 30 days or less
______________
(1) For an S&P rating of AAA.
"S&P Seasoned Eligible Assets" means:
(a) Deposit Assets; and
(b) common stocks that satisfy all of the following conditions:
(i) such common stock (including the common stock of any
predecessor or constituent issuer) has been traded
on a recognized national securities exchange or
quoted on the National Market System (or any
equivalent or successor thereto) of Nasdaq for at
least 450 days,
(ii) the Market Capitalization of such issuer of common
stock exceeds $100 million,
B-53
(iii) the issuer of such common stock is not an entity
that is treated as a partnership for federal income
tax purposes,
(iv) if such issuer is organized under the laws of any
jurisdiction other than the United States, any state
thereof, any possession or territory thereof or the
District of Columbia, the common stock of such
issuer held by the Fund is traded on a recognized
national securities exchange or quoted on the
National Market System of Nasdaq either directly or
in the form of depository receipts, and
(v) if such issuer is registered as an investment
company under the 1940 Act, such issuer does not
invest more than 25% of the value of its gross
assets in securities that are not S&P Eligible
Assets by reason of clause (iv) above;
provided, however, that the Fund's holdings of the common
stock of any single issuer that satisfies the conditions set
forth in clauses (i) through (v) above shall be included in
S&P Eligible Assets only to the extent that:
(1) such holdings may be sold publicly by the Fund at
any time without registration,
(2) to the extent remaining eligible after the operation
of item (1) above, such holdings do not exceed a
number of shares representing the average weekly
trading volume of such common stock during the
preceding 30 day period,
(3) to the extent remaining eligible after the operation
of items (1) and (2) above, the aggregate Market
Value of such holdings, when added to the aggregate
Market Value of the Fund's holdings of all other
similarly eligible shares of common stock of issuers
in the same Industry Classification, does not exceed
10% of the aggregate Market Value of the Fund's S&P
Eligible Assets, and
(4) to the extent remaining eligible after the operation
of items (1) through (3) above, the aggregate Market
Value of each of the three largest issuers is not in
excess of 5% of the aggregate Market Value of the
Fund's S&P Eligible Assets, and of the remaining
issuers, is not in excess of 2% of the aggregate
Market Value of the Fund's S&P Eligible Assets.
(c) preferred stocks on such basis as S&P may determine
in response to a request from the Fund.
Notwithstanding the foregoing, an asset will not be considered an S&P
Eligible Asset if it is held in a margin account, is subject to any material
lien, mortgage, pledge, security interest or security agreement of any kind or
has been deposited irrevocably for the payment of dividends, redemption
payments or any other payment or obligation under the Fund's Articles
Supplementary.
B-54
In addition, so long as any Series E Auction Rate Preferred is
Outstanding and S&P is rating such Series E Auction Rate Preferred at the
Fund's request, the Fund will not, unless it has received written confirmation
that any such transaction would not impair the rating then assigned by S&P to
the Series E Auction Rate Preferred, engage in any one or more of the
following transactions:
(a) purchase or sell futures contracts; write, purchase or sell
options on futures contracts; or write put options (except covered put
options) or call options (except covered call options) on securities owned by
the Fund (collectively, "S&P Hedging Transactions"), except subject to the
following limitations:
(i) for each net long or short position in S&P Hedging
Transactions, the Fund will maintain in a segregated account with the Fund's
custodian an amount of cash or readily marketable securities having a value,
when added to any amounts on deposit with the Fund's futures commission
merchants or brokers as margin or premium for such position, at least equal to
the market value of the Fund's potential obligations on such position,
marked-to-market on a daily basis, in each case as and to the extent required
by the applicable rules or orders of the SEC or by interpretations of the
SEC's staff;
(ii) the Fund will not engage in any S&P Hedging Transaction which
would cause the Fund at the time of such transaction to own or have sold the
lesser of (A) outstanding futures contracts, in aggregate, based on the
Standard & Poor's 500 Index, the Dow Jones Industrial Average, the Russell
2000 Index, the Wilshire 5000 Index, the Nasdaq Composite Index and the New
York Stock Exchange Composite Index (or any component of any of the forgoing)
exceeding in number 50% of the market value of the Fund's total assets or (B)
outstanding futures contracts based on any of the aforementioned indices
exceeding in number 10% of the average number of daily traded futures
contracts based on such index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in closing transactions to close out
any outstanding futures contract which the Fund owns or has sold or any
outstanding option thereon owned by the Fund in the event (A) the Fund does
not have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the Series E Auction Rate Preferred Basic Maintenance Amount on
two consecutive Valuation Dates and (B) the Fund is required to pay variation
margin on the second such Valuation Date;
(iv) the Fund will engage in a closing transaction to close out
any outstanding futures contract or option thereon at least one week prior to
the delivery date under the terms of the futures contract or option thereon
unless the corporation holds the securities deliverable under such terms; and
(v) when the Fund writes a futures contract or option thereon,
either the amount of margin posted by the Fund (in the case of a futures
contract) or the marked-to-market value of the Fund's obligation (in the case
of a put option written by the Fund) shall be treated as a liability of the
Fund for purposes of calculating the Series E Auction Rate Preferred Basic
Maintenance Amount, or, in the event the Fund writes a futures contract or
option thereon which requires delivery of an underlying security and the Fund
does not wish to treat its obligations with respect thereto as a liability for
purposes of calculating the Series E Auction Rate Preferred Basic Maintenance
Amount, it shall hold such underlying security in its portfolio and shall not
include such security to the extent of such contract or option as an S&P
Eligible Asset.
B-55
(b) borrow money, except for the purpose of clearing securities
transactions if (i) the Series E Auction Rate Preferred Basic Maintenance
Amount would continue to be satisfied after giving effect to such borrowing
and (ii) such borrowing (A) is privately arranged with a bank or other person
and is not intended to be publicly distributed or (B) is for "temporary
purposes," and is in an amount not exceeding 5 percent of the market value of
the total assets of the Fund at the time of the borrowing; for purposes of the
foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed;
(c) engage in any short sales of equity securities (other than
short sales against the box) unless the Fund maintains in a segregated account
with the Fund's custodian an amount of cash or other readily marketable
securities having a market value, when added to any amounts on deposit with
the Fund's broker as collateral for its obligation to replace the securities
borrowed and sold short, at least equal to the current market value of
securities sold short, marked-to-market on a daily basis;
(d) utilize any pricing service other than FT Interactive Data,
Reuters, Telekurs, Bloomberg Financial Markets, J.J. Kenney Pricing Service,
Merrill Lynch Securities Pricing Service or Bridge Data Corp, and any pricing
service then permitted by S&P; or
(e) enter into any reverse repurchase agreement, other than with a
counterparty that is rated at least A-1+ by S&P.
NET ASSET VALUE
The net asset value of the Fund's shares will be computed based on
the market value of the securities it holds and will generally be determined
daily as of the close of regular trading on the NYSE.
Portfolio instruments of the Fund which are traded in a market
subject to government regulation on which trades are reported
contemporaneously generally will be valued at the last sale price on the
principal market for such instruments as of the close of regular trading on
the day the instruments are being valued, or lacking any sales, at the average
of the bid and asked price on the principal market for such instruments on the
most recent date on which bid and asked prices are available. Initial public
offering securities are initially valued at cost, and thereafter as any other
equity security. Other readily marketable assets will be valued at the average
of quotations provided by dealers maintaining an active market in such
instruments. Short-term debt instruments that are credit impaired or mature in
more than 60 days for which market quotations are available are valued at the
latest average of the bid and asked prices obtained from a dealer maintaining
an active market in that security. Short-term investments that are not credit
impaired and mature in 60 days or fewer are valued at amortized cost from
purchase price or value on the 61st day prior to maturity. Securities and
other assets for which market quotations are not readily available will be
valued at fair value as determined in good faith by or under the direction of
the Investment Adviser in accordance with guidelines adopted by the Fund. The
Fund may employ recognized pricing services from time to time for the purpose
of pricing portfolio instruments (including non-U.S. dollar denominated assets
and futures and options).
Trading takes place in various foreign markets on days which are not
Business Days and on which therefore the Fund's net asset value per share is
not calculated. The calculation of the Fund's net asset value may not take
place contemporaneously with the determination of the prices of portfolio
securities held by the Fund. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
close of the NYSE will not be reflected in the Fund's calculation of net asset
B-56
value unless the Board of Directors deems that the particular event would
materially affect the net asset value, in which case the fair value of those
securities will be determined by consideration of other factors by or under
the direction of the Board of Directors.
Net asset value per share is calculated by dividing the value of the
securities held plus any cash or other assets minus all liabilities, including
accrued expenses, by the total number of shares outstanding at such time.
BENEFICIAL OWNERS
Name and Address of
Beneficial/Record Owner Amount of Shares and
as of September 15, 2003 Title of Class Nature of Ownership Percent of Class
------------------------ -------------- ------------------- ----------------
Cede & Co.* Common 115,753,308 (Record) 84.60%
P.O. Box 29
Bowling Green Station Series B Preferred 6,586,930 (Record) 99.08%
New York, NY 10274 Series C Auction 5,200 (Record) 100%
Rate Preferred
* A nominee partnership of DTC.
As of September 15, 2003, the Directors and Officers of the Fund as a
group beneficially owned approximately 1.14% of the outstanding shares of the
Fund's common stock.
GENERAL INFORMATION
Book-Entry-Only Issuance
DTC will act as securities depository for the shares of Series D
Preferred and/or Series E Auction Rate Preferred offered pursuant to the
Prospectus. The information in this section concerning DTC and DTC's
book-entry system is based upon information obtained from DTC. The securities
offered hereby initially will be issued only as fully-registered securities
registered in the name of Cede & Co. (as nominee for DTC). One or more
fully-registered global security certificates initially will be issued,
representing in the aggregate the total number of securities, and deposited
with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve
B-57
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds
securities that its participants deposit with DTC. DTC also facilities the
settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized
book-entry changes in participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to the DTC system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a direct participant,
either directly or indirectly through other entities.
Purchases of securities within the DTC system must be made by or
through direct participants, which will receive a credit for the securities on
DTC's records. The ownership interest of each actual purchaser of a security,
a beneficial owner, is in turn to be recorded on the direct or indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the direct or indirect
participants through which the beneficial owners purchased securities.
Transfers of ownership interests in securities are to be accomplished by
entries made on the books of participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interests in securities, except as provided herein.
DTC has no knowledge of the actual beneficial owners of the
securities being offered pursuant to this Prospectus; DTC's records reflect
only the identity of the direct participants to whose accounts such securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Payments on the securities will be made to DTC. DTC's practice is to
credit direct participants' accounts on the relevant payment date in
accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of such
participant and not of DTC or the Fund, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of dividends to
DTC is the responsibility of the Fund, disbursement of such payments to direct
participants is the responsibility of DTC, and disbursement of such payments
to the beneficial owners is the responsibility of direct and indirect
participants. Furthermore each beneficial owner must rely on the procedures of
DTC to exercise any rights under the Securities.
DTC may discontinue providing its services as securities depository
with respect to the securities at any time by giving reasonable notice to the
Fund. Under such circumstances, in the event that a successor securities
depository is not obtained, certificates representing the Securities will be
printed and delivered.
B-58
Counsel and Independent Accountants
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is special counsel to the Fund in connection with the
issuance of Series D Preferred and/or Series E Auction Rate Preferred.
PricewaterhouseCoopers LLP, independent accountants, 1177 Avenue
of the Americas, New York, New York 10036, serve as auditors of the Fund and
will annually render an opinion on the financial statements of the Fund.
B-59
FINANCIAL STATEMENTS
The audited financial statements included in the Semi-Annual Report
to the Fund's Stockholders for the six months ended June 30, 2003, together
with the report of PricewaterhouseCoopers LLP thereon, are also incorporated
herein by reference from the Fund's Annual Report to Stockholders. All other
portions of the Semi-Annual Report to Stockholders are not incorporated herein
by reference and are not part of the Registration Statement. A copy of the
Semi-Annual Report to Stockholders may be obtained without charge by writing
to the Fund at its address at One Corporate Center, Rye, New York 10580-1422
or by calling the Fund toll-free at 800-GABELLI (422-3554).
B-60
GLOSSARY
"AA Financial Composite Commercial Paper Rate" on any date means (i) the
interest equivalent of the 7-day rate, in the case of a Dividend Period of 7
days or shorter; for Dividend Periods greater than 7 days but fewer than or
equal to 31 days, the 30-day rate; for Dividend Periods greater than 31 days
but fewer than or equal to 61 days, the 60-day rate; for Dividend Periods
greater than 61 days but fewer than or equal to 91 days, the 90 day rate; for
Dividend Periods greater than 91 days but fewer than or equal to 270 days, the
rate described in (ii) below; for Dividend Periods greater than 270 days, the
Treasury Index Rate; on commercial paper on behalf of issuers whose corporate
bonds are rated "AA" by S&P, or the equivalent of such rating by another
nationally recognized rating agency, as announced by the Federal Reserve Bank
of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any
Commercial Paper Dealer does not quote a rate required to determine the "AA"
Financial Composite Commercial Paper Rate, such rate will be determined on the
basis of the quotations (or quotation) furnished by the remaining Commercial
Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper
Dealers, by the Auction Agent pursuant to instructions from the Fund. For
purposes of this definition, (A) "Commercial Paper Dealers" will mean (1)
Citigroup Global Markets Inc., Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any
thereof, its respective affiliate or successor; and (3) in the event that any
of the foregoing will cease to quote rates for commercial paper of issuers of
the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations
selected by the Fund, and (B) "interest equivalent" of a rate stated on a
discount basis for commercial paper of a given number of days maturity will
mean a number equal to the quotient (rounded upward to the next higher
one-thousandth of 1%) of (1) such rate expressed as a decimal, divided by (2)
the difference between (x) 1.00 and (y) a fraction, the numerator of which
will be the product of such rate expressed as a decimal, multiplied by the
number of days in which such commercial paper will mature and the denominator
of which will be 360.
"Adjusted Value" of each Eligible Asset shall be computed as follows:
(i) cash shall be valued at 100% of the face value thereof; and
(ii) all other Eligible Assets shall be valued at the applicable
Discounted Value thereof; and
(iii) each asset that is not an Eligible Asset shall be valued at zero.
"Administrator" means the other party to the Administration Agreement with the
Fund, which shall initially be Gabelli Funds, LLC, a New York limited
liability company, and will include, as appropriate, any sub-administrator
appointed by the Administrator.
"Advance Rate" means (a) so long as S&P is rating the Series E Preferred Stock
at the Corporation's request, the Advance Rates set forth in the definition of
S&P Rating Factor or (b) any applicable advance rate established by any Other
Rating Agency, whichever is applicable.
"Affiliate" means, with respect to the Auction Agent, any person known to the
Auction Agent to be controlled by, in control of or under common control with
the Fund; provided, however, that no Broker-Dealer controlled by, in control
of or under common control with the Fund will be deemed to be an Affiliate nor
will any Person controlled by, in control of or under common control with such
Person one of the directors or executive officers of which is director of the
Fund be deemed to be an Affiliate solely because such director or executive
officer is also a director of the Fund.
A-1
"Agent Member" means a member of or a participant in the Securities Depository
that will act on behalf of a Bidder.
"All Hold Rate" means 80% of the "AA" Financial Composite Commercial Paper Rate.
"Applicable Rate" means, with respect to the Series E Auction Rate Preferred,
for each Dividend Period (i) if Sufficient Clearing Bids exist for the Auction
in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders
do not exist for the Auction in respect thereof or an Auction does not take
place with respect to such Dividend Period because of the commencement of a
Default Period that ends prior to an Auction Date, the Maximum Rate and (iii)
if all Series E Auction Rate Preferred is the subject of Submitted Hold Orders
for the Auction in respect thereof, the All Hold Rate.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another commercial
bank, trust company, or other financial institution appointed by a resolution
of the Board of Directors enters into an agreement with the Fund to follow the
Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" means the last day of the initial Dividend Period and each
seventh day after the immediately preceding Auction Date; provided, however,
that if any such seventh day is not a Business Day, such Auction Date shall be
the first preceding day that is a Business Day and the next Auction Date, if
for a Standard Dividend Period, shall (subject to the same advancement
procedure) be the seventh day after the date that the preceding Auction Date
would have been if not for the advancement procedure; provided further,
however, that the Auction Date for the Auction at the conclusion of any
Special Dividend Period shall be the last Business Day in such Special
Dividend Period and that no more than one Auction shall be held during any
Dividend Period; provided, further, however, that the Auction Date following a
Default Period shall be the last Business Day in the Standard Dividend Period
that commenced during such Default Period. Notwithstanding the foregoing, in
the event an auction is not held because an unforeseen event or unforeseen
events cause a day that otherwise would have been an Auction Date not to be a
Business Day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events).
"Auction Procedures" means the procedures for conducting Auctions described in
"Additional Information Concerning the Auction for Series E Auction Rate
Preferred."
"Available Series E Auction Rate Preferred" has the meaning set forth in
"Additional Information Concerning the Auction for Series E Auction Rate
Preferred -- Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate."
"Basic Maintenance Amount" has the meaning set forth in "Additional
Information Concerning The Series D Preferred and Series E Auction Rate
Preferred -- Asset Maintenance."
"Basic Maintenance Report" means, with respect to the Series E Auction Rate
Preferred, a report prepared by the Administrator which sets forth, as of the
related Monthly Valuation Date, (i) Moody's Eligible Assets and S&P Eligible
Assets sufficient to meet or exceed the Basic Maintenance Amount, (ii) the
Market Value and Discounted Value thereof (seriatim and in the aggregate),
(iii) the Basic Maintenance Amount, and (iv) the net asset value of the Fund.
Such report will also include (A) the month-end closing
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price for the Common Stock of the Fund (B) the monthly total-return per Common
Stock, which will be determined based upon month-end closing share prices,
assuming reinvestment of all dividends paid during such month and (C) the
total leverage positions of the Fund. For the purposes of this Articles
Supplementary, "Basic Maintenance Report" or "Report" shall have a correlative
meaning with respect to any other class or series of Preferred Stock.
"Beneficial Owner" with respect to Series E Auction Rate Preferred, means a
customer of a Broker- Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of such
shares of such series.
"Bid" has the meaning set forth in "Additional Information Concerning the
Auction for the Series E Auction Rate Preferred -- Orders by Existing Holders
and Potential Holders."
"Bidder" has the meaning set forth in "Additional Information Concerning the
Auction for Series E Auction Rate Preferred -- Orders by Existing Holders and
Potential Holders."
"Board of Directors" or "Board" means the Board of Directors of the Fund or
any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York, New York are authorized or obligated by law to close.
"By-Laws" means the By-Laws of the Fund, as amended from time to time.
"Charter" means the Articles of Incorporation of the Fund, as amended or
supplemented (including the Articles Supplementary), as filed with the State
Department of Assessments and Taxation of the State of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the shares of the Fund's common stock, par value $.001
per share.
"Cure Date" has the meaning set forth in paragraph 3(a)(i) of Article II of
the Articles Supplementary for the Series D Preferred and paragraph 3(a)(ii)
of Article I of the Articles Supplementary for the Series E Auction Rate
Preferred.
"Date of Original Issue" means the date on which the Series D Preferred or
Series E Auction Rate Preferred, as the case may be, is originally issued by
the Fund.
A-3
"Default Period" has the meaning set forth in "Additional Information
Concerning the Series D Preferred and Series E Auction Rate Preferred --
Dividends and Dividend Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S.
Government Obligations. Except for determining whether the Fund has Eligible
Assets with an Adjusted Value equal to or greater than the Basic Maintenance
Amount, each Deposit Asset shall be deemed to have a value equal to its
principal or face amount payable at maturity plus any interest payable thereon
after delivery of such Deposit Asset but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discount Factor" means (i) so long as Moody's is rating the Series D
Preferred or Series E Auction Rate Preferred at the Fund's request, the
Moody's Discount Factor, (ii) so long as S&P is rating the Series E Auction
Rate Preferred, the S&P Discount Factor, and/or (iii) any applicable discount
factor established by any Other Rating Agency, whichever is applicable.
"Discounted Value" means, as applicable, (i) the quotient of the Market Value
of an Eligible Asset divided by the applicable Discount Factor, or (ii) such
other formula for determining the discounted value of an Eligible Asset as may
be established by an applicable Rating Agency, provided that with respect to
an Eligible Asset that is currently callable, Discounted Value will be equal
to the applicable quotient or product as calculated above or the call price,
whichever is lower, and that with respect to an Eligible Asset that is
prepayable, Discounted Value will be equal to the applicable quotient or
product as calculated above or the par value, whichever is lower.
"Dividend Default" has the meaning set forth in "Additional Information
Concerning the Series D Preferred and Series E Auction Rate Preferred --
Dividends and Dividend Period."
"Dividend Payment Date" means, with respect to the Series D Preferred, any
date on which dividends declared by the Board of Directors thereon are payable
pursuant to the provisions of paragraph 1(a) of Article II of the Articles
Supplementary of the Series D Preferred, and, with respect to the Series E
Auction Rate Preferred, any date on which dividends declared by the Board of
Directors thereon are payable pursuant to the provisions of paragraph 2(b) of
Article I of the Articles Supplementary, for the Series E Auction Rate
Preferred, and shall have a correlative meaning with respect to any other
class or series of Preferred Stock.
"Dividend Period" means, with respect to Series D Preferred, the quarterly
dividend specified in paragraph 1(a) of Article II of the Articles
Supplementary for the Series D Preferred and, with respect to Series E Auction
Rate Preferred, the initial period determined in the manner set forth under
"Designation" in the Articles Supplementary of the Series E Auction Rate
Preferred, and thereafter, the period commencing on the Business Day following
each Auction Date and ending on the next Auction Date or, if such next Auction
Date is not immediately followed by a Business Day, on the latest day prior to
the next succeeding Business Day.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the
Series D Preferred or Series E Auction Rate Preferred at the request of the
Fund), S&P Eligible Assets (if S&P is then rating the Series E Auction Rate
Preferred at the request of the Fund), and/or Other Rating Agency Eligible
Assets if any Other Rating Agency is then rating the Series D Preferred or
Series E Auction Rate Preferred, whichever is applicable.
A-4
"Existing Holder" means (i) a person who beneficially owns those shares of
Series E Auction Rate Preferred listed in that person's name in the records of
the Fund or the Auction Agent or (ii) the beneficial owner of those shares of
Series E Auction Rate Preferred which are listed under such person's Broker-
Dealer's name in the records of the Auction Agent, which Broker-Dealer will
have signed a master purchaser's letter.
"Hold Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series E Auction Rate Preferred -- Orders By Existing Holders
and Potential Holders."
"Holder" means, with respect to the Series E Auction Rate Preferred, the
registered holder of Series E Auction Rate Preferred shares as the same
appears on the stock ledger or stock records of the Fund or records of the
Auction Agent, as the case may be.
"Industry Classification" means a six-digit industry classification in the
Standard Industry Classification system published by the United States.
"Liquidation Preference" means $25 per share of Series D Preferred and $25,000
per share of Series E Auction Rate Preferred and will have a correlative
meaning with respect to shares of any other class or series of Preferred
Stock.
"Market Capitalization" means, with respect to any issue of common stock, as
of any date, the product of (i) the number of shares of such common stock
issued and outstanding as of the close of business on the date of
determination thereof and (ii) the Market Value per share of such common stock
as of the close of business on the date of determination thereof.
"Market Value" means the amount determined by the Fund with respect to
specific Eligible Assets in accordance with valuation policies adopted from
time to time by the Board of Directors as being in compliance with the
requirements of the 1940 Act.
Notwithstanding the foregoing, "Market Value" may, at the option of
the Fund with respect to any of its assets, mean the amount determined with
respect to specific Eligible Assets of the Fund in the manner set forth below:
(i) as to any common or preferred stock which is an Eligible
Asset, (a) if the stock is traded on a national securities
exchange or quoted on the Nasdaq System, the last sales
price reported on the Valuation Date or (b) if there was no
reported sales price on the Valuation Date, the price
obtained from a Pricing Service as of the Valuation Date, or
(c) if there was no reported sales price on the Valuation
Date or price available from a Pricing Service, the lower of
two bid prices for such stock provided to the Administrator
by two recognized securities dealers with a minimum
capitalization of $25,000,000 (or otherwise approved for
such purpose by Moody's and S&P) at least one of which will
be provided in writing or by telecopy, telex, other
electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn
provided to the Fund by any such means by such
administrator, or, if two bid prices cannot be obtained,
such Eligible Asset will have a Market Value of zero;
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(ii) as to any U.S. Government Obligation, Short-Term Money
Market Instrument (other than demand deposits, federal
funds, bankers' acceptances and next Business Day repurchase
agreements) and commercial paper, with a maturity of greater
than 60 days, the product of (a) the principal amount
(accreted principal to the extent such instrument accretes
interest) of such instrument and (b) the price provided by a
Pricing Service or, if not obtainable through a Pricing
Service, the lower of the bid prices for the same kind of
instruments having, as nearly as practicable, comparable
interest rates and maturities provided by two recognized
securities dealers having minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by
Moody's and S&P) to the administrator, at least one of which
will be provided in writing or by telecopy, telex, other
electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn
provided to the Fund by any such means by such
administrator, or, if two bid prices cannot be obtained,
such Eligible Asset will have a Market Value of zero;
(iii) as to cash, demand and timed deposits, federal funds,
bankers' acceptances and next Business Day repurchase
agreements included in Short-Term Money Market Instruments,
the face value thereof;
(iv) as to any U.S. Government Obligation, Short-Term Money Market
Instrument or commercial paper with a maturity of 60 days or
fewer, amortized cost unless the Board of Directors
determines that such value does not constitute fair value; or
(v) as to any other evidence of indebtedness which is an
Eligible Asset, (a) the product of (1) the unpaid principal
balance of such indebtedness as of the Valuation Date and
(2)(A) if such indebtedness is traded on a national
securities exchange or quoted on the Nasdaq System, the last
sales price reported on the Valuation Date or (B) if there
was no reported sales price on the Valuation Date and if
such indebtedness is not traded on a national securities
exchange or quoted on the Nasdaq System, the price obtained
from a Pricing Service as of the Valuation Date or (C) if
there was no reported sales price on the Valuation Date or
if such indebtedness is not traded on a national securities
exchange or quoted on the Nasdaq System, and a price was not
obtainable from a Pricing Service as of the Valuation Date,
the lower of two bid prices for such indebtedness provided
by two recognized dealers with a minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by
Moody's and S&P) to the administrator of the Fund's assets,
at least one of which will be provided in writing or by
telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar
means, and in turn provided to the Fund by any such means by
such administrator, plus (b) accrued interest on such
indebtedness.
Notwithstanding the foregoing, in the case of Preferred Stock that is
rated by a single Rating Agency, "Market Value" shall have the meaning set
forth in the Articles Supplementary of such Preferred Stock.
A-6
"Maximum Rate" means, on any date on which the Applicable Rate is determined,
the applicable percentage of (i) in the case of a dividend period of 184 days
or less, the "AA" Financial Composite Commercial Paper Rate on the date of
such Auction determined as set forth below based on the lower of the credit
ratings assigned to the Series E Auction Rate Preferred by Moody's and S&P
subject to upward but not downward adjustment in the discretion of the Board
of Directors after consultation with the Broker-Dealers; provided that
immediately following any such increase the Fund would be in compliance with
the Basic Maintenance Amount or (ii) in the case of a dividend period of
longer than 184 days, the Treasury Index Rate.
Credit Ratings for Series E Auction Rate Preferred
Moody's Credit Rating S&P Credit Rating Applicable Percentage
---------------------- ----------------- ---------------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 175%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's Guidelines."
"1940 Act" means the Investment Company Act of 1940, as amended, or any
successor statute.
"1940 Act Asset Coverage" means asset coverage, as determined in accordance
with Section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Fund which are stock, including all
Outstanding shares of Series D Preferred and Series E Auction Rate Preferred
(or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
stock of a closed-end investment company as a condition of declaring dividends
on its common stock), determined on the basis of values calculated as of a
time within 48 hours (not including Saturdays, Sundays or holidays) next
preceding the time of such determination.
"1940 Act Asset Coverage Certificate" means the certificate required to be
delivered by the Fund pursuant to paragraph 9(a)(i)(B) of Article I of the
Articles Supplementary of the Series E Auction Rate Preferred.
"Non-Call Period" means a period determined by the Board of Directors after
consultation with the Broker-Dealers, during which the Series E Auction Rate
Preferred subject to such Special Dividend Period are not subject to
redemption at the option of the Fund but only to mandatory redemption.
"NRSRO" means a Nationally Recognized Statistical Ratings Organization.
A-7
"Order" has the meaning set forth in "Additional Information Concerning the
Auction for Series E Auction Rate Preferred -- Orders By Existing Holders and
Potential Holders."
"Other Rating Agency" means any rating agency other than Moody's or S&P then
providing a rating for the Series E Auction Rate Preferred pursuant to the
request of the Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated by
any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Series E Auction Rate Preferred.
"Outstanding" means, as of any date, Preferred Stock theretofore issued by the
Fund except:
(i) any such share of Preferred Stock theretofore cancelled by
the Fund or delivered to the Fund for cancellation;
(ii) any such share of Preferred Stock other than auction rate
Preferred Stock as to which a notice of redemption will have
been given and for whose payment at the redemption thereof
Deposit Assets in the necessary amount are held by the Fund
in trust for, or have been irrevocably deposited with the
relevant disbursing agent for payment to, the holder of such
share pursuant to the Articles Supplementary with respect
thereto;
(iii) in the case of auction rate Preferred Stock, any such stock
theretofore delivered to the applicable auction agent for
cancellation or with respect to which the Fund has given
notice of redemption and irrevocably deposited with the
applicable paying agent sufficient funds to redeem such
shares; and
(iv) any such Preferred Stock in exchange for or in lieu of which
other shares have been issued and delivered.
Notwithstanding the foregoing, (x) for purposes of voting rights (including
the determination of the number of shares required to constitute a quorum),
any Preferred Stock as to which the Fund or any subsidiary is the holder or
Existing Holder, as applicable, will be disregarded and deemed not
Outstanding; and (y) in connection with any auction, any auction rate Preferred
Stock as to which the Fund or any Person known to the auction agent to be an
subsidiary is the holder or Existing Holder, as applicable, will be
disregarded and not deemed Outstanding.
"Paying Agent" means with respect to Series E Auction Rate Preferred, The Bank
of New York unless and until another entity appointed by a resolution of the
Board of Directors enters into an agreement with the Fund to serve as paying
agent, which paying agent may be the same as the Auction Agent and, with
respect to any other class or series of preferred stock, the Person appointed
by the Fund as dividend disbursing or paying agent with respect to such class
or series.
"Person"means and includes an individual, a partnership, the Fund, a trust, a
corporation, a limited liability company, an unincorporated association, a
joint venture or other entity or a government or any agency or political
subdivision thereof.
A-8
"Potential Beneficial Owner or Holder" means (i) any Existing Holder who may
be interested in acquiring additional shares of Series E Auction Rate
Preferred or (ii) any other person who may be interested in acquiring shares
of Series E Auction Rate Preferred and who has signed a master purchaser's
letter or whose shares will be listed under such person's Broker-Dealer's name
on the records of the Auction Agent which Broker-Dealer will have executed a
master purchaser's letter.
"Preferred Stock" means the preferred stock, par value $.001 per share, of the
Fund, and includes the Series D Preferred and Series E Auction Rate Preferred.
"Premium Call Period" means a period consisting of a number of whole years as
determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Fund's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage
or percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Directors after consultation
with the Broker-Dealers.
"Pricing Service" means any of the following: Bloomberg Financial Service,
Bridge Information Services, Data Resources Inc., FT Interactive,
International Securities Market Association, Merrill Lynch Securities Pricing
Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Telerate, Trepp Pricing
and Wood Gundy.
"Rating Agency" means Moody's and S&P as long as such rating agency is then
rating the Series D Preferred or the Series E Auction Rate Preferred at the
request of the Fund, or any other rating agency then rating the Series D
Preferred or the Series E Auction Rate Preferred at the request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's
and S&P Guidelines."
"Redemption Date" means, with respect to shares of the Fund's Outstanding
Preferred Stock, the date fixed by the Fund for the redemption of such shares.
"Redemption Default" has the meaning set forth in "Additional Information
Concerning the Series D Preferred and Series E Auction Rate Preferred --
Dividends and Dividend Period."
"Redemption Price" means, with respect to the Series D Preferred, the price
set forth in paragraph 3(a) of Article II of the Articles Supplementary for
the Series D Preferred and, with respect to the Series E Auction Rate
Preferred, the price set forth in paragraph 3(a)(i) of Article I of the
Articles Supplementary for the Series E Auction Rate Preferred.
"Reference Rate" means, with respect to the determination of the Default Rate,
the applicable "AA" Financial Composite Commercial Paper Rate for a Dividend
Period of 184 days or fewer or the applicable Treasury Index Rate for a
Dividend Period of longer than 184 days and, with respect to the determination
of the Maximum Rate, the "AA" Financial Composite Commercial Paper Rate or the
Treasury Index Rate, as appropriate.
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"S&P Discount Factor" has the meaning set forth in "Moody's and S&P Guidelines
-- S&P Guidelines."
A-9
"S&P Eligible Assets" has the meaning set forth in "Moody's and S&P Guidelines
-- S&P Guidelines."
"S&P Hedging Transactions" has the meaning set forth in "Moody's and S&P
Guidelines -- S&P Guidelines"
"SEC" means the United States Securities and Exchange Commission
"Securities Act" means The Securities Act of 1933, as amended, or any
successor statute.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the shares of Series D Preferred or Series E
Auction Rate Preferred.
"Sell Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series E Auction Rate Preferred -- Orders by Existing Holders
and Potential Holders."
"Series B Preferred" means the Fund's 7.20% Cumulative Preferred Stock, $.001
par value per share and liquidation preference $25 per share.
"Series C Auction Rate Preferred" means the Fund's Series C Auction Rate
Cumulative Preferred Stock.
"Series D Preferred" means the Fund's Series D Cumulative Preferred Stock,
$.001 par value per share and liquidation preference $25 per share.
"Series E Auction Rate Preferred" means the Fund's Series E Auction Rate
Cumulative Preferred Stock, $.001 par value per share and liquidation
preference $25,000 per share.
"Series E Auction Rate Preferred Basic Maintenance Amount Test" means a test
which is met if the lower of the aggregate Discounted Values of the Moody's
Eligible Assets or the S&P Eligible Assets if both Moody's and S&P are then
rating the Series E Auction Rate Preferred at the request of the Fund, or the
Eligible Assets of whichever of Moody's or S&P is then doing so if only one of
Moody's or S&P is then rating the Series E Auction Rate Preferred at the
request of the Fund, meets or exceeds the Basic Maintenance Amount with
respect to the Series E Auction Rate Preferred.
"Short-Term Money Market Instrument" means the following types of instruments
if, on the date of purchase or other acquisition thereof by the Fund, the
remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper matures
in 30 days, or A-1+ if such commercial paper matures in over
30 days;
(ii) AAAm rated money market funds
(iii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or
trust company incorporated under the laws of the United
States of America or any state thereof or the District
of Columbia or (B) a United States branch
A-10
office or agency of a foreign depository institution
(provided that such branch office or agency is subject to
banking regulation under the laws of the United States, any
state thereof or the District of Columbia) or (C) A-1+ rated
institutions;
(iv) overnight funds; and
(v) U.S. Government Obligations.
Notwithstanding the foregoing, in the case of Preferred Stock that is rated by
a single Rating Agency, "Short-Term Money Market Instruments" shall have the
meaning set forth in the Articles Supplementary of such Preferred Stock.
"Special Dividend Period" means a Dividend Period that is not a Standard
Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special Dividend
Period of more than one year, either, or any combination of (i) a Non-Call
Period and (ii) a Premium Call Period.
"Standard Dividend Period" means a Dividend Period of seven days, subject to
increase or decrease to the extent necessary for the next Auction Date and
Dividend Payment Date to each be Business Days.
"Submission Deadline" means 1:30 p.m., New York City time, on any Auction Date
or such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" has the meaning set forth in "Additional Information
Concerning the Auction for Series E Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Bid Order" has the meaning set forth in "Additional Information
Concerning the Auction for Series E Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Hold Order" has the meaning set forth in "Additional Information
Concerning the Auction for Series E Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Order" has the meaning set forth in "Additional Information
Concerning the Auction for Series E Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning
Bid Rate and Applicable Rate."
"Submitted Sell Order" has the meaning set forth in "Additional Information
Concerning the Auction for Series E Auction Rate Preferred -- Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Sufficient Clearing Bids" has the meaning set forth in "Additional
Information Concerning the Auction for Series E Auction Rate Preferred --
Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and
Applicable Rate."
A-11
"Sufficient Clearing Orders" means that all shares of Series E Auction Rate
Preferred are the subject of Submitted Hold Orders or that the number of
shares of Series E Auction Rate Preferred that are the subject of Submitted
Bids by Potential Holders specifying one or more rates equal to or less than
the Maximum Rate exceeds or equals the sum of (i) the number of shares of
Series E Auction Rate Preferred that are subject of Submitted Bids by Existing
Holders specifying one or more rates higher than the Maximum Rate and (ii) the
number of shares of Series E Auction Rate Preferred that are subject to
Submitted Sell Orders.
"Treasury Index Rate" means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities having the same number
of 30-day periods to maturity as the length of the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most
recent such statistical release will not have been published during the 15
days preceding the date of computation, the foregoing computations will be
based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government Obligations selected by the Fund.
"U.S. Government Obligations" means direct obligations of the United States or
by its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Basic Maintenance Amount. Notwithstanding the foregoing, in the case of
Preferred Stock that is rated by a single Rating Agency, "Valuation Date"
shall have the meaning set forth in the Articles Supplementary of such
Preferred Stock.
"Winning Bid Rate" means the lowest rate specified in the Submitted Bids which
if:
(i) (a) each such Submitted Bid of Existing Holders specifying
such lowest rate and
(b) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold
the shares of such series that are subject to such
Submitted Bids; and
(ii) (a) each such Submitted Bid of Potential Holders specifying
such lowest rate and
(b) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted;
would result in such Existing Holders described in subclause (i) above
continuing to hold an aggregate number of shares of Outstanding Series E
Auction Rate Preferred which, when added to the number of shares of
Outstanding Series E Auction Rate Preferred to be purchased by such Potential
Holders described in subclause (ii) above, would equal not less than the
Available shares of Series E Auction Rate Preferred.
A-12
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements (audited) for the fiscal year 2002 (1)
(i) Portfolio of Investments as of December 31, 2002
(ii) Statement of Assets and Liabilities as of December
31, 2002
(iii) Statement of Operations for the year ended December
31, 2002
(iv) Statement of Changes in Net Assets for the year
ended December 31, 2002
(v) Financial highlights for a share outstanding
throughout the periods 1994 through 2002
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) (i) Articles of Incorporation (2)
(ii) Articles Supplementary for the 7.20% Tax Advantaged
Cumulative Preferred Stock (3)
(iii) Articles Supplementary for the Series C Auction
Rate Cumulative Preferred Stock (5)
(iv) Form of Articles Supplementary for the __% Series D
Cumulative Preferred Stock (9)
(v) Form of Articles Supplementary for the Series E
Auction Rate Cumulative Preferred Stock (9)
(b) Amended and Restated By-Laws of Registrant (3)
(c) Not applicable
(d) (i) Specimen Stock Certificate:
(A) 7.20% Tax Advantaged Series B Cumulative
Preferred Stock (3)
1
(B) Series C Auction Rate Cumulative Preferred
Stock (5)
(C) ___% Series D Cumulative Preferred Stock (9)
(D) Series E Auction Rate Cumulative Preferred
Stock (9)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan of Registrant (2)
(f) Not applicable
(g) Investment Advisory Agreement between Registrant and Gabelli
Funds, LLC (6)
(h) Form of Underwriting Agreement (10)
(i) Not applicable
(j) Custodian Contract between Registrant and State Street Bank
and Trust Company (9)
(k) (i) Registrar, Transfer Agency and Service Agreement between
Registrant and EquiServe Trust Company (6)
(ii) Transfer Agent and Registrar Services Fee Agreement (6)
(iii) Form of Auction Agency Agreement for the Series C
Auction Rate Cumulative Preferred Stock (5)
(iv) Form of Auction Agency Agreement for the Series E
Auction Rate Preferred Stock (9)
(v) Form of Broker-Dealer Agreement for the Series C
Auction Rate Cumulative Preferred Stock (5)
(vi) Form of Broker-Dealer Agreement for the Series E
Auction Rate Cumulative Preferred Stock (9)
(vii) Form of DTC Agreement (9)
(1) Opinion and Consent of Miles & Stockbridge (10)
(m) Not applicable
(n) (i) Consent of independent accountant (10)
(ii) Powers of Attorney (7)
(o) Not applicable
(p) Not applicable
2
(q) Not Applicable
(r) Codes of Ethics of the Fund and the Adviser (4)
(1) Incorporated by reference to the Fund's annual report filed on
March 10, 2003.
(2) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos.
333-45951 and 811-4700; as filed with the Securities and Exchange
Commission on February 10, 1998.
(3) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to the Fund's Registration Statement on Form N-2 Nos.
333-47012 and 811-4700; as filed with the Securities and Exchange
Commission on June 11, 2001.
(4) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos.
333-62323 and 811-4700; as filed with the Securities and Exchange
Commission on December 12, 2000.
(5) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 3 to the Fund's Registration Statement on Form N-2 Nos.
333-86554 and 811-4700; as filed with the Securities and Exchange
Commission on June 25, 2002.
(6) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to the Fund's Registration Statement on Form N-2 Nos.
333-62323 and 811-4700; as filed with the Securities and Exchange
Commission on October 13, 1995.
(7) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to the Fund's Registration Statement on Form N-2 Nos.
333-86554 and 811-4700; as filed with the Securities and Exchange
Commission on June 4, 2002.
(8) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos.
333-47012 and 811-4700; as filed with the Securities and Exchange
Commission on June 18, 2002.
(9) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos.
333-106081 and 811-4700; as filed with the Securities and Exchange
Commission on October 1, 2003.
(10) Filed herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration
Statement:
3
Series D Series E
Preferred Auction Rate
--------- ------------
SEC registration fees ............................................... $ 6,068 $ 4,045
New York Stock Exchange listing fee .................................. 36,900 n/a
Rating Agency Fees ................................................... 25,000 25,000
Printing and engraving expenses ...................................... 50,000 50,000
Auditing fees and expenses ........................................... 25,000 25,000
Legal fees and expenses .............................................. 75,000 75,000
Blue Sky fees and expenses ........................................... 20,000 20,000
Miscellaneous......................................................... 12,032
------- -------
Total........................................................ $250,000 $240,000
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of December 31, 2002
Number of Record
Title of Class Holders
-------------- -------
Common Stock, par value $.001 per share 80,063
7.25% Cumulative Preferred Stock,
par value $.001 per share 8,597
7.20% Cumulative Preferred Stock,
par value $.001 per share 8,435
Series C Auction Rate Cumulative Preferred
Stock, par value $.001 per share 1
Item 29. Indemnification
The response of this Item is incorporated by reference to the caption
"Limitation of Officers' and Directors Liability" in the Part B of this
Registration Statement.
Insofar as indemnification for liability arising under the Securities
Act may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered. Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
The Investment Adviser, a limited liability company organized under
the laws of the State of New York, acts as investment adviser to the
Registrant. The Registrant is fulfilling the requirement of this Item
4
30 to provide a list of the officers and directors of the Investment Adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by the Investment Adviser or
those officers and directors during the past two years, by incorporating by
reference the information contained in the Form ADV of the Investment Adviser
filed with the commission pursuant to the Investment Advisers Act of 1940
(Commission File No. 801-26202).
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at
the office of the Investment Adviser at One Corporate Center, Rye, New York
10580-1422, in part at the offices of the Custodian, Boston Safe Deposit and
Trust Company, One Boston Place, Boston, Massachusetts 02108, at the offices
of the Fund's Administrator, PFPC, Inc, 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406, and in part at the offices of EquiServe Trust Company,
N.A., PO Box 43025, Providence, RI 02940-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this
registration statement, its net asset value declines more than ten
percent from its net asset value, as of the effective date of the
registration statement or its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424 (b) if, in the
aggregate, the changes in volume and price
represent no more than 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
5
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement or any material
change to such information in the registration
statement;
2. To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
3. The undersigned registrant hereby undertakes to supplement
the prospectus, after expiration of the subscription period,
to set forth the results of the subscription offer, and the
terms of any subsequent raftering thereof.
5. 1. Registrant undertakes that, for the purpose of
determining any liability under the Securities Act the
information omitted from the form of prospectus filed as
part of the Registration Statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 497(h) will be deemed to be a
part of the Registration Statement as of the time it was
declared effective.
2. Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed
to be a new Registration Statement relating to the
securities offered therein, and the offering of such
securities at that time will be deemed to be the initial
bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information constituting Part B of this Registration Statement.
6
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, this Registrant's Registration Statement has been signed on
behalf of the Registrant, in the City of Rye, State of New York, on the 1st
day of October, 2003.
THE GABELLI EQUITY TRUST INC.
By: /s/ Bruce N. Alpert
------------------------
Bruce N. Alpert
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities set forth below on the 1st day of October, 2003.
Signature Title
* Director, Chairman and Chief
------------------------------------ Investment Officer
Mario J. Gabelli
* Director
------------------------------------
Thomas E. Bratter
* Director
------------------------------------
Anthony J. Colavita
* Director
------------------------------------
James P. Conn
* Director
------------------------------------
Frank J. Fahrenkopf, Jr.
* Director
------------------------------------
Arthur V. Ferrara
* Director
------------------------------------
Karl Otto Pohl
* Director
------------------------------------
Anthony R. Pustorino
* Director
------------------------------------
Salvatore J. Zizza
/s/ Bruce N. Alpert President
-----------------------------------
Bruce N. Alpert
Attorney-in-Fact
* Pursuant to a Power of Attorney.
7
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99 (a) (i) Articles of Incorporation*
EX-99 (a) (ii) Articles Supplementary relating to the
7.20% Cumulative Preferred Stock*
EX-99 (a) (iii) Articles Supplementary relating to the
Series C Auction Rate Cumulative Preferred Stock*
EX-99 (a) (iv) Form of Articles Supplementary relating
to the __% Series D Cumulative Preferred Stock*
EX-99 (a) (v) Form of Articles Supplementary relating
to the Series E Auction Rate
Cumulative Preferred*
EX-99 (b) Amended and Restated By-Laws*
EX-99 (d) (i) (A) Specimen Stock Certificate, 7.20% Tax Advantaged
Cumulative Preferred Stock*
EX-99 (d) (i) (B) Specimen Stock Certificate, Series C Auction Rate
Preferred Cumulative Preferred Stock*
EX-99 (d) (i) (C) Specimen Stock Certificate, __% Series D
Cumulative Preferred Stock*
EX-99 (d) (i) (D) Specimen Stock Certificate, Series E Auction Rate
Cumulative Preferred Stock*
EX-99 (e) Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan*
EX-99 (g) Investment Advisory Agreement between Registrant
and Gabelli Funds, LLC*
EX-99 (h) Form of Underwriting Agreement
EX-99 (j) Custodian Agreement between Registrant and State
Street Bank and Trust Company*
EX-99 (k) (i) Registrar, Transfer Agency and Service Agreement
between Registrant and EquiServe Trust Company*
EX-99 (k) (ii) Form of Auction Agency Agreement*
8
EX-99 (k) (iii) Form of Broker-Dealer Agreement*
EX-99 (k) (iv) Form of DTC Agreement*
EX-99 (1) Opinion and Consent of Miles & Stockbridge
EX-99 (n) (i) Consent of PricewaterhouseCoopers LLP
EX-99 (n) (ii) Powers of Attorney*
EX-99 (r) Code of Ethics*
*Previously filed and incorporated by reference.
9