As filed with the Securities and Exchange Commission on March 11, 2003
Securities Act File No. 333-102494
Investment Company Act File No. 811-05715
===============================================================================
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. 9
(Check Appropriate Box or Boxes)
________________________
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
(Exact Name of Registrant as Specified in Charter)
________________________
One Corporate Center
Rye, New York 10580-1434
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Convertible and Income Securities Fund 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 Convertible and Income Simpson Thacher & Bartlett
Meagher & Flom LLP Securities Fund Inc. 425 Lexington Avenue
Four Times Square One Corporate Center New York, New York 10017
New York, New York 10036 Rye, New York 10580-1422 (212) 455-2000
(212) 735-3000 (914) 921-5100
________________________
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 of
Amount Being Offering Price Offering Registration
Title of Securities Registered Per Share Price (1) Fee(2)
------------------- ------------------ -------------- ------------- -------------
Series B __% Cumulative 1,000,000 Shares $25 $25,000,000 $1,907.50
Preferred Stock
Series C Auction Rate Cumulative
Preferred Stock 1,000 Shares $25,000 $25,000,000 $1,907.50
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $230 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.
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
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PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Page.......... Outside Front Cover 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 Objective and Policies
8. General Description of the
Registrant....................................... Outside Front Cover Page; Summary; The Fund;
Investment Objective and Policies; Risk Factors &
Special Considerations; How the Fund Manages
Risk; Description of Series B Preferred and
Series C 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
Objective and Policies; Description of Series B
Preferred and Series C Auction Rate Preferred;
Description of Capital Stock and Other Securities;
Taxation
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 Objective and
Policies......................................... Investment Objective 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.
[flag]
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 MARCH 11, 2003
PROSPECTUS [GABELLI LOGO]
The Gabelli
Convertible and Income Securities Fund Inc.
1,000,000 Shares, Series B % Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
1,000 Shares, Series C Auction Rate Cumulative Preferred Stock
(Liquidation Preference $25,000 per Share)
____________
The Gabelli Convertible and Income Securities Fund Inc., or the
Fund, is a diversified, closed-end management investment company that has
an investment objective of a high level of total return on its assets. The
Fund's investments are selected by its Investment Adviser, Gabelli Funds,
LLC. The Fund seeks to achieve its investment objective through a
combination of current income and capital appreciation. Under normal
circumstances the Fund will invest at least 80% of its total assets in
securities that are convertible into or represent the right to acquire
common stock, and in other debt or equity securities that are expected to
periodically accrue or generate income for their holders.
This prospectus describes shares of the Fund's Series B %
Cumulative Preferred Stock (the "Series B Preferred"), liquidation
preference $25 per share. Dividends on shares of Series B Preferred issued
within 30 days of the original Series B Preferred issue date are cumulative
from such original issue date at the annual rate of % of the liquidation
preference of $25 per share and are payable quarterly 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 C
Auction Rate Cumulative Preferred Stock (the "Series C Auction Rate
Preferred"), liquidation preference $25,000 per share. The dividend rate
for the Series C Auction Rate Preferred will vary from dividend period to
dividend period. The annual dividend rate for the initial dividend period
for the Series C 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 C 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, $50 million
of preferred stock of either Series B Preferred, or Series C Auction Rate
Preferred, or a combination of both series.
____________
Investing in our Series B Preferred or Series C Auction Rate
Preferred involves risks. See "Risk Factors and Special Considerations"
beginning on page 34.
____________
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.
____________
Per Share of Per Share of Series C
Series B Preferred Total Auction Rate Preferred Total
------------------ ----- ----------------------- -----
Public Offering Price(1) $25 $25,000,000 $25,000 $25,000,000
Underwriting Discount(2) $ $ $ $
Proceeds to the Fund
(before expenses)(3) $ $ $ $
_________________
(1) Plus accumulated dividends, if any, from .
(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 $ .
____________
The shares of Series B Preferred and/or Series C 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 B Preferred or Series C Auction Rate
Preferred will be made in book-entry form through the facilities of The
Depository Trust Company on or about , 2003.
____________
Salomon Smith Barney
Gabelli & Company, Inc.
, 2003
(Continued from previous page)
Application has been made to list the Series B Preferred on the
New York Stock Exchange. If offered, trading of the Series B 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 B Preferred. See "Underwriting."
The Series C Auction Rate Preferred will not be listed on an
exchange. Investors may only buy or sell Series C 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 C 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 objective and
policies. See "Investment Objective and Polices" beginning on page 25 .
The Fund expects that dividends paid on the Series B Preferred and
Series C Auction Rate Preferred will consist of long-term capital gains
(consisting of 20% federal tax rate capital gains from the sale of assets
held longer than 12 months), ordinary income (including net investment
income and short-term capital gains), and, in certain circumstances, a
return of capital. Over the past one, three and five fiscal years ending
December 31, 2002, the distributions of taxable income by the Fund
consisted of 0.00%, 31.37%, and 31.75% long-term capital gains. No
assurance can be given, however, as to what percentage, if any, of the
dividends paid on the Series B Preferred or Series C Auction Rate Preferred
will consist of long-term capital gains, which are taxed at lower rates for
individuals than ordinary income.
Neither the Series B Preferred nor the Series C Auction Rate
Preferred may be issued unless it is rated Aaa by Moody's Investors
Service, Inc. ("Moody's"). In addition, the Series C Auction Rate Preferred
may not be issued unless it is also rated AAA by Fitch, Inc. ("Fitch"). In
order to keep these ratings, the Fund will be required to maintain a
minimum discounted asset coverage with respect to its outstanding Series B
Preferred and Series C Auction Rate Preferred under guidelines established
by each of Moody's and Fitch. See "Description of the Series B Preferred
and Series C 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 (the "1940 Act"). If the Fund fails to
maintain any of these minimum asset coverage requirements, the Fund can
require, at its option, consistent with its Charter and the requirements of
the 1940 Act, that some or all of its outstanding preferred stock,
including the Series B Preferred or Series C Auction Rate Preferred, be
sold back to it (redeemed). Otherwise, prior to March , 2008 the Series B
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 1940 Act),
the Fund, at its option, may redeem (i) the Series B Preferred beginning on
March , 2008 and (ii) the Series C 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 Series B 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). In
the event the Fund redeems Series C 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.
This prospectus concisely sets forth important information about
the Fund that you should know before deciding whether to invest in Series B
Preferred or Series C Auction Rate Preferred. You should read this
prospectus and retain it for future reference.
The Fund has also filed with the Securities Exchange Commission a
Statement of Additional Information, dated March , 2003 (the "SAI"), which
contains additional information about the Fund. The SAI is incorporated by
reference in its entirety into this prospectus. You can review the table of
contents of the SAI on page of this prospectus. You may request a free copy
of the SAI 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 SAI on the Securities and Exchange Commission's web
site (http://www.sec.gov).
Certain persons participating in the offering of Series B
Preferred, in the event they are offered, may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Series B
Preferred, including the entry of stabilizing bids, syndicate covering
transactions or the imposition of penalty bids. For a description of these
activities, see "Underwriting."
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. You should assume
that the information appearing in this prospectus is accurate as of the
date on the front cover of this prospectus only.
------------------------------------
TABLE OF CONTENTS
Page
Summary .......................................................................1
Tax Attributes of Preferred Stock Dividends...................................19
Financial Highlights..........................................................22
Use of Proceeds...............................................................24
The Fund......................................................................24
Capitalization................................................................25
Investment Objective and Policies.............................................25
Risk Factors and Special Considerations.......................................34
How the Fund Manages Risk.....................................................42
Management of the Fund........................................................44
Portfolio Transactions........................................................46
Dividends and Distributions...................................................46
Description of Series B Preferred and Series C Auction
Rate Preferred..............................................................48
The Auction of Series C Auction Rate Preferred................................60
Description of Capital Stock and Other Securities.............................64
Taxation......................................................................66
Anti-takeover Provisions of the Charter and By-Laws...........................69
Custodian, Transfer Agent, Auction Agent and Dividend-
Disbursing Agent............................................................70
Underwriting..................................................................71
Legal Matters.................................................................73
Experts.......................................................................73
Additional Information........................................................74
Special Note Regarding Forward-Looking Statements.............................74
Table of Contents of SAI......................................................75
Appendix A...................................................................A-1
SUMMARY
This is only a summary. You should review the more detailed
information contained in this prospectus and the SAI.
The Fund................................ The Fund is a closed-end, diversified, management investment
company. Prior to March 31, 1995, the Fund operated as an
open-end, diversified, management investment company. The
Fund was incorporated in Maryland on December 19, 1988. The
Fund's outstanding shares of common stock, par value $.001 per
share, are listed and traded on the NYSE. As of December 31,
2002, the sum of the net assets of the Fund plus the liquidation
value of the Fund's outstanding preferred stock ($15 million) was
approximately $108.8 million. As of December 31, 2002, the
Fund had outstanding 11,113,431 shares of common stock and
600,000 shares of 8% Cumulative Preferred Stock, liquidation
preference $25 per share (the "Series A Preferred"). The Fund
redeemed all of its outstanding Series A Preferred on February
11, 2003.
The Offering............................ The Fund offers by this prospectus, in the aggregate, $50 million
of preferred stock of either Series B Preferred or Series C
Auction Rate Preferred, or a combination of both such series.
The Series B Preferred and/or Series C Auction Rate Preferred
are being offered by Salomon Smith Barney Inc. and Gabelli &
Company, Inc. as underwriters. Upon issuance, the Series B
Preferred and the Series C Auction Rate Preferred will have the
same seniority with respect to dividends and liquidation
preference.
Series B Preferred. The Fund is offering 1,000,000 shares of
% Series B Cumulative Preferred, par value $.001 per share,
liquidation preference $25 per share, at a purchase price of $25
per share. Dividends on the shares of Series B Preferred will
accumulate from the date on which such shares are issued;
provided, however, that any shares of Series B Preferred issued
within 30 days of the original issue date of the series will
accumulate dividends from the series' original date of issue.
Application has been made to list the Series B Preferred on the
New York Stock Exchange.
Series C Auction Rate Preferred. The Fund is offering 1,000
shares of Series C 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 C Auction Rate Preferred is
issued.
The Series C Auction Rate Preferred will not be listed on an
exchange. Instead, investors may buy or sell Series C 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 B Preferred or Series C Auction
Rate Preferred will not receive certificates representing
ownership of their shares. The securities depository (The
Depository Trust Company or any successor) or its nominee for
the account of the investor's broker-dealer will maintain record
ownership of the preferred stock shares in book-entry form. An
investor's broker-dealer, in turn, will maintain records of that
investor's beneficial ownership of preferred stock.
Investment Objective.................... The investment objective of the Fund is to seek a high level of
total return on its assets. The Fund will seek to achieve this
objective through a combination of current income and capital
appreciation by investing primarily in convertible and other
income producing securities. Under normal circumstances the
Fund will invest at least 80% of the value of its total assets
(taken at current value) in "convertible securities," i.e., securities
(bonds, debentures, notes, stocks and other similar securities)
that are convertible into common stock or other equity
securities, and "income securities," i.e., nonconvertible debt or
equity securities having a history of regular payments or accrual
of income to holders. No assurance can be given that the Fund
will achieve its investment objective. See "Investment Objective
and Policies."
Dividends
and Distributions....................... Series B Preferred. Dividends on the Series B Preferred, at the
annual rate of % of its $25 per share liquidation preference,
are cumulative from the Series B Preferred's original issue date
for any shares issued within 30 days of such 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. Any Series B
Preferred issued later than 30 days following the original issue
date will accumulate dividends from the date such shares are issued.
Series C Auction Rate Preferred. The holders of Series C
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 C Auction Rate Preferred.
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
-------- --------------- ---------------
Series C
Auction Rate
Preferred....... % , 2003
For subsequent dividend periods, the Series C 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 a special dividend period.
Dividends on shares of Series C 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 C
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 C Auction Rate
Preferred by Moody's and Fitch or (ii) in the case of a dividend
period of longer than 184 days, the applicable percentage of the
Treasury Index Rate.
Moody's Fitch 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 B Preferred and Series C Auction
Rate Preferred -- Dividends on the Series C Auction Rate
Preferred -- Maximum Rate." For example, calculated as of
September 30, 2002 and December 31, 2002, respectively, the
maximum rate, approximately, for the Series C Auction Rate
Preferred (assuming a rating of Aa3 or above by Moody's and
AA- or above by Fitch) would have been approximately 2.57% and
1.92%, for dividend periods of 90 days, and approximately 2.90%
and 2.57% 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 B Preferred and
Series C Auction Rate Preferred -- Dividends on the Series C
Auction Rate Preferred" and "The Auction of Series C 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 B Preferred
and/or Series C Auction Rate Preferred as to the payment of
dividends, any dividends being paid on the shares of such
preferred stock (including any outstanding Series B Preferred
and Series C 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 net
investment income and net capital gain 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.
--------
* Dividend periods presented for illustrative purposes only.
Actual dividend periods may be of greater or lesser duration.
Common Stock. In order to allow its holders of common stock 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 of Directors, of paying
distributions on its common stock of 8% of average quarter-end
net assets attributable to common stock. For the fiscal year
ending December 31, 2002, 64% of the distributions paid by the
Fund with respect to its common stock consisted of a return of
capital. The Fund had not previously returned capital as part of
distributions on its common stock since 1995, the year the Fund
began operating as a closed-end fund. The Fund's Board of
Directors monitors and reviews the Fund's common stock
distribution policy on a regular basis. See "Dividends and
Distributions."
Auction Procedures...................... You may buy, sell or hold Series C 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 C
Auction Rate Preferred, but each dividend rate will not be higher
than the then-maximum rate. See "Description of the Series B
Preferred and Series C Auction Rate Preferred -- Dividends on
the Series C Auction Rate Preferred."
If you own shares of Series C Auction Rate Preferred, you may
instruct your broker-dealer to enter one of three kinds of order 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
C 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 C
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 C 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 C Auction Rate Preferred. You may also enter an
order to buy additional Series C Auction Rate Preferred. All
orders must be for whole shares. All orders you submit are
irrevocable. There is a fixed number of Series C 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
C Auction Rate Preferred and general economic conditions
including current interest rates. If you own Series C 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 C 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 C 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 C 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 C Auction Rate Preferred. A broker-dealer's
failure to submit orders for Series C 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 C 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 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 C 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 C 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 C 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 C 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 C Auction Rate Preferred available for purchase in the
auction.
If the number of Series C 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 C 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 to sell any or all of the
Series C 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 C Auction
Rate Preferred and in so doing to help protect the earnings
available to pay dividends on common shares, and to serve as
the dividend rate in the event of a failed auction (that is, an
auction where there are more Series C 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 C 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 then-current "AA" Financial Composite Commercial Paper
Rate.
The auction procedures include a pro rata allocation of Series C
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
C 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 The Depository Trust Company.
Purchasers will pay for their Series C Auction Rate Preferred
through broker-dealers in same-day funds to The Depository
Trust Company against delivery to the broker-dealers. The
Depository Trust Company 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 C 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 C Auction Rate Preferred normally will be held every
Tuesday (or the next preceding business day if Tuesday is a
holiday), and each subsequent dividend period for the Series C
Auction Rate Preferred normally will begin on the following
Wednesday.
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. See "The Auction of Series C Auction Rate Preferred."
Potential Tax Benefit
to Certain Investors.................... Most individuals pay federal income tax at a lower rate on long
term capital gains than on ordinary income and short-term
capital gains. For individuals in the highest tax brackets this
differential currently can be as great as 18.6%, the difference
between 38.6% on ordinary income and short-term capital gains
and 20.0% on long-term capital gains. In accordance with the
current view of the Internal Revenue Service, the Fund intends
to allocate its net long-term capital gain and ordinary income
(including net short-term capital gain and investment income)
proportionately between its common stock and preferred stock.
Over the past one, three and five fiscal years ending December
31, 2002, the distributions of taxable income by the Fund
consisted of 0.00%, 31.37%, and 31.75% long-term capital
gains. If the Fund is able in future years to pay a portion of its
distributions in the form of long-term capital gain distributions,
most individual investors will accordingly realize a tax benefit
and pay a lower rate of federal income tax on their Series B
Preferred and/or Series C Auction Rate Preferred dividends than
if the Fund did not distribute long-term capital gains. See "Tax
Attributes of Preferred Stock Dividends." No assurance can be
given as to what, if any, portion of the Fund's dividends in future
years will consist of long-term capital gains.
Rating and Asset
Coverage Requirements................... Series B Preferred. Before it can be issued, the Series B
Preferred must receive a rating of Aaa from Moody's Investors
Service, Inc. The Fund's Articles Supplementary, setting forth
the rights and preferences of the Series B Preferred, contain
certain tests that the Fund must satisfy to obtain and maintain a
rating of Aaa from Moody's on the Series B Preferred. See
"Description of the Series B Preferred and Series C Auction
Rate Preferred-- Rating Agency Guidelines."
Series C Auction Rate Preferred. Before it can be issued, the
Series C Auction Rate Preferred must receive both a rating of
Aaa from Moody's and a rating of AAA from Fitch. As with the
Series B Preferred, the Articles Supplementary of the Fund
setting forth the rights and preferences of the Series C 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 Fitch. See "Description of the Series B Preferred and
Series C Auction Rate Preferred -- Rating Agency Guidelines."
Asset Coverage Requirements. Under the asset coverage tests to
which each of the Series B Preferred and/or Series C 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 B Preferred and Series C Auction
Rate Preferred -- Rating Agency Guidelines") for each such
series calculated pursuant to the applicable 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 1940 Act) with respect to all outstanding preferred stock of
the Fund, including the Series B Preferred and the Series C
Auction Rate Preferred. See "Description of the Series B
Preferred and Series C Auction Rate Preferred -- Asset
Maintenance Requirements."
The Fund estimates that if the shares offered hereby had been
issued and sold as of February 14, 2003, the asset coverage
under the 1940 Act would have been approximately 290%
immediately following such issuance and sale (after giving
effect to the deduction of the underwriting discounts and
estimated offering expenses for such shares of $1,500,000). The
asset coverage would have been computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($144,898,943) divided by senior securities representing
indebtedness plus liquidation preference of each class of
preferred stock ($50,000,000), expressed as a percentage = 290%.
The Articles Supplementary for each of the Series B Preferred
and the Series C Auction Rate Preferred, which contain the
technical provisions 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 SEC
(http://www.sec.gov).
Mandatory
Redemption.............................. The Series B Preferred and the Series C 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 each of the applicable rating
agency guidelines and the 1940 Act by 10%.
With respect to the Series B 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 C 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 date
fixed for redemption, plus, in the case of Series C 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 B Preferred and Series
C Auction Rate Preferred -- Redemption -- Mandatory
Redemption."
In the event of a mandatory redemption, such redemption will be
made from the Series B Preferred, the Series C 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 B Preferred and/or the
Series C Auction Rate Preferred as follows:
Series B Preferred. Commencing on March , 2008 and at any
time thereafter, the Fund at its option may redeem the Series B
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 B Preferred are to be
redeemed, any such redemption of Series B Preferred shares will
be made pro rata in accordance with the number of such shares
held. Prior to March , 2008 the Series B 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 B Preferred and Series C Auction
Rate Preferred -- Redemption -- Optional Redemption of the
Series B Preferred."
Series C Auction Rate Preferred. The Fund generally may
redeem Series C 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 C
Auction Rate Preferred are to be redeemed, any such redemption
of Series C Auction Rate Preferred shares will be made pro rata
in accordance with the number of such shares held. See
"Description of the Series B Preferred and Series C Auction
Rate Preferred -- Redemption -- Optional Redemption of the
Series C Auction Rate Preferred."
The redemption price per Series C 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 C 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 B Preferred and Series C Auction
Rate Preferred -- Redemption -- Optional Redemption of the
Series C Auction Rate Preferred."
Voting Rights........................... At all times, holders of shares of the Fund's preferred stock
outstanding (including the Series B Preferred and/or Series C
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 the smallest number of directors that would then constitute
a 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 B Preferred, Series C
Auction Rate Preferred and any other preferred stock will vote
separately as a class on certain other matters, as required under
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 B
Preferred and/or Series C 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 holders of shares of
common stock and any other preferred stock as a single class.
See "Description of the Series B Preferred and Series C Auction
Rate Preferred -- Voting Rights."
Liquidation
Preference.............................. The liquidation preference of each share of Series B Preferred is
$25. The liquidation preference of the Series C Auction Rate
Preferred is $25,000 per share. Upon liquidation, preferred
stock shareholders 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 B Preferred and
Series C 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
objective and policies. See "Use of Proceeds."
Listing of the Series B
Preferred............................... Prior to its being offered, there has been no public market for the
Series B Preferred. Following its issuance (if issued), the Series
B Preferred is expected to be listed on the New York Stock
Exchange. However, during an initial period which is not
expected to exceed 30 days after the date of its initial issuance,
the Series B Preferred will not be listed on any securities
exchange.
Limitation on Secondary Market
Trading of the Series C
Auction Rate Preferred ................. The Series C 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 C Auction Rate Preferred
outside of auctions. There can be no assurance that a secondary
market will provide owners with liquidity. You may transfer
Series C 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 B Preferred or Series C Auction Rate Preferred you
should consider the risks carefully.
Series B Preferred. Primary risks associated with an
investment in the Series B Preferred include:
The market price for the Series B Preferred will be influenced by
changes in interest rates, the perceived credit quality of the
Series B Preferred and other factors.
During an initial period which is not expected to exceed 30 days
after the date of its issuance, the Series B Preferred will not be
listed on any securities exchange. During such period, the
underwriters intend to make a market in the Series B Preferred;
however, they have no obligation to do so. Consequently, the
Series B 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 B Preferred being liquid at any time.
Series C Auction Rate Preferred. Primary risks associated with an
investment in Series C Auction Rate Preferred, include:
If an auction fails, you may not be able to sell some or all of
your Series C Auction Rate Preferred. The Fund is not obliged
to redeem your Series C Auction Rate Preferred if an auction
fails. The underwriters are not required to make a market in the
Series C Auction Rate Preferred. No broker-dealer is obligated
to maintain a secondary market for the Series C Auction Rate
Preferred apart from the
auctions.
You may receive less than the price you paid for your Series C
Auction Rate Preferred if you sell them outside of the auction,
especially when market interest rates are rising.
In connection with the sale of the Series C Auction Rate
Preferred, the Fund may enter into interest rate swap or cap
transactions in order to reduce the impact of changes in the
dividend rate of the Series C Auction Rate Preferred or obtain
the equivalent of a fixed rate for the Series C Auction Rate
Preferred that is lower than the Fund would have to pay if it
issued fixed rate preferred shares. 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. See "How the Fund
Manages Risk-- Interest Rate Transactions."
Both the Series B Preferred and Series C Auction Rate Preferred.
An investment in either the Series B Preferred or Series C Auction
Rate Preferred also includes the following primary risks:
A rating agency could downgrade or withdraw the rating
assigned to the Series B Preferred and/or Series C 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.
The Fund may be required to redeem your Series B Preferred and/or
Series C Auction Rate Preferred to meet regulatory or rating
agency requirements or may voluntarily redeem your Series B
Preferred and/or Series C 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 B Preferred and/or Series C Auction Rate Preferred.
The Series B Preferred and/or Series C 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 B Preferred
and/or Series C 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 B Preferred and/or
Series C 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.
The Fund invests a significant portion of its assets in convertible
securities. Many convertible securities are not investment grade,
that is, not rated within the four highest categories by Moody's
and Standard & Poor's Ratings Services. To the extent that the
convertible securities and any other fixed income securities
owned by the Fund are rated lower than investment grade, or are
not rated, there would be a greater risk as to the timely
repayment of the principal of, and timely payment of interest or
dividends on, those securities. Convertible debt securities
(which generally are rated lower than investment grade) and
fixed income securities that are rated lower than investment
grade, or not rated but of similar quality, are commonly
described as "junk bonds." See "Risk Factors and Special
Considerations -- Asset Class Risks."
The Fund may invest up to 25% of its total assets in securities of
foreign issuers. The Fund may also purchase sponsored
American Depository Receipts or U.S. denominated securities of
foreign issuers, which will not be included in the Fund's 25%
foreign securities limitation. Investing in securities of foreign
companies and 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 Investment Adviser (as hereinafter defined) 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."
Federal Income Tax
Considerations.......................... 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 "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 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
administrator. Notwithstanding the foregoing, the Investment
Adviser will 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 B
Preferred or Series C 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 B Preferred, the stated
annual dividend rate of such series and (ii) in the case of the
Series C Auction Rate Preferred, the dividend rate for the Series
C Auction Rate Preferred at the beginning of such year
(including the anticipated cost of a swap or cap if the Fund
hedges its Series C Auction Rate Preferred dividend
obligations), in every case prorated during the year such series is
issued and the final year such series is outstanding. See
"Management of the Fund."
Repurchase of Common
Stock and Anti-takeover
Provisions.............................. The Fund is authorized to repurchase up to 500,000 shares of its
common stock in the open market when the common stock is
trading at a discount of 10% or more (or such other percentage
as the Fund's Board of Directors may determine from time to
time) from net asset value. Such repurchases are subject 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
December 31, 2002, the Fund has repurchased in the open
market 305,200 shares of its common stock under this
authorization. See "Description of Capital Stock and Other
Securities-- Common Stock." 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, and the affirmative vote of the holders of 75% of the
outstanding shares of the Fund and the vote of a majority (as
defined in the 1940 Act) of the holders of preferred shares,
voting as a single class, are 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."
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 with respect to the common stock of the Fund.
Series B Preferred. EquiServe will also serve as the transfer
agent, registrar, dividend and paying agent and redemption agent
with respect to the Series B Preferred.
Series C 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 C
Auction Rate Preferred.
Interest Rate Transactions.............. In connection with the sale of the Series C Auction Rate
Preferred, the Fund may enter into interest rate swap or cap
transactions in order to reduce the impact of changes in the
dividend rate of the Series C Auction Rate Preferred or obtain
the equivalent of a fixed rate for the Series C Auction Rate
Preferred that is lower than the Fund would have to pay if it
issued fixed rate preferred shares. 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 the
Series C Auction Rate Preferred. 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 C 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 C
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, consistent
with its Charter and the requirements of the 1940 Act, and in
certain circumstances will be required to, mandatorily redeem
some or all of these shares (including the Series C 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 maintain in a segregated account with its custodian
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 C Auction Rate Preferred in a
notional amount in excess of the outstanding amount of the
Series C Auction Rate Preferred. See "How the Fund Manages
Risk -- Interest Rate Transactions" for additional information.
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially
all of its net capital gains and net investment income (including
short-term capital gain). The Fund operates as a regulated investment
company under the Internal Revenue Code of 1986, as amended, (the "Code")
and distributions by a regulated investment company generally retain their
character as capital gain or ordinary income when received by individual
investors who hold its preferred or common stock. Thus, dividends paid by
the Fund to holders of the Series B Preferred or Series C Auction Rate
Preferred may, for federal income tax purposes, consist of varying
proportions of long-term capital gain, ordinary income and/or returns of
capital.
Capital gain on assets held longer than 12 months generally is
currently taxable to individuals at a maximum rate of 20.0% (or 18.0% for
capital assets that have been held for more than five years, the holding
period of which began after December 31, 2000). Net investment income,
which includes short- term capital gain of the Fund, is currently taxable
to individuals at a maximum rate of 38.6%.
Although the Fund is not managed using a tax-focused investment
strategy and does not seek to achieve any particular distribution
composition, individual investors in the Series B Preferred or Series C
Auction Rate Preferred would, under current federal income tax law, realize
a tax advantage on their investment to the extent that distributions by the
Fund to its stockholders are composed of long-term capital gain which is
taxed at a lower rate than ordinary income. In contrast, preferred stock
dividends distributed by corporations that are not regulated investment
companies are generally taxed, for federal income tax purposes, as ordinary
income.
Over the past one, three and five fiscal years ending December 31,
2002, the distributions of taxable income by the Fund consisted of 0.00%,
31.37%, and 31.75% long-term capital gains. The fiscal year ending December
31, 2002 was the first year since the Fund's reorganization in 1995 as a
closed-end fund for which its distributions of taxable income failed to
include a portion of long-term capital gain. Given current market
conditions, there is no assurance that over the next several years the
percentage of its taxable distributions that consist of long-term capital
gain will again approach historical levels. An investment by an individual
in the common stock or preferred stock of a regulated investment company
whose dividends consist of a larger percentage of long-term capital gain
would be expected to realize a proportionately higher tax advantage as
compared to dividends on the Series B Preferred or Series C Auction Rate
Preferred.
Corporate taxpayers are subject to a 35% tax on capital gain and
ordinary income dividends. In addition, corporate taxpayers that are
eligible for the dividends received deduction on dividends that constitute
ordinary income will not be able to utilize that deduction with respect to
Fund dividends that constitute long-term capital gain, and so may incur a
tax disadvantage by holding stock in the Fund.
The Bush Administration has announced a proposal to reduce or
eliminate the tax on dividends; however, many details of the proposal
(including how the proposal would apply to dividends paid by a regulated
investment company) have not been specified. Moreover, the prospects for
this proposal are unclear. Accordingly, it is not possible to evaluate how
this proposal might affect the taxation of the Fund's stockholders.
The federal income tax characteristics of the Fund and the
taxation of its stockholders are described more fully under "Taxation."
The following tables show examples of the pure ordinary income
equivalent yield that would be generated by the stated dividend rate on the
Series B Preferred and Series C Auction Rate Preferred, respectively,
assuming distributions for federal income tax purposes consisting of
different proportions of long-term capital gain and ordinary income
(including short-term capital gain) for an individual in the 38.6% and
30.0% federal marginal income tax brackets. In reading these tables, you
should understand that a number of factors could affect the actual
composition for federal income tax purposes of the Fund's distributions
each year. Such factors include (i) the Fund's investment performance for
any particular year, which may result in distributions of varying
proportions of long-term capital gain, ordinary income and/or return of
capital and (ii) revocation or revision of the Internal Revenue Service
revenue ruling requiring the proportionate allocation of types of income
among the holders of various classes of a regulated investment company's
capital stock.
These tables are for illustrative purposes only and cannot be taken as an
indication of the actual composition for federal income tax purposes of the
Fund's future distributions.
Series B Preferred
------------------
Series B Preferred Series B Preferred
Illustrative Annual Illustrative Annual
Dividend Rate Dividend Rate
---------------------------- ---------------------------------
5.75% 6.25% 5.75% 6.25%
Percentage of Series B Preferred
Stated Annual Dividend Comprised of
--------------------------------------- Tax Equivalent Yield for an Tax Equivalent Yield for an
Long-Term Ordinary Individual in the 38.6% Individual in the 30.0%
Capital Gains Income federal Income Tax Bracket(1) federal Income Tax Bracket(1)
------------- ------ ---------------------------- ---------------------------------
33.3% 66.7% 6.33% 6.88% 6.02% 6.55%
30.0% 70.0% 6.27% 6.82% 6.00% 6.52%
20.0% 80.0% 6.10% 6.63% 5.91% 6.43%
10.0% 90.0% 5.92% 6.44% 5.83% 6.34%
0.0% 100.0% 5.75% 6.25% 5.75% 6.25%
Series C Auction Rate Preferred
-------------------------------
Series C Auction Rate Series C Auction Rate
Preferred Illustrative Annual Preferred Illustrative
Dividend Rate* Annual Dividend Rate*
------------------------------------- ------------------------------
1.00% 1.50% 1.00% 1.50%
Percentage of Series C Auction Rate
Preferred Share Illustrative Annual
Dividend Comprised of
---------------------------------------------
Tax Equivalent Yield
for an Individual in the
Tax Equivalent Yield for an 30.0%
Long-Term Ordinary Individual in the 38.6% federal Income Tax
Capital Gains Income federal Income Tax Bracket(1) Bracket(1)
-------------- ------------- ------------------------------------- ------------------------------
33.3% 66.7% 1.10% 1.65% 1.05% 1.57%
30.0% 70.0% 1.09% 1.64% 1.04% 1.56%
20.0% 80.0% 1.06% 1.59% 1.03% 1.54%
10.0% 90.0% 1.03% 1.55% 1.01% 1.52%
0.0% 100.0% 1.00% 1.50% 1.00% 1.50%
---------------------------
* Actual dividend rates for the Series C Auction Rate Preferred will
be determined based upon the results of periodic auctions. See
"Description of the Series B Preferred and Series C Auction Rate
Preferred -- Dividends on the Series C Auction Rate Preferred."
(1) Annual taxable income levels for individuals corresponding to the
2003 federal marginal tax brackets are as follows:
2003 Federal
Income Tax
Bracket+ Single Joint
------------ ------ -----
38.6% over $311,950 over $311,950
35.0% over $143,500 - $311,950 over $174,700 - $311,950
30.0% over $68,800 - $143,500 over $114,650 - $174,700
27.0% over $28,400 - $68,800 over $47,450 - $114,650
15.0% over $6,000 - $28,400 over $12,000 - $47,450
10.0% up to and including $6,000 up to and including $6,000
Your federal marginal income tax rates may exceed the rates shown in
the above tables due to the reduction, or possible elimination, of
the personal exemption deduction for high-income taxpayers and an
overall limit on itemized deductions. Income may be subject to
certain state, local and foreign taxes. If you pay alternative
minimum tax, or AMT, equivalent yields may be lower than those shown
above. The tax rates shown above do not apply to corporate
taxpayers.
+ The Economic Growth and Tax Relief Reconciliation Act of 2001
creates a new 10 percent income tax bracket and reduces the tax
rates applicable to ordinary income over a six year phase-in period.
Beginning in the taxable year 2006, ordinary income will be subject
to a 35% maximum rate, with approximately proportionate reductions
in the other ordinary rates.
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
each of the five years ended December 31, 2002 has been audited by
PricewaterhouseCoopers LLP, 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:
Year Ended December 31,
-------------------------------------------------------
2002 2001 2000 1999 1998 1997
------------------------------------------------------
Operating performance:
Net asset value, beginning of period................. $9.92 $10.02 $11.40 $11.45 $11.48 $11.08
------------------------------------------------------
Net investment income................................ 0.49 0.68 0.72 0.51 0.53 0.49
Net realized and unrealized gain (loss) on
investments......................................... (0.76) 0.32 (0.52) 0.77 0.65 1.23
----- ---- ----- ---- ---- ----
Total from investment operations..................... (0.27) 1.00 0.20 1.28 1.18 1.72
------------------------------------------------------
Distributions to preferred stock shareholders:
Net investment income................................ (0.28) (0.18) (0.13) (0.11) (0.13) (0.08)
Net realized gain on investments..................... -- (0.12) (0.17) (0.19) (0.17) (0.11)
------------------------------------------------------
Total distributions to preferred stock
shareholders........................................ (0.28) (0.30) (0.30) (0.30) (0.30) (0.19)
------------------------------------------------------
Net increase (decrease) in net assets attributable
to common stock shareholders resulting
from operations...................................... (0.55) 0.70 (0.10) 0.98 0.88 1.53
------------------------------------------------------
Distributions to common stock shareholders:
Net investment income................................ (0.27) (0.48) (0.57) (0.39) (0.39) (0.40)
Net realized gain on investments..................... -- (0.33) (0.73) (0.64) (0.53) (0.56)
Paid in capital...................................... (0.48) -- -- -- -- --
------------------------------------------------------
Total distributions to common stock
shareholders........................................ (0.75) (0.81) (1.30) (1.03) (0.92) (0.96)
------------------------------------------------------
Capital share transactions:
Increase in net asset value from common share
transactions........................................ 0.02 0.01 0.02 -- 0.01 0.01
Decrease in net asset value from shares issued in
rights offering..................................... (0.20) -- -- -- -- --
Preferred share offering costs charged to
paid-in capital..................................... 0.00 -- -- -- -- (0.18)
------------------------------------------------------
Total capital share transactions..................... (0.18) 0.01 0.02 0.00 0.01 0.17
------------------------------------------------------
Net asset value attributable to common stock
shareholders, end of period.......................... $8.44 $9.92 $10.02 $11.40 $11.45 11.48
======================================================
Net asset value total return(+)...................... (7.0)% 7.0% 0.0% 9.4% 8.3% 13.5%
======================================================
Market value, end of period.......................... $8.55 $10.90 $ 9.13 10.56 $11.25 $10.31
------------------------------------------------------
Total investment return(++).......................... (14.2)% 29.1% (1.7)% 3.2% 18.4% 22.2%
======================================================
Ratios and supplemental data:
Net assets including liquidation value of pre-
ferred shares, end of period (in 000's)............. $108,774 $110,074 $108,066 $120,179 $120,726 $122,382
Net assets attributable to common shares, end of
period (in 000's)................................... $ 93,774 $ 80,074 $ 78,066 $ 90,179 $ 90,726 $ 92,382
Ratio of net investment income to average net
assets attributable to common shares*............... 5.32% 6.58% 6.49% 4.35% 4.54% 4.23%
Ratio of operating expenses to average net assets
attributable to common shares* (a).................. 1.58 1.46% 1.48% 1.80% 1.83% 1.68%
Ratio of operating expenses to average total net
assets including liquidation value of
preferred shares (c).............................. 1.15% 1.07% 1.10% 1.36% 1.38% 1.39%
Portfolio turnover rate.............................. 56% 59% 169% 175% 149% 243%
Cumulative Preferred Stock:
8.00% Cumulative Preferred Stock Liquidation
value, end of period (in 000's)..................... $ 15,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Total shares outstanding (in 000's).................. 600 1,200 1,200 1,200 1,200 1,200
Liquidation preference per share..................... $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00
Average market value (b)............................. $ 25.83 $ 25.80 $ 24.31 $ 25.36 $ 26.84 $ 25.69
Asset coverage....................................... 725% 367% 360% 401% 402% 408%
Asset coverage per share............................. $ 181.29 $ 91.72 $ 90.05 $ 100.15 $ 100.60 $ 101.99
-------------------------------------
See footnotes on following page.
Year Ended December 31,
1996+ 1995+ 1994+ 1993+
---------- ---------- ---------- ---------
Operating Performance:
Net asset value, beginning of period.......................... $ 11.01 $ 10.60 $ 11.52 $ 11.45
---------- ---------- ---------- ---------
Net investment income......................................... 0.49 0.53 0.69 0.76
Net realized and unrealized gain (loss)
on securities.............................................. 0.31 1.03 (0.71 0.74
---------- ---------- ---------- ---------
Total from investment operations.............................. 0.80 1.56 (0.02) 1.50
---------- ---------- ---------- ---------
Distributions to common stock shareholders:
Net investment income......................................... (0.49) (0.53) (0.69) (0.76)
Net realized gain on investments.............................. (0.24) (0.56) (0.21) (0.67)
Distributions in excess of net investment income.............. -- (0.02) -- --
Distributions in excess of net realized gains................. -- (0.01) -- --
Paid-in capital............................................... -- (0.03) -- --
---------- ---------- ---------- ----------
Total distributions........................................... (0.73) (1.15) (0.90) (1.43)
---------- ---------- ---------- ----------
Market value, end of period................................... $ 9.25 $ 10.75 -- --
========== ========== ========== =========
Net asset value, end of period................................ $ 11.08 $ 11.01 $ 10.60 $ 11.52
========== ========== ========== =========
Total Net Asset Value Return ++ (d)........................... 8.4% 15.0% (0.2)% 13.1%
Total Investment Return ++(e)................................. (7.3)% 12.3% -- --
Ratios and supplemental data:
Net assets, end of period (in thousands)...................... $ 89,659 $ 89,137 $ 112,090 $ 108,674
Ratio of operating expenses to average net assets (f)......... 1.45% 1.56% 1.31% 1.38%
Ratio of net investment income (loss) to average net assets... 4.33% 4.60% 4.77% 4.58%
Portfolio turnover rate....................................... 114% 140% 67% 45%
___________________________
(+) Based on net asset value per share, adjusted for reinvestment of
distributions.
(++) Based on market value per share, adjusted for reinvestment of
distributions.
+ No preferred stock outstanding during this period.
++ Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of distributions.
* The expense ratio and net investment income ratio do not reflect the
effect of dividend payments to preferred shareholders.
(a) The ratio of operating expenses to average net assets attributable to
common stock for the fiscal year ended December 31, 1997 does not include
a reduction of expenses for custodian fee credits on cash balances
maintained with the custodian. Including the custodian fee credit, the
ratio of operating expenses to average net assets attributable to common
stock for the year would have been 1.67%.
(b) Based on weekly prices.
(c) Amounts are attributable to both common and preferred stock assets.
(d) Based on net asset value per share, adjusted for reinvestment of all
distributions.
(e) Based on net asset value per share through March 31, 1995, the date of
conversion of the Fund to closed-end status, and market value thereafter,
adjusted for reinvestment of all distributions.
(f) Includes, for 1995, a current period expense associated with the
conversion of the Fund to closed-end Status. Without the conversion
expense, this ratio would have been 1.28% in 1995.
The following table provides information about the Fund's Series A
Preferred since its issuance in May 1997. The Fund redeemed all of its
outstanding shares of Series A Preferred on February 11, 2003. The information
has been audited by PricewaterhouseCoopers LLP, independent accountants.
Involuntary Average
Liquidation Market
Year ended Shares Asset Coverage Preference Value
December 31, Outstanding Per Share Per Share Per Share
------------ ----------- --------- --------- ---------
2002 600,000 $181.29 $25.00 $25.83
2001 1,200,000 $91.72 $25.00 $25.80
2000 1,200,000 $90.05 $25.00 $24.31
1999 1,200,000 $100.15 $25.00 $25.36
1998 1,200,000 $100.60 $25.00 $26.84
1997 1,200,000 $101.99 $25.00 $25.69
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 number of shares of Series A Preferred outstanding on
that date. Involuntary Liquidation Preference Per Share refers to the amount
holders of Series A 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 is the average of the weekly closing prices of the
Series A Preferred 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 income securities in
accordance with the Fund's investment guidelines. Thereafter, the Fund intends
to reallocate all or a portion of the offering proceeds to other long-term
income or convertible securities in accordance with the Fund's investment
guidelines as suitable investment opportunities become available.
THE FUND
The Fund was incorporated in Maryland on December 19, 1988 as an
open-end, diversified, management investment company. The Fund converted to
closed-end status after receiving stockholder approval of its Charter on
February 21, 1995 and filing of the Charter in Maryland on March 31, 1995. The
Fund's common stock is traded on the New York Stock Exchange under the symbol
"GCV." The Fund's Series A Preferred, all of which was redeemed by the Fund on
February 11, 2003, previously traded on the New York Stock Exchange under the
symbol "GCV Pr."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of February 14, 2003, and its adjusted capitalization assuming the
Series B Preferred and/or Series C Auction Rate Preferred offered in this
prospectus had been issued as of that date.
As of February 14, 2003
Actual As Adjusted
------ -----------
(Unaudited)
Preferred stock, $0.001 par value, 2,000,000 shares authorized.
(The "Actual" column reflects the Fund's outstanding capitalization
as of February 14, 2003; the "As Adjusted" column assumes the
issuance of an additional 1,000,000 shares of Series B Preferred,
liquidation preference $25 per share, and 1,000 shares of Series C
Auction Rate Preferred, liquidation preference $25,000 per share) $ 0 $ 50,000,000
Common stock, $.001 par value per share; 100,000,000 shares
authorized, 11,113,431 shares outstanding.................. 11,113 11,113
Paid-in surplus*.............................................. 104,240,469 102,740,469
Undistributed net investment income........................... 171,637 171,637
Accumulated net realized loss from investment
transactions............................................... (1,280,802) (1,280,802)
Net unrealized depreciation................................... (6,743,474) (6,743,474)
_______________ _________________
Net assets applicable to common shareholders.................. $96,398,943 $94,898,943
Net assets, plus liquidation preference of preferred stock.... $96,398,943 $144,898,943
______________
* As adjusted paid-in surplus reflects a reduction for the sales load and
estimated offering cost of the Series B Preferred and/or Series C Auction
Rate Preferred issuance of $1,500,000.
As used in this prospectus, unless otherwise noted, the Fund's
"managed assets" include the aggregate net asset value of the common shares
plus assets attributable to outstanding shares of its preferred stock, with no
deduction for the liquidation preference of such shares of 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).
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of total
return on its assets. The Fund seeks to achieve its investment objective
through a combination of current income and capital appreciation. There is no
assurance that this objective will be achieved. It is, however, a fundamental
policy of the Fund and cannot be changed without stockholder approval. Under
normal circumstances the Fund will invest at least 80% of the value of its
total assets (taken at current value) in "convertible securities," i.e.,
securities (bonds, debentures, notes, stocks and other similar securities)
that are convertible into common stock or other equity securities, and "income
securities," i.e., nonconvertible debt or equity securities having a history
of regular payments or accrual of income to holders. Securities received upon
conversion of a convertible security will not be included in the calculation
of the percentage of Fund assets invested in convertible securities but may be
retained in the Fund's portfolio to permit orderly disposition or to establish
long-term holding periods for federal income tax purposes. The Fund expects to
continue its practice of focusing on convertible securities to the extent
attractive opportunities are available.
The Fund may invest up to 20% of its total assets (taken at current
value and subject to any restrictions appearing elsewhere in this Registration
Statement) in any combination and quantity of securities that do not generate
any income, such as common stocks that do not pay dividends. In selecting any
of the foregoing securities for investment, the factors that will be
considered by the Investment Adviser include the Investment Adviser's
evaluation of the underlying value of the assets and business of the issuers
of the securities, the potential for capital appreciation, the price of the
securities, the issuer's balance sheet characteristics and the perceived
skills and integrity of the issuer's management.
During periods when it is deemed necessary for temporary defensive
purposes, the Fund may invest without limit in high quality money market
instruments, including commercial paper of domestic and foreign corporations,
certificates of deposit, bankers' acceptances and other obligations of
domestic and foreign banks and obligations issued or guaranteed by the United
States government, its instrumentalities or agencies and, subject to statutory
limitations, unaffiliated money market mutual funds, unless an exemptive order
permits the Fund to invest in affiliated money market funds. The yield on
these securities will, as a general matter, tend to be lower than the yield on
other securities to be purchased by the Fund. See " -- Investment Practices --
Temporary Defensive Investments."
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 interest or dividend income generated by the securities;
o the potential for capital appreciation of the securities and
any underlying common stocks;
o the prices of the securities relative to any underlying common
stock;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of sinking
funds or other protective conditions or covenants;
o the existence of any anti-dilution protections or guarantees of
the security; and
o the diversification of the Fund's portfolio as to issuers.
The Investment Adviser's investment philosophy with respect to debt
and 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.
Investment Practices
Convertible Securities. A convertible security is a bond, debenture,
note, stock or other similar security that may be converted into or exchanged
for a prescribed amount of common stock or other equity security of the same
or a different issuer within a particular period of time at a specified price
or formula. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stream of income with generally higher yields than those of common stock of
the same or similar issuers. Convertible securities are senior in rank to
common stock in a corporation's capital structure and, therefore, generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which
the convertible security sells above its value as a fixed income security.
The Fund believes that the characteristics of convertible securities
make them appropriate investments for an investment company seeking a high
level of total return on its assets. These characteristics include the
potential for capital appreciation if the value of the underlying common stock
increases, the relatively high yield received from dividend or interest
payments as compared to common stock dividends and decreased risks of decline
in value, relative to the underlying common stock due to their fixed income
nature. As a result of the conversion feature, however, the interest rate or
dividend preference on a convertible security is generally less than would be
the case if the securities were not convertible. During periods of rising
interest rates, it is possible that the potential for capital gain on a
convertible security may be less than that of a common stock equivalent if the
yield on the convertible security is at a level that causes it to sell at a
discount.
Every convertible security may be valued, on a theoretical basis, as
if it did not have a conversion privilege. This theoretical value is
determined by the yield it provides in comparison with the yields of other
securities of comparable character and quality that do not have a conversion
privilege. This theoretical value, which may change with prevailing interest
rates, the credit rating of the issuer and other pertinent factors, often
referred to as the "investment value," represents the security's theoretical
price support level.
"Conversion value" is the amount a convertible security would be
worth in market value if it were to be exchanged for the underlying equity
security pursuant to its conversion privilege. Conversion value fluctuates
directly with the price of the underlying equity security, usually common
stock. If, because of low prices for the common stock, the conversion value is
substantially below the investment value, the price of the convertible
security is governed principally by the factors described in the preceding
paragraph. If the conversion value rises near or above its investment value,
the price of the convertible security generally will rise above its investment
value and, in addition, will sell at some premium over its conversion value.
This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege. Accordingly, the conversion
value of a convertible security is subject to equity risk, that is, the risk
that the price of an equity security will fall due to general market and
economic conditions, perceptions regarding the industry in which the issuer
participates or the issuing company's particular circumstances. If the
appreciation potential of a convertible security is not realized, its
conversion value premium may not be recovered.
In its selection of convertible securities for the Fund, the
Investment Adviser will not emphasize either investment value or conversion
value, but will consider both in light of the Fund's overall investment
objective. See "Convertible Securities" in the Statement of Additional
Information. The Fund may convert a convertible security that it holds:
o when necessary to permit orderly disposition of the investment
when a convertible security approaches maturity or has been
called for redemption;
o to facilitate a sale of the position;
o if the dividend rate on the underlying common stock increases
above the yield on the convertible security; or
o whenever the Investment Adviser believes it is otherwise in the
best interests of the Fund.
Convertible securities are generally not investment grade, that is,
not rated within the four highest categories by S&P and Moody's. To the extent
that such convertible securities and other nonconvertible debt securities,
which are acquired by the Fund consistent with the factors considered by the
Investment Adviser as described in this prospectus, are rated lower than
investment grade or are not rated, there would be a greater risk as to the
timely repayment of the principal of, and timely payment of interest or
dividends on, those securities. It is expected that not more than 50% of the
Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa
or lower by Moody's or, if unrated, are of comparable quality as determined by
the Investment Adviser. Those securities and securities rated BB or lower by
S&P or Ba or lower by Moody's are often referred to in the financial press as
"junk bonds" and may include securities of issuers in default. "Junk bonds"
are considered by the rating agencies to be predominantly speculative and may
involve major risk exposure to adverse conditions. See "Risk Factors and
Special Considerations -- Asset Class Risks." Securities rated BBB by S&P or
Baa by Moody's, in the opinion of the rating agencies, also have speculative
characteristics. Securities need not meet a minimum rating standard in order
to be acceptable for investment by the Fund. See "Appendix A -- Description of
Corporate Bond Ratings."
The Fund's investments in securities of issuers in default will be
limited to not more than 5% of the total assets of the Fund. Further, the Fund
will invest in securities of issuers in default only when the Investment
Adviser believes that such issuers will emerge from bankruptcy and the value
of such securities will appreciate. By investing in securities of issuers in
default the Fund bears the risk that such issuers will not emerge from
bankruptcy or that the value of such securities will not appreciate.
The Fund has no independent limit on the amount of its net assets it
may invest in unregistered and otherwise illiquid securities and other
investments. The current intention of the Investment Adviser is not to invest
in excess of 15% of the Fund's net assets in illiquid convertible securities
or income securities. Common stockholders will be notified if the Investment
Adviser changes its intention. Investments in unregistered or otherwise
illiquid securities entail certain risks related to the fact that they cannot
be sold publicly in the United States without registration under the
Securities Act. See "Risk Factors and Special Considerations -- Asset Class
Risks."
Income Securities. Although it is the Fund's policy to invest in
convertible securities to the extent attractive opportunities are available,
the Fund may also invest in income securities other than convertible
securities that are expected to periodically accrue or generate income for
their holders. Such income securities include (i) fixed income securities such
as bonds, debentures, notes, stock, short-term discounted Treasury Bills or
certain securities of the U.S. government sponsored instrumentalities, as well
as money market mutual funds that invest in those securities, which, in the
absence of an applicable exemptive order, will not be affiliated with the
Investment Adviser, and (ii) common stocks of issuers that have historically
paid periodic dividends. Fixed income securities obligate the issuer to pay to
the holder of the security a specified return, which may be either fixed or
reset periodically in accordance with the terms of the security. Fixed income
securities generally are senior to an issuer's common stock and their holders
generally are entitled to receive amounts due before any distributions are
made to common stockholders. Common stocks, on the other hand, generally do
not obligate an issuer to make periodic distributions to holders.
The market value of fixed income securities, especially those that
provide a fixed rate of return, may be expected to rise and fall inversely
with interest rates and in general is affected by the credit rating of the
issuer, the issuer's performance and perceptions of the issuer in the market
place. The market value of callable or redeemable fixed income securities may
also be affected by the issuer's call and redemption rights. In addition, it
is possible that the issuer of fixed income securities may not be able to meet
its interest or principal obligations to holders. Further, holders of
non-convertible fixed income securities do not participate in any capital
appreciation of the issuer.
The Fund may also invest in obligations of government sponsored
instrumentalities. Unlike non- U.S. government securities, 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.
The Fund also may invest in common stock of issuers that have
historically paid periodic dividends or otherwise made distributions to common
stockholders. Unlike fixed income securities, dividend payments generally are
not guaranteed and so may be discontinued by the issuer at its discretion or
because of the issuer's inability to satisfy its liabilities. Further, an
issuer's history of paying dividends does not guarantee that it will continue
to pay dividends in the future. In addition to dividends, under certain
circumstances the holders of common stock may benefit from the capital
appreciation of the issuer.
Special Investment Methods.
Options. On behalf of the Fund, the Investment Adviser may, subject
to guidelines of the Board of Directors, purchase or sell (i.e., write)
options on securities, securities indices and foreign currencies that 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 stock 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. The Fund may not
write covered call options in an amount exceeding 25% of the value of its
total assets. The Fund's investment in OTC options is limited to 5% of its
total assets.
A call option is a contract that gives the holder of the option the
right, in return for a premium paid, to buy from the writer (seller) of the
call option the security 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
upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the
right, in return for the premium paid, to sell to the writer (seller) of the
put option the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security 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 that
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.
The Fund will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 10% of the Fund's total assets. See
"Investment Practices -- Derivative Instruments" in the SAI.
Futures Contracts and Options Thereon. On behalf of the Fund, the
Investment Adviser may, subject to 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, in accordance with regulations of
the Commodity Futures Trading Commission ("CFTC"). 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.
Under the CFTC regulations, the Investment Adviser on behalf of the
Fund (i) may purchase and sell futures contracts and options thereon for bona
fide hedging purposes, as defined under CFTC regulations, without regard to
the percentage of the Fund's assets committed to margin and option premiums,
and (ii) may enter into non-hedging transactions, provided that, immediately
thereafter, the sum of the amount of the initial margin deposits on the Fund's
existing futures positions and option premiums does not exceed 5% of the
market value of the Fund's total assets.
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 will be limited to hedging involving either specific transactions or
portfolio positions, and the amount the Fund may invest in forward currency
contracts is limited to the amount of its aggregate investments in foreign
currencies. The Fund will only enter into forward currency contracts with
parties that it believes to be creditworthy.
Short Sales Against the Box. The Fund may from time to time make
short sales of securities it owns or has the right to acquire through
conversion or exchange of other securities it owns. A short sale is "against
the box" to the extent that the Fund contemporaneously owns or has the right
to obtain at no added cost securities identical to those sold short. In a
short sale, the Fund does not immediately deliver the securities sold or
receive the proceeds from the sale. The Fund may not make short sales or
maintain a short position if it would cause more than 25% of the Fund's total
assets, taken at market value, to be held as collateral for such sales.
To secure its obligations to deliver the securities sold short, the
Fund will deposit in escrow in a separate account with its custodian an equal
amount to the securities sold short or securities convertible into, or
exchangeable for, such securities. The Fund may close out a short position by
purchasing and delivering an equal amount of the securities sold short, rather
than by delivering securities already held by the Fund, because the Fund may
want to continue to receive interest and dividend payments on securities in
its portfolio that are convertible into the securities sold short.
The Fund may make a short sale in order to hedge against market risks
when it believes that the price of a security may decline, causing a decline
in the value of a security owned by the Fund or a security convertible into,
or exchangeable for, such security, or when the Fund does not want to sell the
security it owns. Such short sale transactions may be subject to special tax
rules, one of the effects of which may be to accelerate income to the Fund.
Additionally, the Fund may use short sales in conjunction with the purchase of
a convertible security when it is determined that a convertible security can
be bought at a small conversion premium and has a yield advantage relative to
the underlying common stock sold short.
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 that furnish
collateral at least equal in value or market price to the amount of their
repurchase obligation. In a repurchase agreement, the Fund purchases a debt
security from a seller that 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 a duration of up to a week.
Repurchase agreements may be seen to be loans by the Fund collateralized by
the underlying debt obligation. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the holding period.
The value of the underlying securities will be at least equal to all times to
the total amount of the repurchase obligation, including interest. The Fund
bears a risk of loss in the event that the other party to a repurchase
agreement defaults on its obligations and the Fund is delayed in or prevented
from exercising its rights to dispose of the collateral securities, including
the risk of a possible decline in the value of the underlying securities
during the period in which it seeks to assert these rights. 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 contra party to the repurchase agreements.
If the financial institution that 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 unsettled. As a
result, under extreme 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 33% 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 other party 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 extreme circumstances, there may be a restriction on the Fund's
ability to sell the collateral and the Fund would suffer a loss. See "Special
Investment Methods -- Loans of Portfolio Securities" in the SAI.
Leverage. As provided in the 1940 Act and subject to compliance with
the Fund's investment objective, policies and restrictions, the Fund is
permitted to issue additional preferred stock or debt so long as the Fund's
total assets immediately after such issuance, less certain ordinary course
liabilities, exceed 300% of the amount of the debt outstanding and exceed 200%
of the sum of the amount of preferred stock and debt outstanding. Such debt or
preferred stock may be convertible in accordance with SEC staff guidelines
that may permit the Fund to obtain leverage at attractive rates. The Fund
currently has authorized the issuance of 2,000,000 shares of preferred stock.
The Fund redeemed all of its outstanding preferred stock on February 11, 2003,
and currently has no shares of preferred stock outstanding. The Fund does not
currently intend to offer shares of preferred stock or senior securities
representing indebtedness in addition to the Series B Preferred and/or Series
C Auction Rate Preferred described by this prospectus. However, the Fund will
consider from time to time whether to do so and may issue additional such
securities were the Board of Directors to conclude that such an offering would
be consistent with the Fund's Charter and applicable law, and in the best
interest of existing common stockholders.
Corporate Reorganizations. The Fund may invest without limit in
securities of companies for which a tender or exchange offer has been made or
announced and in securities of companies for which a merger, consolidation,
liquidation or similar reorganization proposal has been announced if, in the
judgment of the Investment Adviser, there is a reasonable prospect of capital
appreciation significantly greater than the added portfolio turnover expenses
inherent in the short term nature of such transactions. The principal risk is
that such offers or proposals may not be consummated within the time and under
the terms contemplated at the time of the investment, in which case, unless
such offers or proposals are replaced by equivalent or increased offers or
proposals that are consummated, the Fund may sustain a loss.
Warrants and Rights. The Fund may invest without limit in warrants or
rights (other than those acquired in units or attached to other securities)
that entitle the holder to buy equity securities at a specific price for a
specific period of time but will do so only if such equity securities are
deemed appropriate by the Investment Adviser for inclusion in the Fund's
portfolio.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in no more than 3% of the securities of any one investment company
including small business investment companies and may invest up to 10% of its
total assets in the securities of other investment companies in the aggregate.
The purchase of securities in investment companies will result indirectly in
the payment of duplicative management fees by the Fund. The Fund will not
purchase the securities of affiliated investment companies.
Foreign Securities. The Fund may invest up to 25% of its total assets
in securities of foreign issuers, which are generally denominated in foreign
currencies. See "Risk Factors and Other Considerations -- Foreign Securities."
The Fund may purchase sponsored American Depository Receipts ("ADRs")
or U.S. denominated securities of foreign issuers, which will not be included
in this foreign securities limitation. 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.
When Issued, Delayed Delivery Securities and Forward Commitments. The
Fund may enter into forward commitments for the purchase of securities. Such
transactions may include purchases on a "when issued" or "delayed delivery"
basis. 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 the
Fund 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 maintain a segregated account of cash or liquid
high-grade debt securities with the Fund's custodian in an aggregate amount at
least equal to the amount of its forward commitments as long as the obligation
to purchase continues.
Temporary Defensive Investments. During temporary defensive periods
and during periods when the Fund's normal asset allocation is not optimal, the
Fund may invest more heavily in securities of U.S. government sponsored
instrumentalities and in money market mutual funds that invest in those
securities, which, in the absence of an exemptive order, are not 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 investment objective.
Further information on the investment objective 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 of the
outstanding voting securities of the Fund, as defined in the 1940 Act. 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.
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).
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 B Preferred or Series C Auction Rate Preferred. The market value
for the Series B Preferred and/or Series C Auction Rate Preferred will be
influenced by changes in interest rates, the perceived credit quality of the
Series B Preferred or Series C Auction Rate Preferred and other factors. The
Series B Preferred and/or Series C Auction Rate Preferred are subject to
redemption 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 than that of the Series B Preferred or Series C Auction
Rate Preferred. Subject to such circumstances, the Series B Preferred and/or
Series C Auction Rate Preferred are perpetual.
The credit rating on the Series B Preferred or Series C 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 B Preferred or Series C Auction Rate Preferred. A reduction or
withdrawal of the credit rating would likely have an adverse effect on the
market value of the Series B Preferred or Series C Auction Rate Preferred.
The Series B Preferred and the Series C Auction Rate Preferred are
not obligations of the Fund. The Series B Preferred and/or Series C 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 B Preferred and/or
Series C Auction Rate Preferred for the full redemption price. In addition,
the Fund has adopted a policy (which it may modify) of distributing 8% of
average quarter-end net assets attributable to 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
distributions, which may have the effect of decreasing the asset coverage per
share with respect to the Fund's outstanding Series B Preferred and Series C
Auction Rate Preferred. For the year ending December 31, 2002, 64% of the
distributions paid by the Fund with respect to its common stock 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 B Preferred and/or Series C Auction Rate Preferred
being offered in this prospectus, the amount of leverage will represent
approximately 35% of the Fund's managed assets (as defined below). The Fund's
leveraged capital structure creates special risks not associated with
unleveraged funds having similar investment objective 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 Series B Preferred
and/or Series C Auction Rate Preferred's asset coverage.
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 shares plus assets attributable to outstanding shares of
its preferred stock, with no deduction for the liquidation preference of such
shares of preferred stock), when the Fund's total return at least equals the
dividend rate on the 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.
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 B Preferred and/or Series C 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 the Series B
Preferred and/or Series C Auction Rate Preferred and that Fitch assigns a
rating of AAA to the Series C Auction Rate Preferred, the ratings do not
eliminate or necessarily mitigate the risks of investing in Series B Preferred
or Series C Auction Rate Preferred. The credit rating on the Series B
Preferred or Series C 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 B Preferred or Series C Auction Rate Preferred.
A reduction or withdrawal of the credit ratings on the Series C Auction Rate
Preferred may also make your Series C Auction Rate Preferred shares less
liquid at an auction or in the secondary market.
In addition, if a rating agency rating the Series C Auction Rate
Preferred at the Fund's request downgrades the Series C Auction Rate
Preferred, the maximum rate on the Series C Auction Rate Preferred will
increase. See "Description of the Series B Preferred and Series C 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.
Special Risks of the Series B Preferred
Illiquidity Prior to Exchange Listing. Prior to the offering, there
has been no public market for the Series B Preferred. In the event the Series
B Preferred are issued, prior application will have been made to list the
Series B Preferred on the New York Stock Exchange. However, during an initial
period, which is not expected to exceed 30 days after the date of its initial
issuance, the Series B Preferred will not be listed on any securities
exchange. During such period, the underwriters intend to make a market in the
Series B Preferred, though, they have no obligation to do so. Consequently, an
investment in the Series B Preferred may be illiquid during such period.
Special Risks of the Series C Auction Rate Preferred
Interest Rate Risk. In connection with the sale of the Series C
Auction Rate Preferred, the Fund may enter into interest rate swap or cap
transactions in order to reduce the impact of changes in the dividend rate of
the Series C Auction Rate Preferred or obtain the equivalent of a fixed rate
for the Series C Auction Rate Preferred that is lower than the Fund would have
to pay if it issued fixed rate preferred shares. 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. See "How the Fund Manages Risk -- Interest Rate
Transactions."
Auction Risk. You may not be able to sell your Series C Auction Rate
Preferred at an auction if the auction fails, i.e., if there is more Series C
Auction Rate Preferred offered for sale than there are buyers for those
shares. Also, if you place orders (place a hold order) at an auction to retain
Series C Auction Rate Preferred only at a specified rate that exceeds the rate
set at the auction, you will not retain your Series C 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 C Auction Rate
Preferred, which could also affect the liquidity of your investment. See
"Description of the Series B Preferred and Series C Auction Rate Preferred"
and "The Auction of Series C Auction Rate Preferred."
Secondary Market Risk. If you try to sell your Series C 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 C Auction Rate Preferred are not required to
maintain this market, and the Fund is not required to redeem Series C Auction
Rate Preferred if either an auction or an attempted secondary market sale
fails because of a lack of buyers. The Series C Auction Rate Preferred is not
registered on a stock exchange or the NASDAQ stock market. If you sell your
Series C 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.
Asset Class Risks
Credit Risk for Convertible Securities and Fixed Income Securities.
Many convertible securities are not investment grade, that is, not rated
within the four highest categories by S&P and Moody's. To the extent that the
Fund's convertible securities and any other fixed income securities are rated
lower than investment grade or are not rated, there would be a greater risk as
to the timely repayment of the principal of, and timely payment of interest or
dividends on, those securities. It is expected that not more than 50% of the
Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa
or lower by Moody's or, if unrated, are of comparable quality as determined by
the Investment Adviser.
Securities rated BB or lower by S&P or Ba or lower by Moody's are
often referred to in the financial press as "junk bonds" and may include
securities of issuers in default. "Junk bonds" are considered by the rating
agencies to be predominantly speculative and may involve major risk exposures
such as:
o greater volatility and credit risk;
o vulnerability to economic downturns and changes in interest rates;
o sensitivity to adverse economic changes and corporate
developments;
o additional expenses to pursue recovery from issuers that default;
o redemption or call provisions that may be exercised at
inopportune times;
o difficulty in accurately valuing or disposing of such
securities;
o subordination to other debt of the issuer; and
o junk bonds are generally unsecured.
Convertible securities and other income securities need not meet a minimum
rating standard in order to be acceptable for investment by the Fund. See
"Appendix A -- Description of Corporate Bond Ratings."
In addition, securities ratings are relative and subjective and not
absolute standards of quality. They are based largely on an issuer's
historical financial condition and the rating agency's analysis at the time of
the rating. Consequently, the rating assigned to any particular security is
not necessarily a reflection of the issuer's current financial condition.
Dilution Risk for Convertible Securities. In the absence of adequate
anti-dilution provisions in a convertible security, dilution in the value of
the Fund's holding may occur in the event the underlying stock is subdivided,
additional equity securities are issued for below market value, a stock
dividend is declared, or the issuer enters into another type of corporate
transaction that has a similar effect.
Illiquid Securities. The Fund has no limit on the amount of its net
assets it may invest in unregistered and otherwise illiquid investments.
Unregistered securities are securities that cannot be sold publicly in the
United States without registration under the Securities Act. Unregistered
securities generally can be resold only in privately negotiated transactions
with a limited number of purchasers or in a public offering registered under
the Securities Act. Considerable delay could be encountered in either event
and, unless otherwise contractually provided for, the Fund's proceeds upon
sale may be reduced by the costs of registration or underwriting discounts.
The difficulties and delays associated with such transactions could result in
the Fund's inability to realize a favorable price upon disposition of
unregistered securities, and at times might make disposition of such
securities impossible.
Unregistered convertible securities or the securities obtained upon
conversion normally may be resold publicly under certain volume and other
restrictions beginning one year following the acquisition of the securities
obtained upon conversion and without any restrictions beginning two years
after the acquisition of the securities obtained upon conversion. Unregistered
securities that are freely salable among qualified institutional investors
under special rules adopted by the Securities and Exchange Commission (the
"SEC") may be treated as liquid if they satisfy institutional liquidity
standards established by the Board of Directors. The continued liquidity of
such securities is not as well assured as that of publicly traded securities,
and accordingly, the Board of Directors will monitor their liquidity.
Interest Rate Risk for Fixed Income Securities. The primary risk
associated with fixed income securities is interest rate risk. A decrease in
interest rates will generally result in an increase in the value of a fixed
income security, while increases in interest rates will generally result in a
decline in its value. This effect is generally more pronounced for fixed rate
securities than for securities whose income rate is periodically reset. Market
interest rates recently have declined significantly below historical average
rates, which may increase the risk that these rates will rise in the future.
Further, while longer term fixed rate securities may pay higher
interest rates than shorter term securities, longer term fixed rate
securities, like fixed rate securities, also tend to be more sensitive to
interest rate changes and, accordingly, tend to experience larger changes in
value as a result of interest rate changes.
Distribution Risk for Equity Income Securities. In selecting equity
income securities in which the Fund will invest, the Investment Adviser will
consider the issuer's history of making regular periodic distributions (i.e.,
dividends) to its equity holders. An issuer's history of paying dividends,
however, does not guarantee that the issuer will continue to pay dividends in
the future. The dividend income stream associated with equity income
securities generally is not guaranteed and will be subordinate to payment
obligations of the issuer on its debt and other liabilities. Accordingly, in
the event the issuer does not realize sufficient income in a particular period
both to service its liabilities and to pay dividends on its equity securities,
it may forgo paying dividends on its equity securities. In addition, because
in most instances issuers are not obligated to make periodic distributions to
the holders of their equity securities, such distributions or dividends
generally may be discontinued at the issuer's discretion.
Equity Risk. The principal risk of investing in equity securities is
equity risk. Equity risk is the risk that the price of an equity security will
fall due to general market and economic conditions, perceptions regarding the
industry in which the issuer participates or the issuing company's particular
circumstances. Common stock in which the Fund will invest or receive upon
conversion of convertible securities is subject to such equity risk. In the
case of convertible securities, it is the conversion value of a convertible
security that is subject to the equity risk; that is, if the appreciation
potential of a convertible security is not realized, the premium paid for its
conversion value may not be recovered. See "Investment Objective and Policies
-- Investment Practices -- Convertible Securities."
Ratings Risk. The rating received by the Fund on its outstanding
preferred stock, or on any other senior security that it may issue, is an
assessment by the applicable rating agency of the capacity of the Fund to
satisfy its obligations on its outstanding senior securities. However, an AAA,
Aaa or similar rating on the Fund's outstanding preferred stock does not
eliminate or mitigate the risks associated with investing in the Fund's
preferred or common stock. 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. If the Fund were required to redeem its outstanding preferred stock (in
whole or part) as a result of the change in or withdrawal of the rating, the
common stock of the Fund will lose the benefits associated with a leveraged
capital structure.
Prepayment Risks on Government Sponsored Mortgage-Backed Securities.
The yield and maturity characteristics of government sponsored mortgage-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may generally be prepaid at any time
because the underlying assets (i.e., loans) generally may be prepaid at any
time. Prepayment risks include the following:
o the relationship between prepayments and interest rates may
give some lower grade government sponsored mortgage-backed
securities less potential for growth in value than conventional
bonds with comparable maturities;
o in addition, when interest rates fall, the rate of prepayments
tends to increase. During such periods, the reinvestment of
prepayment proceeds by the Fund will generally be at lower
rates than the rates that were carried by the obligations that
have been prepaid;
o because of these and other reasons, a government sponsored
mortgage-backed security's total return and maturity may be
difficult to predict; and
o to the extent that the Fund purchases government sponsored
mortgage-backed securities at a premium, prepayments may result
in loss of the Fund's principal investment to the extent of
premium paid.
Long-term Objective
The Fund is intended for investors seeking a high level of total
return over the long-term. 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 shareholder should take into account the Fund's investment objective as
well as the shareholder's other investments when considering an investment in
the Fund.
Market Value and Net Asset Value
The Fund is a diversified, closed-end 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 stock in the Fund on the New York
Stock Exchange 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.
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 may invest up to 25% of its total assets in
securities of foreign issuers.
The Fund may purchase sponsored American Depository Receipts ("ADRs")
or U.S. denominated securities of foreign issuers, which will not be included
in the 25% foreign securities limitation. 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.
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 is inaccurate, the
consequences to the Fund may leave the Fund in a worse position than if it had
not used such strategies. 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;
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; and
o the creditworthiness of counterparties.
For a further description, see "Risk Factors and Special Considerations --
Futures Transactions" and "Risk Factors and Special Considerations -- Forward
Currency Exchange Contracts."
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 on price
fluctuation;
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, see "Investment Objective 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 Objective 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
As a result of the terrorist attacks on the World Trade Center and
the Pentagon on September 11, 2001, some of the U.S. Securities Markets were
closed for a four-day period. These terrorists attacks and related events have
led to increased short-term market volatility and may have long-term effects
on U.S. and world markets. A similar disruption of financial markets could
affect interest rates, securities exchanges, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the Series B
Preferred and/or Series C Auction Rate Preferred.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding shares of common
stock and preferred stock voting together as a single class. 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 Fitch on its preferred stock. See "Investment Restrictions" in the
SAI for a complete list of the fundamental and non-fundamental investment
policies of the Fund.
Interest Rate Transactions
In order to reduce the impact of changes in the dividend rate of the
Series C Auction Rate Preferred or obtain the equivalent of a fixed rate for
the Series C Auction Rate Preferred that is lower than the Fund would have to
pay if it issued fixed rate preferred shares, the Fund may enter into interest
rate swap or cap transactions.
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 the Series C Auction Rate Preferred. 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 C 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 C 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 C
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 C 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 C 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 maintain in a segregated account with its custodian 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 C Auction Rate Preferred in a notional amount
in excess of the outstanding amount of the Series C Auction Rate Preferred.
MANAGEMENT OF THE FUND
General
The Fund's Board of 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 10580-1434, and the Sub-Administrator (as defined below). Pursuant to
an Investment Advisory Contract 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;
and 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 will waive the portion of its investment advisory fee
attributable to an amount of assets of the Fund equal to the aggregate stated
value of its outstanding preferred stock 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 the stated annual dividend rate of such preferred stock, prorated
during the year such preferred stock is issued and the final year it is
outstanding. 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 Advisers, Inc., which was organized in 1980. As of December 31,
2002, the Investment Adviser acted as registered investment adviser to 18
management investment companies with aggregate net assets of $8.7 billion. The
Investment Adviser, together with other affiliated investment advisers, had
assets under management totaling $9.7 billion, as of December 31, 2002. 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 $10.0 billion under management as of December 31, 2002. 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 $1.6 billion under management as of December 31, 2002.
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 New York Stock Exchange 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 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 Contract 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 Contract 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 responsible for the day-to-day management of the
Fund. 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.; Vice Chairman of the Board of Lynch Corporation, a
diversified manufacturing company, and Chairman of the Board and Chief
Executive Officer of Lynch Interactive Corporation, a multimedia and
communications services company.
Non-resident Directors
Karl Otto Pohl and Anthonie C. van Ekris, directors of the Fund,
reside outside the United States and all or a significant portion of their
assets are located outside the United States. Neither director has 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 either director in United
States courts judgments predicated upon civil liability provisions of United
States securities laws. It may also not be possible to enforce against either
director 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 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
distributions on its common stock of 8% of average quarter-end net assets
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 implement this policy, the Fund makes quarterly distributions of $0.20 per
share at the end of each of the first three calendar quarters of each year to
holders of its common stock. The Fund's distribution in December for each
calendar year is an adjusting distribution (equal to the sum of 2.0% of the
net asset value of the Fund as of the last day of the four preceding calendar
quarters less the aggregate distributions of $0.60 per share made for the most
recent three calendar quarters) in order to meet the Fund's 8% pay-out goal.
If, for any calendar year, the total distributions exceed net investment
income and net capital gain, the excess will generally be treated as a
tax-free return of capital up to the amount of the stockholder's tax basis in
his stock. The amount treated as a tax-free return of capital will reduce a
stockholder's tax basis in his stock, thereby increasing his potential gain or
reducing his potential loss on the sale of his 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 net
investment 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 may 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 registered investment companies advised by
the Investment Adviser (the "Other Funds"), 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 the Fund
maintains distribution policies with respect to the common stock calling 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. If the total distributions required by the proposed
periodic pay-out policy exceed the Fund's net investment income and net
capital gain, the excess will be treated as a return of capital. If the Fund's
net investment income (including net short-term capital gains) and net
long-term capital gains for any year exceed the amount required to be
distributed under the periodic pay-out policy, the Fund generally intends to
pay such excess once a year, but may, in its discretion, retain and not
distribute net long-term capital gains to the extent of such excess. The Fund
reserves the right, but does not currently intend, to retain for reinvestment
and pay the resulting U.S. federal income taxes on the excess of its net
realized long-term capital gains over its net short-term capital losses, if
any.
DESCRIPTION OF THE SERIES B PREFERRED AND
SERIES C AUCTION RATE PREFERRED
The Fund offers by this prospectus, in the aggregate, $50 million of
preferred stock of either Series B Preferred or Series C Auction Rate
Preferred, or a combination of both such series. The following is a brief
description of the terms of each of the Series B Preferred and the Series C
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 B Preferred and the
Series C Auction Rate Preferred. For complete terms of the Series B Preferred
or the Series C 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 1,995,000
shares of preferred stock as Series B Preferred and up to 5,000 shares of
preferred stock as Series C 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 B Preferred or
Series C 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 B Preferred will have a liquidation
preference of $25 per share and the Series C Auction Rate Preferred will have
a liquidation preference of $25,000 per share. Upon a liquidation, each holder
of Series B Preferred or Series C 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 B Preferred and Series C 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. The Series B
Preferred and the Series C 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 B Preferred
and Series C Auction Rate Preferred shares each carry one vote per share on
all matters on which such shares are entitled to vote. The Series B Preferred
and the Series C Auction Rate Preferred will, upon issuance, be fully paid and
nonassessable and will have no preemptive, exchange or conversion rights. Any
Series B Preferred or Series C 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
will not issue any class of stock senior to the Series B Preferred and/or
Series C Auction Rate Preferred.
Rating Agency Guidelines
Upon issuance, both the Series B Preferred and the Series C Auction
Rate Preferred will be rated Aaa by Moody's Investors Service, Inc. In
addition, the Series C Auction Rate Preferred will also be rated AAA by Fitch.
The Fund is required under Moody's and Fitch 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 B Preferred or Series C Auction Rate
Preferred, with respect to the separate guidelines Moody's and Fitch has each
established 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). The
Moody's and Fitch 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) is 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) is 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 B Preferred or the Series C 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 B Preferred or the
Series C 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
Fitch. 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 B
Preferred or the Series C 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 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 Fitch, 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 Moody's and Fitch (or such other rating agency then rating the Series
B Preferred or Series C Auction Rate Preferred at the request of the Fund)
that such modification would not adversely affect its then-current rating of
the Series B Preferred or Series C Auction Rate Preferred, as the case may be.
In addition, with respect to the Series C 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
C Auction Rate Preferred -- Maximum Rate") to increase the percentage amount
by which the "AA" Financial Composite Commercial Paper Rate or the Treasury
Index Rate, whichever is applicable, is multiplied to determine the maximum
rate without the vote or consent of the holders of Series C Auction Rate
Preferred or any other stockholder of the Fund, but only after consultation
with the broker-dealers for the Series C Auction Rate Preferred, and with
confirmation from each applicable rating agency that the Fund could meet the
Basic Maintenance Amount Test applicable to the Series C Auction Rate
Preferred immediately following any such increase. See "-- Dividends on the
Series C Auction Rate Preferred-- Maximum Rate"
As described by Moody's and Fitch, the ratings assigned to the Series
B Preferred and the Series C Auction Rate Preferred are assessments of the
capacity and willingness of the Fund to pay the obligations of each of the
Series B Preferred and the Series C Auction Rate Preferred. The ratings on the
Series B Preferred and the Series C 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 Series B Preferred or Series C 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 Fitch 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 B Preferred or
Series C 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 Fitch for rating the Series B and the Series C 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 B Preferred and/or Series C 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 B Preferred and the
Series C 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 days, in the case of the Series B Preferred, or 10 days, in
the case of the Series C Auction Rate Preferred, (including the Series B
Preferred or Series C 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 B Preferred and/or Series C Auction Rate
Preferred offered hereby had been issued and sold as of February 14, 2003,
the asset coverage required under the 1940 Act immediately following such
issuance and sale (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $1,500,000),
would have been computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($144,898,943) divided by senior securities representing
indebtedness plus liquidation preference of each class of preferred
stock ($50,000,000), expressed as a percentage = 290%.
Dividends on the Series B Preferred
Upon issuance of the Series B Preferred (if issued), holders of
shares of Series B 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 B Preferred are registered at the close of business on
the fifth preceding business day.
Dividends on the shares of Series B Preferred will accumulate from
the date on which such shares are issued; provided, however, that any shares
of Series B Preferred issued within 30 days of the original issue date of the
series will accumulate dividends from the series' original date of issue.
Dividends on the Series C Auction Rate Preferred
General. Upon issuance of the Series C Auction Rate Preferred (if
issued), the holders of Series C 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 C 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 C 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 are also 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 C 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 C 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 C 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 C Auction Rate Preferred
pays dividends based on a rate set at auction at which Series C 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 C Auction Rate
Preferred. The auction agent then determines the lowest dividend rate that
will result in all of the Series C Auction Rate Preferred continuing to be
held. See "The Auction of Series C 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.
Maximum Rate. The dividend rate that results from an auction for the
Series C 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 C Auction Rate Preferred by Moody's and Fitch or (ii) in the case of a
dividend period of longer than 184 days, the applicable percentage of the
Treasury Index Rate.
Moody's Credit Rating Fitch 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 C
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 C 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).
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 and pay dividends more or less frequently than
weekly. 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 shares.
The Fund does not currently expect to hold auctions and pay dividends less
frequently than weekly in the near future. If the Fund designates a special
dividend period, changes in interest rates could affect the price received if
shares of Series C 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 C 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 C 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 C Auction Rate Preferred
and has provided notice of such designation and a Basic Maintenance Report to
each rating agency then rating the Series C 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 (y) 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 B Preferred
and the Series C Auction Rate Preferred
So long as any Series B Preferred or Series C 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 shares) 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 the Fund ranking junior to the Series B Preferred and/or Series C
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 B Preferred and/or Series
C 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 Series B
Preferred and/or Series C 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 B Preferred
or Series C 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 B Preferred and Series C 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 B Preferred and/or Series C Auction Rate Preferred as to the payment of
dividends, any dividends being paid on the shares of such preferred stock
(including the Series B Preferred and/or Series C 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. The
Fund may, at its option, consistent with its Charter and the 1940 Act, and in
certain circumstances will be required to, mandatorily redeem preferred stock
(including, at its discretion, the Series B Preferred or Series C 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 B Preferred, or 10
business days in the case of the Series C 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 shares of each of the Series B Preferred and
Series C 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 C
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 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 rating
agency guidelines asset coverage requirements 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 C 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 the 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 B Preferred. Prior to , 2008,
the shares of Series B 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 , 2008 and thereafter, the Fund may at any time redeem
shares of Series B 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 C Auction Rate Preferred. The Fund
may, at its option, redeem the Series C 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
C 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 C 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.
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, in the case of the Series B
Preferred, and not less than 7 days in the case of the Series C 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 B Preferred or Series C 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 B Preferred or
Series C 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 B Preferred or Series C Auction Rate
Preferred as to liquidation payments, a liquidation distribution in the amount
of $25 per share, in the case of the Series B Preferred, or $25,000 per share,
in the case of the Series C Auction Rate Preferred, in either case plus an
amount equal to all unpaid dividends accrued 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 B Preferred and/or Series C Auction Rate Preferred as
to payment upon liquidation will be insufficient to permit the payment in full
to such holders of the Series B Preferred and/or Series C 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 B Preferred, the Series C 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 B Preferred and/or
Series C 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 B
Preferred and/or Series C 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 as otherwise required by applicable law, holders of the
Series B Preferred and/or Series C Auction Rate Preferred along with holders
of other outstanding shares of series of preferred stock, will be entitled to
one vote per share held on each matter submitted to a vote of stockholders and
will vote together with holders of shares of common stock and of any other
preferred stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders of
the outstanding shares of Series B Preferred, Series C 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 B Preferred, Series C 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 B Preferred,
Series C 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 B Preferred, Series C Auction Rate Preferred and other series of
preferred stock as described above, would then constitute a 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 B Preferred, Series C
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 or replacement 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 at the
earliest time permitted by law.
So long as shares of Series B Preferred or Series C 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 B Preferred or
Series C 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 B Preferred or Series C 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). Unless a higher percentage is provided for under the Charter or
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 B Preferred and/or Series C Auction Rate
Preferred), voting together as a single class, will be required to approve any
plan of reorganization adversely affecting the preferred stock or any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's investment objective or
changes in the investment restrictions described as fundamental policies under
"Investment Objective and Policies" and "Investment Restrictions" in this
prospectus and the SAI. For purposes of the preferred stock voting rights
described in this section, except as otherwise required under the 1940 Act,
the phrase "vote of the holders of a majority of the outstanding shares of
preferred stock" (or any like 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 B Preferred, Series C 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 Fitch (or any other
rating agency then rating the Series B Preferred or Series C 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 B
Preferred or Series C 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 B Preferred and/or Series C
Auction Rate Preferred will have no preemptive rights or rights to cumulative
voting.
Limitation on Incurrence of Additional Indebtedness
and Issuance of Additional Preferred Stock
So long as any Series B Preferred or Series C Auction Rate Preferred
is outstanding and subject to compliance with the Fund's investment objective,
policies and restrictions, the Fund may issue and sell one or more series of a
class of senior securities of the Fund representing indebtedness under the
1940 Act and/or otherwise create or incur indebtedness, provided that the Fund
will, immediately after giving effect to the incurrence of such indebtedness
and to its receipt and application of the proceeds thereof (including the
retirement of any senior securities representing indebtedness to be retired
with such proceeds), have an "asset coverage" for all senior securities of the
Fund representing indebtedness, as defined in the 1940 Act, of at least 300%
of the amount of all indebtedness of the Fund then outstanding and no such
additional indebtedness will have any preference or priority over any other
indebtedness of the Fund upon the distribution of the assets of the Fund or in
respect of the payment of interest. Any possible liability resulting from
lending and/or borrowing portfolio securities, entering into reverse
repurchase agreements, entering into futures contracts and writing options, to
the extent such transactions are made in accordance with the investment
restrictions of the Fund then in effect, will not be considered to be
indebtedness limited by the Articles Supplementary.
So long as any Series B Preferred or Series C Auction Rate Preferred
is outstanding, subject to receipt of approval from Moody's and, in the case
of the Series C Auction Rate Preferred, Fitch, 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 preferred stock in addition to
the Series B Preferred or Series C Auction Rate Preferred, 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 for which
notice of redemption has been given prior to such issuance, 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 preferred shares or
senior securities representing indebtedness. However, the Fund will consider
from time to time whether to do so and may issue additional such securities
were the Board of Directors to conclude 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 B Preferred and Series C Auction Rate Preferred Shares
The Fund is a closed-end investment company and, as such, holders of
the Series B Preferred or Series C Auction Rate Preferred do not and will not
have the right to redeem their shares of the Fund. The Fund, however, may
repurchase Series B Preferred or, outside of an auction, Series C 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.
Book-Entry
Shares of Series B Preferred will initially be held in the name of
Cede & Co. as nominee for The Depository Trust Company ("DTC"). The Fund will
treat Cede & Co. as the holder of record of the Series B Preferred for all
purposes. In accordance with the procedures of DTC, however, purchasers of
Series B Preferred will be deemed the beneficial owners of shares purchased
for purposes of dividends, voting and liquidation rights. Purchasers of Series
B Preferred may obtain registered certificates by contacting the Transfer
Agent.
Shares of Series C Auction Rate Preferred will initially be held by
the auction agent as custodian for Cede & Co., in whose name the shares of the
Series C Auction Rate Preferred shall be registered. The Fund will treat Cede
& Co. as the holder of record of the Series C Auction Rate Preferred for all
purposes.
THE AUCTION OF SERIES C AUCTION RATE PREFERRED
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the
Series C 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 C Auction
Rate Preferred.
The auctions determine the dividend rate for the Series C Auction
Rate Preferred, but each dividend rate will not be higher than the maximum
rate. See "Description of the Series B Preferred and Series C Auction Rate
Preferred -- Dividends on the Series C Auction Rate Preferred." If you own
shares of Series C Auction Rate Preferred, you may instruct your broker-dealer
to enter one of three kinds of order in the auction with respect to your
shares: sell, bid and hold.
o If you enter a sell order, you indicate that you want to sell
Series C 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 dividends rate, you indicate that you want to sell
Series C 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 C 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 C Auction Rate Preferred. You may also enter an order to buy
additional Series C Auction Rate Preferred. All orders must be for whole
shares. All orders you submit are irrevocable. There is a fixed number of
Series C 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 C Auction Rate
Preferred and general economic conditions including current interest rates. If
you own Series C 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 C 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 C 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 C 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 C Auction Rate Preferred.
A broker-dealer's failure to submit orders for Series C 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 C 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 Series C 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 C 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 C 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 C 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
C Auction Rate Preferred available for purchase in the auction.
If the number of Series C 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 C 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 to sell any or all of the Series
C 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 C Auction Rate Preferred and in so doing to help
protect the earnings available to pay dividends on common shares, and to serve
as the dividend rate in the event of a failed auction (that is, an auction
where there are more Series C 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 C 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 Series C Auction Rate Preferred.
The auction procedures include a pro rata allocation of Series C
Auction Rate Preferred shares 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 Series C Auction Rate Preferred
shares 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 The
Depository Trust Company. Purchasers will pay for their Series C Auction Rate
Preferred through broker-dealers in same-day funds to The Depository Trust
Company against delivery to the broker-dealers. The Depository Trust Company
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 New York Stock Exchange 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 C 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 C Auction Rate Preferred normally will be held every
Tuesday (or the next preceding business day if Tuesday is a holiday), and each
subsequent dividend period for the Series C Auction Rate Preferred normally
will begin on the following Wednesday.
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 Series C Auction Rate Preferred
shares 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 sell all Bid order at 1.6% rate for
500 shares if auction rate is less than all 500 shares
1.6%
Current Holder B Owns 300 shares, wants to hold Hold order - will take the
auction rate
Current Holder C Owns 200 shares, wants to sell all Bid order at 1.4% rate for
200 shares if auction rate is less than all 200 shares
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%
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 C
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 C Auction Rate Preferred
The underwriters are not required to make a market in the Series C
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 C Auction Rate Preferred will develop or, if it does develop,
that it will provide owners with liquidity of investment. The Series C Auction
Rate Preferred will not be registered on any stock exchange or on the NASDAQ
market. Investors who purchase Series C 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 C 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 C Auction Rate Preferred in the name of a
broker-dealer, a sale or transfer of your Series C 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 is authorized to issue one billion (1,000,000,000) shares of
capital stock, par value $.001 per share, in multiple classes and series
thereof as determined from time to time by the Board of Directors of the Fund.
Of the Fund's one billion (1,000,000,000) shares of authorized capital stock,
one hundred million (100,000,000) shares have been classified by the Board of
Directors as common stock class and two million (2,000,000) shares as
preferred stock class. As of February 14, 2003, 11,113,431 shares of common
stock were outstanding. The common stock of the Fund is listed on the New York
Stock Exchange under the symbol "GCV" and began trading March 31, 1995. The
average weekly trading volume of the common stock on the NYSE for the 12
months ended February 14, 2003 was 83,921. Each share within a particular
class or series thereof has equal voting, dividend, distribution and
liquidation rights. There are no conversion or preemptive rights in connection
with any outstanding stock of the Fund. All stock, when issued in accordance
with the terms of the offering, will be fully paid and non-assessable. The
common stock is not redeemable and has no preemptive, conversion or cumulative
voting rights. The Fund has a policy, which may be modified at any time by its
Board of Directors, of paying distributions on its common stock of 8% of
average quarter-end net assets 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.
The Fund is a closed-end, management investment company and, as such,
its stockholders do not, and will not, have the right to redeem their stock.
The Fund, however, may repurchase its common stock from time to time as and
when it deems such a repurchase advisable. The Fund's Board of Directors has
determined that such repurchase, up to 500,000 shares of common stock, may be
made when the Fund's common stock is trading at a discount of 10% or more from
net asset value. Pursuant to this authorization the Fund has repurchased in
the open market 305,200 shares through December 31, 2002, none of which stock
was repurchased during the year ended December 31, 2002. Pursuant to the 1940
Act, the Fund may repurchase its 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 as otherwise permitted in accordance
with Rule 23c-1 under the 1940 Act. Under Rule 23c-1, certain conditions must
be met for such alternative purchases regarding, among other things,
distribution of net income for the preceding fiscal year, asset coverage with
respect to the Fund's senior debt and equity securities, identity of the
sellers, price paid, brokerage commissions, prior notice to stockholders of an
intention to purchase stock and purchasing in a manner and on a basis which
does not discriminate unfairly against the other stockholders through their
interest in the Fund. In addition, Rule 23c-1 requires the Fund to file
notices of such purchase with the SEC. Any repurchase of common stock by the
Fund will also be subject to Maryland corporate law, which requires that
immediately following such repurchase the total assets of the Fund must be
equal to or greater than the sum of the Fund's total liabilities plus the
aggregate liquidation preference of its outstanding preferred stock.
When the Fund repurchases its common stock for a price below its net
asset value, the net asset value of the common stock that remains outstanding
will be enhanced. This does not, however, necessarily mean that the market
price of the Fund's remaining outstanding common stock will be affected,
either positively or negatively. Further, interest on any borrowings made to
finance the repurchase of common stock will reduce the net income of the Fund.
From the commencement of the Fund's operations as a closed-end
investment company, the Fund's common stock has traded in the market for
extended periods at both a premium to and a discount from net asset value.
Preferred Stock
Currently, two million (2,000,000) shares of the Fund's one billion
(1,000,000,000) authorized shares of capital stock have been classified by the
Board of Directors as preferred stock, par value $.001 per share. As of
February 14, 2003, there were no shares of preferred stock outstanding. The
terms of such preferred stock may be fixed by the Board of Directors and would
materially limit and/or qualify the rights of the holders of the Fund's common
stock. As of December 31, 2002, the Fund had outstanding 600,000 shares of
Series A Preferred, all of which the Fund redeemed on February 11, 2003. Prior
to its redemption, the Series A Preferred was rated AAA by S&P and was listed
and traded on the New York Stock Exchange under the symbol "GCV Pr."
The following table shows the number of shares of (i) capital stock
authorized, (ii) its classification and (iii) capital stock outstanding for
each class of authorized securities of the Fund as of February 14, 2003.
AMOUNT AMOUNT AMOUNT
CLASS OF STOCK AUTHORIZED CLASSIFIED OUTSTANDING
-------------- ---------- ---------- ------------
Common Stock................. 1,000,000,000(1) shares 100,000,000 11,113,431
Preferred Stock.............. 1,000,000,000(1) shares 2,000,000 0 (2)
(1) The total number of shares of capital stock of all classes
authorized. The Board of Directors is authorized to classify or
reclassify these one billion shares.
(2) Does not include the Series B Preferred or Series C Auction Rate
Preferred being offered pursuant to this prospectus.
TAXATION
The following is a description of certain U.S. federal income tax
consequences to a stockholder of acquiring, holding and disposing of preferred
stock of 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.
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, 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.
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 (which includes, among other
items, dividends, interest and the excess of any net short-term capital gains
over net long-term capital losses and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) 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 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 ordinary 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
taxable to you as ordinary income to the extent of the Fund's earning and
profits. 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.
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 ordinary income dividends or capital gain dividends and
other distributions.
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 (whether through the automatic reinvestment of dividends or
otherwise) 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, however,
short-term capital gains and ordinary income will currently be taxed at a
maximum rate of 38.6% while long-term capital gains generally will be taxed at
a maximum rate of 20% and 10% for taxpayers in the 15% bracket. The 20%
capital gains rate and the 10% capital rate will be reduced to 18% and 8%
respectively, for capital assets held for more than five years if the holding
period begins after December 31, 2000.
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional stock of the Fund. 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 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 Internal Revenue Service.
The Bush Administration has announced a proposal to reduce or
eliminate the tax on dividends; however, many of the details of the proposal
(including how the proposal would apply to dividends paid by a regulated
investment company) have not been specified. Moreover, the prospects for this
proposal are unclear. Accordingly, it is not possible to evaluate how this
proposal might affect the tax discussion above.
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 Amended and
Restated By-Laws (together, its "Governing Documents") that could have the
effect of limiting:
o the ability of other entities or persons to acquire control of
the Fund's Board of Directors;
o the Fund's freedom to engage in certain transactions; or
o the ability of the Fund's directors or stockholders to amend
the Governing Documents or effectuate changes in the Fund's
management.
These provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Directors of the Fund is divided into
three classes, each having a term of 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." A director of the Fund may be removed
with cause by a vote of a majority of the votes entitled to be cast for the
election of directors of the Fund. A director of the Fund may not be removed
without cause. In addition, the affirmative vote of the holders of 75% of the
outstanding shares of the Fund, and the vote of a majority (as defined in the
1940 Act) of the holders of preferred shares, voting as a single class, are
required to authorize its conversion from a closed-end to an open-end
investment company, or to amend certain provisions of the Charter involving
conversion to an open-end fund.
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, open-ending the Fund and changing the Fund's investment
objective 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 Governing Documents 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
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."
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 B Preferred. EquiServe will also serve as the Fund's transfer
agent, registrar, dividend and paying agent and redemption agent with respect
to the Series B Preferred.
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 C Auction Rate Preferred.
UNDERWRITING
Salomon Smith Barney Inc. and Gabelli & Company, Inc. are acting as
underwriters in this offering. Subject to the terms and conditions stated in
the underwriting agreement dated the date of this prospectus, each underwriter
named below has agreed to purchase, and the Fund has agreed to sell to that
underwriter, the number of shares of Series B Preferred and Series C Auction
Rate Preferred set forth opposite the underwriter's name.
Number of Series C
Number of Series Auction Rate
Underwriter B Preferred Shares Preferred Shares
----------- ------------------ -------------------
Salomon Smith Barney Inc........
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
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the Series B Preferred or Series C Auction Rate
Preferred, as applicable, if they purchase any such shares. 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.
Offering of Series B Preferred Shares
The Fund has been advised by the underwriters that they propose
initially to offer some of the Series B Preferred shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not to exceed $ per share. The sales load the Fund will pay of
$ per Series B Preferred share is equal to % of the initial offering
price. After the initial public offering, the underwriters may change the
public offering price and the concession. Investors must pay for any Series B
Preferred purchased in the initial public offering on or before , 2003.
Prior to the offering, there has been no public market for the Series
B Preferred. Application has been made to list the Series B Preferred on the
New York Stock Exchange. However, during an initial period which is not
expected to exceed 30 days after the date of this prospectus, the Series B
Preferred will not be listed on any securities exchange. During such period,
the underwriters intend to make a market in the Series B Preferred; however,
they have no obligation to do so. Consequently, an investment in the Series B
Preferred may be illiquid during such period.
In connection with the offering, the underwriters may purchase and
sell shares of Series B Preferred in the open market. These transactions may
include short sales and stabilizing transactions. Short sales involve
syndicate sales of shares in excess of the number of shares to be purchased by
the underwriters in the offering, which creates a syndicate short position.
Stabilizing transactions consist of bids for or purchases of shares in the
open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit
the underwriters to reclaim a selling concession from a syndicate member when
the underwriters repurchase shares originally sold by that syndicate member in
order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of the stock. They may also cause the
price of the Series B Preferred to be higher than the price that would
otherwise exist in the open market in the absence of these transactions. The
underwriters may conduct these transactions on the New York Stock Exchange or
in the over-the-counter market, or otherwise. If the underwriters commence any
of these transactions, they may discontinue them at any time.
Offering of Series C Auction Rate Preferred Shares
The Fund has been advised by the underwriters that they propose
initially to offer some of the Series C Auction Rate Preferred shares directly
to the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not to exceed $ per share. The sales load the Fund will pay of
$ per Series C Auction Rate Preferred share is equal to % of the initial
offering price. After the initial public offering, the underwriters may change
the public offering price and the concession. Investors must pay for any
Series C Auction Rate Preferred purchased in the initial public offering on or
before , 2003.
Provision of Other Services to the Fund
The underwriters have performed investment banking and advisory
services for the Fund 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 preform services for the Fund in the
ordinary course of their business.
The underwriters have acted in the past and the Fund anticipates that
the underwriters may continue from time to time act as brokers or 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
Transactions" after they have ceased to be underwriters. 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 Series C Auction Rate Preferred" and in the SAI. 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, and perform services for, the Fund.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, NY 10013. The principal business address of
Gabelli & Company, Inc. is One Corporate Center, Rye, New York 10580.
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.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Series B Preferred and Series C 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 B
Preferred and/or Series C Auction Rate Preferred, and by Simpson Thacher &
Bartlett, New York, New York, counsel to the underwriters. Skadden, Arps,
Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett 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, 2001
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.
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 is listed on the New York Stock Exchange, 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 New York Stock
Exchange, 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 B Preferred and Series C 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.
TABLE OF CONTENTS OF SAI
An SAI dated March , 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
INVESTMENT OBJECTIVE AND POLICIES ..................................... B-3
INVESTMENT RESTRICTIONS................................................ B-17
MANAGEMENT OF THE FUND................................................. B-19
PORTFOLIO TRANSACTIONS ................................................ B-29
REPURCHASE OF COMMON STOCK............................................. B-31
PORTFOLIO TURNOVER .................................................... B-32
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN......................................... B-32
TAXATION .............................................................. B-34
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR SERIES C AUCTION RATE PREFERRED........................ B-40
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND SERIES C AUCTION RATE PREFERRED ......... B-49
MOODY'S AND FITCH GUIDELINES .......................................... B-57
NET ASSET VALUE........................................................ B-69
BENEFICIAL OWNERS...................................................... B-71
GENERAL INFORMATION.................................................... B-72
FINANCIAL STATEMENTS................................................... B-74
GLOSSARY .............................................................. B-75
===============================
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.
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.
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.
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.
===============================================================================
$50,000,000
THE GABELLI
CONVERTIBLE AND
INCOME SECURITIES FUND
INC.
1,000,000 Shares, Series B % Cumulative
Preferred Stock
(Liquidation Preference $25 per Share)
1,000 Shares, Series C Auction Rate Cumulative
Preferred Stock
(Liquidation Preference $25,000 per Share)
[Gabelli Logo]
PROSPECTUS
, 2003
Salomon Smith Barney
Gabelli & Company, Inc.
===============================================================================
The information in this statement of additional information 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 statement of additional information 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 March 11, 2003
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
___________________
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Convertible and Income Securities Fund Inc. (the "Fund")
is a diversified, closed- end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
seeks a high level of total return on its assets through a combination of
current income and capital appreciation. The Fund invests primarily in a
portfolio of convertible and income producing securities selected by Gabelli
Funds, LLC, the investment adviser to the Fund (the "Investment Adviser"). It
is the policy of the Fund, under normal market conditions, to invest at least
80% of the value of its total assets in "Convertible Securities," i.e., debt
or equity securities (bonds, debentures, notes, stocks and other similar
securities) that are convertible into common stock or other equity securities,
and "Income Securities," i.e., securities that are expected to periodically
accrue or generate income for securities holders, including short-term
discounted Treasury Bills. The Fund expects to continue its practice of
focusing on Convertible Securities to the extent attractive opportunities are
available.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the prospectus for the Fund dated
, 2003 (the "Prospectus"). Investors should obtain and read the Prospectus
prior to purchasing the Series B Preferred or the Series C 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
Investment Objective and Policies.......................................B-3
Investment Restrictions................................................B-17
Management of the Fund.................................................B-19
Portfolio Transactions.................................................B-29
Repurchase of Common Stock.............................................B-31
Portfolio Turnover.....................................................B-32
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan.......B-32
Taxation ..............................................................B-34
Additional Information Concerning
Auctions for the Series C Auction Rate Preferred.......................B-40
Additional Information Concerning the
Series B Preferred and Series C Auction Rate Preferred.................B-49
Moody's and Fitch Guidelines...........................................B-57
Net Asset Value........................................................B-69
Beneficial Owners......................................................B-71
General Information....................................................B-72
Financial Statements...................................................B-74
Glossary...............................................................B-75
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange
Commission, Washington, D.C. The registration statement may be obtained from
the Securities and Exchange Commission upon payment of the fee prescribed, or
inspected at the Securities and Exchange Commission's office at no charge.
This Statement of Additional Information is dated , 2003.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is a high level of total return on
its assets. Under normal market conditions, the Fund will invest at least 80%
of the value of its total assets in "Convertible Securities," i.e., securities
(bonds, debentures, notes, stocks and other similar securities) that are
convertible into common stock or other equity securities, and "Income
Securities," i.e., securities that are expected to periodically accrue or
generate income for their holders, including short-term discounted Treasury
Bills. The Fund expects to continue its practice of focusing on Convertible
Securities to the extent attractive opportunities are available. See
"Investment Objective and Policies" in the Prospectus.
Investment Practices
Convertible Securities. A Convertible Security entitles the holder to
exchange such security for a fixed number of shares of common stock or other
equity security, usually of the same company, at fixed prices within a
specified period of time and to receive the fixed income of a bond or the
dividend preference of a preferred stock until the holder elects to exercise
the conversion privilege. The fixed income or dividend component of a
Convertible Security is referred to as the security's "investment value."
A Convertible Security's position in a company's capital structure
depends upon its particular provisions. In the case of subordinated
convertible debentures, the holder's claims on assets and earnings are
subordinated to the claims of others and are senior to the claims of common
stockholders.
To the degree that the price of a Convertible Security rises above
its investment value because of a rise in price of the underlying common
stock, the value of such security is influenced more by price fluctuations of
the underlying common stock and less by its investment value. The price of a
Convertible Security that is supported principally by its conversion value
will rise along with any increase in the price of the common stock, and such
price generally will decline along with any decline in the price of the common
stock except that the security will receive additional support as its price
approaches investment value. A Convertible Security purchased or held at a
time when its price is influenced by its conversion value will produce a lower
yield than nonconvertible senior securities with comparable investment values.
Convertible Securities may be purchased by the Fund at varying price levels
above their investment values and/or their conversion values in keeping with
the Fund's investment objective.
Many Convertible Securities in which the Fund will invest have call
provisions entitling the issuer to redeem the security at a specified time and
at a specified price. This is one of the features of a Convertible Security
which affects valuation. Calls may vary from absolute calls to provisional
calls. Convertible Securities with superior call protection usually trade at a
higher premium. If long-term interest rates decline, the interest rates of new
Convertible Securities will also decline. Therefore, in a falling interest
rate environment companies may be expected to call Convertible Securities with
high coupons and the Fund would have to invest the proceeds from such called
issues in securities with lower coupons. Thus, Convertible Securities with
superior call protection will permit the Fund to maintain a higher yield than
with issues without call protection.
Income Securities. Although it is the Fund's policy to invest in
Convertible Securities to the extent attractive opportunities are available,
the Fund may also invest in Income Securities other than Convertible
Securities that are expected to periodically accrue or generate income for
their holders. Such Income Securities include (i) fixed income securities such
as bonds, debentures, notes, stock, short-term discounted Treasury Bills or
certain securities of U.S. government sponsored instrumentalities, as well as
money market mutual funds that invest in those securities, which, in the
absence of an applicable exemptive order, will not be affiliated with the
Investment Adviser, and (ii) common stocks of issuers that have historically
paid dividends. Fixed income securities obligate the issuer to pay to the
holder of the security a specified return, which may be either fixed or reset
periodically in accordance with the terms of the security. Fixed income
securities generally are senior to an issuer's common stock and their holders
generally are entitled to receive amounts due before any distributions are
made to common stockholders. Common stocks generally do not obligate an issuer
to make periodic distributions to holders.
The market value of fixed income securities, especially those that
provide a fixed rate of return, may be expected to rise and fall inversely
with interest rates and in general is affected by the credit rating of the
issuer, the issuer's performance and perceptions of the issuer in the market
place. The market value of callable or redeemable fixed income securities may
also be affected by the issuer's call and redemption rights. It is possible
that the issuer of fixed income securities may not be able to meet its payment
obligations on interest or principal to holders. Further, holders of
non-convertible fixed income securities do not participate in any capital
appreciation of the issuer.
The Fund may also invest in obligations of U.S. government sponsored
instrumentalities. Unlike non-U.S. government securities, 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.
The Fund also may invest in common stock of issuers that have
historically paid dividends or otherwise made distributions to common
stockholders. Unlike payments on fixed income securities, common stock
dividend payments generally are not guaranteed and so may be discontinued by
the issuer at its discretion or because of the issuer's inability to satisfy
its liabilities. Further, an issuer's history of paying dividends does not
guarantee that it will continue to pay dividends in the future. In addition to
dividends, under certain circumstances the holders of common stock may benefit
from the capital appreciation of the issuer.
Other Investments. The Fund may without limit invest in securities of
companies for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgement of the
Investment Adviser, there is a reasonable prospect of capital appreciation
significantly greater than the brokerage and other transaction expenses
involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when: the
discount significantly overstates the risk of the contingencies involved; the
market significantly undervalues the securities, assets or cash to be received
by stockholders of the prospective portfolio company as a result of the
contemplated transaction; or the market fails adequately to recognize the
possibility that the offer or proposal may be replaced or superseded by an
offer or proposal of greater value. The evaluation of such contingencies
requires unusually broad knowledge and experience on the part of the
Investment Adviser which must appraise not only the value of the issuer and
its component businesses as well as the assets or securities to be received as
a result of the contemplated transaction but also the financial resources and
business motivation of the offeror and the dynamics and business climate when
the offer or proposal is in process.
In making the investments, the Fund will not violate any of its
investment restrictions (see below, "Investment Restrictions") including the
requirement that, (i) as to 75% of its total assets, it will not invest more
than 5% of its total assets in the securities of any one issuer and (ii) it
will not invest more than 25% of its total assets in any one industry. Certain
investments are short-term in nature and will tend to increase the turnover
ratio of the Fund thereby increasing its brokerage and other transaction
expenses.
Unregistered Convertible Securities and Other Illiquid Investments.
As set forth in the Prospectus, the Fund is not subject to an independent
limitation on the amount it may invest in unregistered securities and other
illiquid investments, including repurchase agreements having a maturity of
longer than seven days.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased over-the-counter ("OTC") options and the
assets used as "cover" for written OTC options are illiquid. The assets used
as cover for OTC options written by the Fund will be considered illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC option it writes at a maximum price to be calculated by
a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure will be considered illiquid only to the
extent that the maximum repurchase price under the option formula exceeds the
intrinsic value of the option.
When Issued and Delayed Delivery Securities and Forward Commitments.
As discussed in the Prospectus, the Fund may purchase securities on a "when,
as and if issued" basis under which the issuance of the security depends upon
the occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring. The commitment for the purchase of any
such security will not be recognized in the portfolio of the Fund until the
Investment Adviser determines that issuance of the security is probable. At
such time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At such time, the
Fund will also establish a segregated account with its custodian bank in which
it will maintain cash or liquid high- grade debt securities at least equal in
value to the amount of its commitments. The Investment Adviser does not
believe that the net asset value of the Fund will be adversely affected by its
purchase of securities on this basis.
Foreign Securities. Subject to the limitations described in the
Prospectus, the Fund may invest in foreign securities which involve certain
risks not associated with domestic investments.
Among other risks, foreign markets have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlements could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to the Fund
due to subsequent declines in the value of such portfolio security or, if the
Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
High Yield/High Risk Securities. Subject to the limitations described
in the Prospectus, the Fund may invest in high yielding, lower rated bonds,
commonly called "junk bonds." Bonds that are rated Ba or lower by Moody's or
BB or lower by S&P, or unrated bonds of comparable quality, are generally
considered to be high yield bonds. These high yield bonds are subject to
greater risks than lower yielding, higher rated debt securities.
Lower rated securities are subject to risk factors such as: (i)
vulnerability to economic downturns and changes in interest rates; (ii)
sensitivity to adverse economic changes and corporate developments; (iii)
redemption or call provisions which may be exercised at inopportune times;
(iv) difficulty in accurately valuing or disposing of such securities; (v)
federal legislation which could affect the market for such securities; and
(vi) special adverse tax consequences associated with investments in certain
high yield, high risk bonds structured as zero coupon or pay-in-kind
securities.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in lower return for investors. Conversely, a high yield
bond's value will decrease in a rising interest rate market.
The market for high yield bonds is in some cases more thinly traded
than the market for investment grade bonds, and recent market quotations may
not be available for some of these bonds. Market quotations are generally
available only from a limited number of dealers and may not represent firm
bids from such dealers or prices for actual sales. As a result, the Fund may
have greater difficulty valuing the high yield bonds in its portfolio
accurately and disposing of these bonds at the time or price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like other
bonds, attempt to evaluate the timeliness of principal and interest payments
on those bonds. However, such ratings do not assess the risk of a decline in
the market value of those bonds. In addition, ratings may fail to reflect
recent events in a timely manner and are subject to change. If a rating with
respect to a portfolio security is changed, the Investment Adviser will
determine whether the security will be retained based upon the factors the
Investment Adviser considers in acquiring or holding other securities in the
portfolio. Investment in high yield bonds may make achievement of the Fund's
investment objective more dependent on the Investment Adviser's own credit
analysis than is the case for higher rated bonds.
Market prices for high yield bonds tend to be more sensitive than
those for higher rated securities due to many of the factors described above,
including the creditworthiness of the issuer, redemption or call provisions,
the liquidity of the secondary trading market and changes in credit ratings,
as well as interest rate movements and general economic conditions. In
addition, yields on such bonds will fluctuate over time. An economic downturn
could severely disrupt the market for high yield bonds.
The risk of default in payment of principal and interest on high
yield bonds is significantly greater than with higher rated debt securities
because high yield bonds are generally unsecured and are often subordinated to
other obligations of the issuer, and because the issuers of high yield bonds
usually have high levels of indebtedness and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates. Upon a
default, bondholders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of the Fund to
the extent it invests in high yield bonds, is expected to be more volatile
than the net asset value of funds which invest solely in higher rated debt
securities.
Derivative Instruments.
Options. The Fund may, from time to time, subject to guidelines of
the Board of Directors and the limitations set forth in the Prospectus and
applicable rating agency guidelines, 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 OTC market, as a means of achieving
additional return or of hedging the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the
right to buy from the writer of the call option, in return for a premium, 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 a contract that gives the holder of the option the
right, in return for a premium, to sell to the seller the underlying security
at a specified price. The seller of the put option has the obligation to buy
the underlying security upon exercise at the exercise price.
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 (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other instruments held in its portfolio. 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 securities or other liquid securities 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. The Investment
Adviser, on behalf of the Fund, has no present intention to engage in
uncovered option transactions. 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. 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. 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.
Options on Securities Indices. The Fund may purchase and sell
securities index options. One effect of such transactions may be to hedge all
or part of the Fund's securities holdings against a general decline in the
securities market or a segment of the securities market. Options on securities
indices are similar to options on stocks except that, rather than the right to
take or make delivery of stock at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the index and the price
of the securities being hedged against is imperfect and the risk from
imperfect correlation increases as the composition of the Fund diverges from
the composition of the relevant index. Accordingly, a decrease in the value of
the securities being hedged against may not be wholly offset by a gain on the
exercise or sale of a securities index put option held by the Fund.
Options on Foreign Currencies. Instead of purchasing or selling
currency futures (as described below), the Fund may attempt to accomplish
similar objectives by purchasing put or call options on currencies or by
writing put options or call options on currencies either on exchanges or in
OTC markets. A put option gives the Fund the right to sell a currency at the
exercise price until the option expires. A call option gives the Fund the
right to purchase a currency at the exercise price until the option expires.
Both types of options serve to insure against adverse currency price movements
in the underlying portfolio assets designated in a given currency. The Fund's
use of options on currencies will be subject to the same limitations as its
use of options on securities, described above and in the Prospectus.
Currency options may be subject to position limits which may limit the ability
of the Fund to fully hedge its positions by purchasing the options.
As in the case of interest rate futures contracts and options
thereon, described below, the Fund may hedge against the risk of a decrease or
increase in the U.S. dollar value of a foreign currency denominated debt
security which the Fund owns or intends to acquire by purchasing or selling
options contracts, futures contracts or options thereon with respect to a
foreign currency other than the foreign currency in which such debt security
is denominated, where the values of such different currencies (vis-a- vis the
U.S. dollar) historically have a high degree of positive correlation.
Futures Contracts. The Fund will enter into futures contracts only
for certain bona fide hedging, yield enhancement and risk management purposes.
The Fund may enter into futures contracts for the purchase or sale of debt
securities, financial indices, and U.S. government securities (collectively,
"interest rate futures contracts"). It may also enter into futures contracts
for the purchase or sale of foreign currencies in which securities held or to
be acquired by the Fund are denominated, or the value of which have a high
degree of positive correlation to the value of such currencies as to
constitute an appropriate vehicle for hedging. In addition, the Fund may enter
into futures contracts on stock and bond indices (collectively, "securities
indices"). The Fund may enter into such futures contracts both on U.S. and
foreign exchanges.
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 "purchase" 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 are
settled on a net cash payment basis rather than by the sale and delivery of
the assets underlying the futures contracts. U.S. futures contracts have been
designed by exchanges that have been designated as "contract markets" by the
Commodity Futures Trading Commission (the "CFTC"), an agency of the U.S.
government, and must be executed through a futures commission merchant, i.e.,
a brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on these contract markets and their affiliated clearing
organizations guarantee performance of the contracts as between the clearing
members of the exchange.
At the time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment (initial margin). It is
expected that the initial margin on U.S. exchanges will vary from 0.5% to 4%
of the face value of the contract. Under certain circumstances, however, such
as during periods of high volatility, the Fund may be required by an exchange
to increase the level of its initial margin payment. Thereafter, the futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "mark-to-the-market." Each day the Fund is
required to provide or is entitled to receive variation margin in an amount
equal to any change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual
delivery or acquisition of underlying assets, in most cases the contractual
obligation is extinguished by offset before the expiration of the contract.
The offsetting of a contractual obligation is accomplished by buying
(to offset an earlier sale) or selling (to offset an earlier purchase) an
identical futures contract calling for delivery in the same month. Such a
transaction cancels the obligation to make or take delivery of the underlying
commodity. When the Fund purchases or sells futures contracts, the Fund will
incur brokerage fees and related transactions costs.
In addition, futures contracts entail risks. The ordinary spreads
between values in the cash and futures markets, due to differences in the
characters of those markets, are subject to distortions. First, all
participants in the futures market are subject to initial and variation margin
requirements. Rather than meeting additional variation margin requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing price distortions. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Increased participation by speculators in the futures market may cause
temporary price distortions. Thus, a correct forecast of interest rate trends
by the Investment Adviser may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its
portfolio securities and sells futures contracts on other securities that
historically have had a high degree of positive correlation to the value of
the portfolio securities, the value of its portfolio securities might decline
more rapidly than the value of a poorly correlated futures contract rises. In
that case, the hedge will be less effective than if the correlation had been
greater. In a similar but more extreme situation, the value of the futures
position might in fact decline while the value of the portfolio securities
holds steady or rises. This would result in a loss that would not have
occurred but for the attempt to hedge.
Options on Futures Contracts. The Fund may also enter into options on
futures contracts for certain bona fide hedging, yield enhancement and risk
management purposes. The Fund may purchase put and call options and write put
and call options on futures contracts that are traded on U.S. and foreign
exchanges. The Investment Adviser, on behalf of the Fund, has no present
intention to engage in uncovered option transactions. 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 (a long position if the option is a
call and a short position if the option is a put) at a specified exercise
price at any time during the option exercise period. The writer of the option
is required upon exercise to assume a short futures position (if the option is
a call) or a long futures position (if the option is a put). Upon exercise of
the option, the assumption of offsetting futures positions by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise of the
option on the futures contract.
The Fund will be considered "covered" with respect to a call option
it writes on a futures contract if the Fund owns the asset which is
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates and maintains with its
custodian for the term of the option, cash or liquid securities equal to the
fluctuating value of the optioned futures. The Fund will be considered
"covered" with respect to a put option it writes on a futures contract if it
owns an option to sell that futures contract having a strike price equal to or
greater than the strike price of the "covered" option and having an expiration
date not earlier than the expiration date of the "covered" option, or if it
segregates and maintains with its custodian for the term of the option, cash
or liquid securities at all times equal in value to the exercise price of the
put (less any initial margin deposited by the Fund with its custodian with
respect to such put option). There is no limitation on the amount of the
Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to
acquire. If the futures price at expiration of the option is above the
exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any increase that may have occurred in
the price of the debt securities the Fund intends to acquire. If the market
price of the underlying futures contract is below the exercise price when the
option is exercised, the Fund will incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities the Fund
intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written
call option is below the exercise price, the Fund will retain the full amount
of the option premium, thereby partially hedging against any decline that may
have occurred in the Fund's holding of debt securities. If the futures price
when the option is exercised is above the exercise price, however, the Fund
will incur a loss, which may be wholly or partially offset by the increase in
the value of the securities in the Fund's portfolio which were being hedged.
The Fund may purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund may also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as
a result of declining interest rates or fluctuating currency exchange rates.
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 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 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. Subject to the guidelines of the Board of Directors, the
Fund may engage in transactions in futures contracts and options hereon only
for bona fide hedging, yield enhancement and risk management purposes, in each
case in accordance with the rules and regulations of the CFTC.
Regulations of the CFTC applicable to the Fund permit the Fund's
futures and options on futures transactions to include (i) bona fide hedging
transactions without regard to the percentage of the Fund's assets committed
to margin and option premiums and (ii) non-hedging transactions, provided that
the Fund not enter into such non-hedging transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and option premiums would exceed 5% of the market
value of the Fund's liquidating value, after taking into account unrealized
profits and unrealized losses on any such transactions.
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 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 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.
Repurchase Agreements. The Fund may engage in repurchase agreements
as set forth in the Prospectus. A repurchase agreement is an instrument under
which the purchaser, i.e., the Fund, acquires a debt security and the seller
agrees, at the time of the sale, to repurchase the obligation at a mutually
agreed upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. The underlying securities are
ordinarily U.S. Treasury or other government obligations or high quality money
market instruments. The Fund will require that the value of such underlying
securities, together with any other collateral held by the Fund, always equals
or exceeds the amount of the repurchase obligations of the counter party. The
Fund's risk is primarily that, if the seller defaults, the proceeds from the
disposition of the underlying securities and other collateral for the seller's
obligation are less than the repurchase price. If the seller becomes
insolvent, the Fund might be delayed in or prevented from selling the
collateral. In the event of a default or bankruptcy by a seller, the Fund will
promptly seek to liquidate the collateral. To the extent that the proceeds
from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will experience a
loss.
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 unsettled. As a
result, under extreme 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. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to securities
broker-dealers or financial institutions, provided that such loans are
callable at any time by the Fund (subject to notice provisions described
below), and are at all times secured by cash or cash equivalents, which are
maintained in a segregated account pursuant to applicable regulations and that
are at least equal to the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive
the income on the loaned securities while at the same time earns interest on
the cash amounts deposited as collateral, which will be invested in short-
term obligations. The Fund will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
stock is qualified for sale. The Fund's loans of portfolio securities will be
collateralized in accordance with applicable regulatory requirements and no
loan will cause the value of all loaned securities to exceed 33% of the value
of the Fund's total assets. The Fund's ability to lend portfolio securities
will be limited by the rating agency guidelines applicable to any of the
Fund's outstanding preferred stock.
A loan may generally be terminated by the borrower on one business
day notice, or by the Fund on five business days notice. If the borrower fails
to deliver the loaned securities within five days after receipt of notice, the
Fund could use the collateral to replace the securities while holding the
borrower liable for any excess of replacement cost over collateral. As with
any extensions of credit, there are risks of delay in recovery and in some
cases even loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms deemed by the Fund's management to be creditworthy and
when the income which can be earned from such loans justifies the attendant
risks. The Board of Directors will oversee the creditworthiness of the
contracting parties on an ongoing basis. Upon termination of the loan, the
borrower is required to return the securities to the Fund. Any gain or loss in
the market price during the loan period would inure to the Fund. The risks
associated with loans of portfolio securities are substantially similar to
those associated with repurchase agreements. Thus, if the counter party 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 extreme circumstances, there may be a restriction on the Fund's
ability to sell the collateral and the Fund would suffer a loss. When voting
or consent rights which accompany loaned securities pass to the borrower, the
Fund will follow the policy of calling the loaned securities, to be delivered
within one day after notice, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in such
loaned securities. The Fund will pay reasonable finder's, administrative and
custodial fees in connection with a loan of its securities.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the
Fund as fundamental policies, except as otherwise indicated. Under the 1940
Act, a fundamental policy may not be changed without the vote of a majority of
the outstanding voting securities of the Fund and the vote of a majority of
the preferred shares, voting as a single class, as defined in the 1940 Act.
Such a majority is defined as the lesser of (i) 67% or more of the shares
present at a meeting of stockholders, if the holders of 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii) more than 50%
of the outstanding shares of the Fund.
Under its investment restrictions the Fund may not:
o Purchase the securities of any one issuer, other than the
United States government or any of its agencies or
instrumentalities, if immediately after such purchase more than
5% of the value of its total assets would be invested in such
issuer or the Fund would own more than 10% of the outstanding
voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard
to such 5% and 10% limitations.
o Purchase or otherwise acquire real estate or interests therein,
although the Fund may purchase securities of issuers which
engage in real estate operations and securities secured by real
estate or interests therein.
o Purchase or otherwise acquire or sell commodities or commodity
contracts except that the Fund may purchase or sell financial
futures contracts and related options thereon.
o Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs, except that
the Fund may invest in the securities of companies which
operate, invest in, or sponsor such programs.
o Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets, except that the Fund reserves the right
to invest up to 5% of its total assets in not more than 3% of
the securities of any one investment company including small
business investment companies or invest up to 10% of its total
assets in the securities of investment companies, nor make any
such investments other than through purchases in the open
market where to the best information of the Fund no commission
or profit to a sponsor or dealer (other than the customary
broker's commission) results from such purchase.
o Pledge its assets or assign or otherwise encumber them except
to secure permitted borrowings. For the purpose of this
restriction, collateral arrangements with respect to the
writing of options or entering into financial futures
transactions or forward contracts, or when issued or delayed
delivery securities are not deemed to be pledges of assets and
such arrangements are not deemed to be the issuance of a senior
security as described in the immediately following restriction.
o Issue senior securities except to the extent permitted by
applicable law.
o Borrow money except for short-term credits from banks as may be
necessary for the clearance of portfolio transaction and for
temporary or emergency purposes to the extent permitted by
applicable law.
o Make loans of money or securities, except: (a) that the Fund
may engage in repurchase agreements as set forth in the
Prospectus and (b) the Fund may lend its portfolio securities
consistent with applicable regulatory requirements and as set
forth in the Prospectus.
o Make short sales of securities or maintain a short position,
unless at all times when a short position is open, it either
owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
o Engage in the underwriting of securities, except insofar as the
Fund may be deemed an underwriter under the Securities Act of
1933, as amended, in disposing of a portfolio security.
o Invest for the purpose of exercising control or management of
any other issuer.
o Invest more than 25% of the value of its total assets in any
one industry.
If a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in values
of portfolio securities or amount of total or net assets will not be
considered a violation of any of the foregoing restrictions.
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 Investment Adviser, State
Street Bank and Trust Company, the Fund's custodian (the "Custodian"),
EquiServe Trust Company ("EquiServe"), the Fund's transfer agent and dividend
disbursing agent with respect to the Series B Preferred, and The Bank of New
York, the Fund's auction agent, paying agent and registrar with respect to the
Series C Auction Rate Preferred. 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.
Number of
Term of Funds in
Name (And Age), Office and Fund Other
Position with the Fund Length of Complex Principal Directorships
and Time Overseen by Occupation During Held by
Business Address1 Served2 Director Past Five Years Director
----------------- ---------- ------------ ----------------- --------------
INTERESTED
DIRECTORS3:
Mario J. Gabelli Since 22 Chairman of the Board Director of Morgan
Director, President and 1989*** and Chief Executive Group Holdings, Inc.
Chief Investment Officer Officer of Gabelli (holding company);
Age: 60 Asset Management Vice Chairman of
Inc. and Chief Lynch Corporation
Investment Officer of (diversified
Gabelli Funds, LLC manufacturing)
and GAMCO
Investors, Inc;
Chairman and Chief
Executive Officer of
Lynch Interactive
Corporation
(multimedia and
services)
Karl Otto Pohl+ Since 31 Member of the Director of Gabelli
Director 1992*** Shareholder Asset Management
Age: 72 Committee of Sal Inc. (investment
Oppenheim Jr. & Cie management);
(private investment Chairman, Incentive
bank); Former Capital and Incentive
President of the Asset Management
Deutsche Bundesbank (Zurich); Director at
and Chairman of its Sal Oppenheim Jr. &
Central Bank Council Cie, Zurich
(1980-1991)
NON-INTERESTED
DIRECTORS:
--------------
E. Val Cerutti Since 7 Chief Executive Director of Lynch
Director 1989** Officer of Cerutti Corporation
Age: 62 Consultants, Inc.;
Former President and
Chief Operating
Officer of Stella D'oro
Biscuit Company
(through 1992);
Adviser, Iona College
School of Business
Anthony J. Colavita4 Since 33 President and Attorney ___
Director 1989* at Law in the law firm
Age: 66 of Anthony J.
Colavita, P.C.
Dugald A. Fletcher Since 2 President, Fletcher & Director of Harris
Director 1989** Company, Inc.; and Harris Group,
Age: 72 Former Director and Inc. (venture capital)
Chairman and Chief
Executive Officer of
Binnings Building
Products, Inc. (1997)
Anthony R. Pustorino Since 17 Certified Public ___
Director 1989** Accountant; Professor
Age: 76 Emeritus, Pace
University
Werner J. Roeder, MD4 Since 26 Medical Director of ___
Director 2001*** Lawrence Hospital
Age: 61 and practicing private
physician
Anthonie C. van Ekris+ Since 18 Managing Director of
Director 1992* BALMAC
Age: 67 International, Inc.
Salvatore J. Zizza Since 9 Chairman, Hallmark Board Member of
Director 1991* Electrical Supplies Hollis Eden
Age: 56 Corp.; Former Pharmaceuticals
Executive Vice
President of FMG
Group (OTC), a
healthcare provider.
OFFICERS:
Bruce N. Alpert Since 2003 ___ Executive Vice ___
President President and Chief
Age: 51 Operating Officer of
Gabelli Funds, LLC
since 1988 and an
officer of all mutual
funds advised by
Gabelli Funds, LLC
and its affiliates;
Director and President
of Gabelli Advisors,
Inc.
Gus Coutsouros ___
Vice President and
Treasurer
Peter W. Latartara Since 1998 ___ Vice President of the ___
Vice President Fund since 1998.
Age: 35 Vice President of
Gabelli & Company,
Inc. from 1996
James E. McKee Since 1995 ___ Vice President, ___
Secretary General Counsel and
Age: 38 Secretary of 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
_______________________
+ Non-resident director with no authorized agent in the United States.
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:
* Term expires at the Fund's 2003 Annual Meeting of Stockholders and
until their successors are duly elected and qualified.
** Term expires at the Fund's 2004 Annual Meeting of Stockholders and
until their successors are duly elected and qualified.
*** Term expires at the Fund's 2005 Annual Meeting of Stockholders and
until their successors are duly elected and qualified.
3 "Interested person" of the Fund as defined in the Investment Company Act
of 1940. 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 the Preferred Stock.
The Board of Directors of the Fund are divided into three classes,
with a class having a term of three years except as described below. Each year
the term of office of one class of directors of the Fund will expire. However,
to ensure that the term of a class of the Fund's directors expires each year,
one class of the Fund's directors will serve three-year terms. The terms of
Messrs. Colavita, van Ekris and Zizza as directors of the Fund expire in 2003;
the terms of Messrs. Fletcher and Pustorino as directors of the Fund expire in
2004; and the terms of Messrs. Gabelli, Pohl, Cerutti and Dr. Roeder as
directors of the Fund expire in 2005.
------------------------------------------------------------------------------------------------------------
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of
Investment Companies
------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTORS
------------------------------------------------------------------------------------------------------------
Mario J. Gabelli E E
Karl Otto Pohl A A
------------------------------------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
------------------------------------------------------------------------------------------------------------
E. Val Cerutti C E
Anthony J. Colavita E E
Dugald A Fletcher E E
Anthony R. Pustorino D E
Werner J, Roeder, MD A E
Anthonie C. van Ekris C E
Salvatore J. Zizza E E
------------------------------------------------------------------------------------------------------------
------------------------------------------
* KEY TO DOLLAR RANGES
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All stock was valued as of December 31, 2002.
The Directors serving on the Fund's Nominating Committee are Messrs.
Anthony J. Colavita, Chairman of the committee, and Salvatore J. 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 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. Anthony R. Pustorino, Chairman, Anthony J. Colavita, and
Salvatore J. Zizza serve on the Fund's Audit Committee and these directors are
not "interested persons" of the Fund as defined in the 1940 Act. The Audit
Committee is responsible for reviewing and evaluating issues related to the
accounting and financial reporting policies and internal controls of the Fund
and the internal controls of certain service providers, overseeing the quality
and objectivity of the Fund's financial statements and the audit thereof and
to act 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 economic terms of the Advisory Agreement between the Fund and its
Investment Adviser were unanimously approved by the Fund's Board of Directors
at its May 22, 2002 meeting. The Board's approval included a majority of the
Directors who are not parties to the Advisory Agreement or interested persons
of any such party (as such term is defined in the 1940 Act). In approving the
Advisory Agreement, the Board of Directors considered, among other things, the
nature and quality of services to be provided by the Investment Adviser, the
profitability to the Investment Adviser of its relationship with the Fund,
economies of scale and comparative fees and expense ratios.
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 Securities and Exchange Commission's Public Reference
Room in Washington, D.C. Information on the operations of the Reference Room
may be obtained by calling the Securities and Exchange Commission at (202)
942-8090. The Code of Ethics is also available on the EDGAR database on the
Securities and Exchange Commission'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 Securities and Exchange Commission'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 $5,000 per year plus $750 per meeting
attended, 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. Latartara is employed by the Fund and his 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.
Compensation Table For the Fiscal Year Ended December 31, 2002
TOTAL
COMPENSATION
FROM THE FUND
AND FUND
AGGREGATE COMPLEX PAID
NAME OF PERSON AND COMPENSATION TO DIRECTORS/
POSITION* FROM THE FUND OFFICERS
MARIO J. GABELLI $0 $0
Chairman of the Board (22)
E. VAL CERUTTI Director (7) $8,750 $23,250
ANTHONY J. COLAVITA Director (33) $9,750 $152,286
DUGALD A. FLETCHER Director (2) $9,250 $17,250
KARL OTTO POHL Director (31) $0 $0
ANTHONY R. PUSTORINO Director (17) $9,750 $132,286
WERNER J. ROEDER, MD Director (26) $8,750 $97,786
ANTHONIE C. van EKRIS Director (18) $8,750 $67,250
SALVATORE J. ZIZZA Director (9) $10,250 $73,750
--------
TOTAL** $65,250
* 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.
** Does not include $2,202 of unallocated Director expenses, which would
bring total Director compensation/expenses from the Fund to $67,452.
For his services as Vice President of the Fund, Mr. Latartara, received
compensation in 2002 of $97,500.
Indemnification of Directors and Officers; Limitations on Liability
Subject to limitations imposed by the 1940 Act, the Fund's Charter
limits the liability of the Fund's directors and officers to the Fund and its
stockholders to the fullest extent permitted by Maryland law. Under Maryland
law, Maryland corporations may limit their directors' and officers' liability
for money damages to the corporation and stockholders except to the extent (i)
that it is proved that a director or officer actually received an improper
benefit or profit in money, property or services, in which case such director
or officer may be liable for the amount of the benefit or profit actually
received or (ii) that a judgment or other final adjudication adverse to a
director or officer is entered in a proceeding based on a finding that such
director's or officer's action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding.
The Charter also provides for the indemnification of, and expenses to
be advanced on behalf of, directors and officers, among others, to the fullest
extent permitted by Maryland law, subject to the limitations imposed by the
1940 Act. Under Maryland law, corporations may indemnify present and past
directors and officers, or officers of another corporation that serve at the
request of the indemnifying corporation, against judgments, penalties, fines,
settlements and reasonable expenses (including attorneys' fees) actually
incurred in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation in which such director or
officer is adjudicated liable to the corporation), in which they are made
parties by reason of being or having been directors or officers, unless it is
proved that (i) the act or omission of the director or officer was material to
the matter giving rise to the proceeding and was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) the director or officer
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. Maryland
law also provides that, unless limited by the corporation's charter, a
corporation will indemnify present and past directors and officers who are
successful, on the merits or otherwise, in the defense of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, against reasonable expenses (including
attorneys' fees) incurred in connection with such proceeding. The Fund's
Charter does not limit the extent of this indemnity.
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 Advisers, Inc., which was organized in
1980. As of December 31, 2002, the Investment Adviser acted as registered
investment advisers to 18 management investment companies with aggregate net
assets of $8.7 billion. The Investment Adviser, together with other affiliated
investment advisers, has assets under management totaling $9.7 billion as of
December 31, 2002. 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 $10.0 billion under management as of
December 31, 2002. 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 $1.6 billion under management as of
December 31, 2002. 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 New York Stock Exchange 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
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and manages its 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 or
valuing its investment portfolio, will be an expense of the Fund under its
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 will 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 applicable series of its preferred
stock 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 the stated annual dividend rate
of such series, prorated during the year such series is issued and the final
year such series is outstanding.
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 of stockholder approval
of such Agreement, 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 its
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 Board of Directors at a meeting held on June 5, 1989 and was approved most
recently by the Board of Directors on May 22, 2002. 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
shares.
For each of the years ended December 31, 2000, December 31, 2001, and
December 31, 2002, the Investment Adviser was paid $822,916, $750,049, and
$687,016 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.
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 $144,932, $42,738, and $19,349
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $116,959, $34,251, and $16,332, 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 84.4% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately 96.7% of the
aggregate dollar amount of transactions by the Fund for such period.
REPURCHASE OF COMMON STOCK
The Fund is a closed-end, diversified, management investment company
and as such its stockholders do not, and will not, have the right to redeem
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 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.
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 2000 were 56%, 59% and 169%,
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 its stockholders, as applicable. A
higher rate of portfolio turnover may also result in taxable gains being
passed to stockholders.
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 New York Stock Exchange 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 New York Stock Exchange
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 net asset 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 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, 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 net
investment income (i.e., 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 at least
90% of the sum of its net investment income and any net tax-exempt 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
securities, 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 securities 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.
The IRS has taken the position that if a regulated investment company
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 regulated investment company
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, ordinary
investment income and dividends qualifying for the dividends received
deduction to common stockholders and preferred stockholders. The amount of net
capital gain and ordinary investment income and dividends qualifying for the
dividends received deduction allocable among common stockholders and the
preferred stockholders will depend upon the amount of such net capital gain
and ordinary investment income and dividends qualifying for the dividends
received deduction realized by the Fund and the total dividends paid by the
Fund on shares of common stock and the preferred stock during a taxable 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. 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.
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 net investment
income and loss.
If the Fund invests in stock of a passive foreign investment company
(a "PFIC"), the Fund may be subject to federal income tax on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock even if such income is distributed as a taxable dividend by the Fund to
its stockholders. The tax would be determined by allocating such distribution
or gain ratably to each day of the Fund's holding period for the stock. The
amount so allocated to any taxable year of the Fund prior to the taxable year
in which the excess distribution or disposition occurs would be taxed to the
Fund at the highest marginal federal corporate income tax rate in effect for
the year to which it was allocated, and the tax would be further increased by
an interest charge. The amount allocated to the taxable year of the
distribution or disposition would be included in the Fund's net investment
income and, accordingly, would not be taxable to the Fund to the extent
distributed by the Fund as a taxable dividend to stockholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect
to treat the PFIC as a "qualified electing fund," in lieu of being taxable in
the manner described in the above paragraph, and to include annually in income
its pro rata share of the ordinary earnings and net capital gain (whether or
not distributed) of the PFIC. In order to make this election, the Fund would
be required to obtain annual information from the PFICs in which it invests,
which may be difficult to obtain. Alternatively, the Fund may elect to
mark-to-market at the end of each taxable year all shares that it hold in
PFICs. If it makes this election, the Fund would recognize as ordinary income
any increase in the value of such shares over their adjusted basis and as
ordinary loss any decrease in such value to the extent it does not exceed
prior increases.
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 net investment 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 net investment 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 the
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.
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. It is anticipated that the Fund
will not invest more than 25% of its total assets in foreign securities.
Accordingly, 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. In
order to make such an election, at least 50% of the Fund's total assets would
be required to be invested in foreign securities.
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 of ordinary income are taxable to a U.S. stockholder as
ordinary income, whether paid in cash or shares. Ordinary income dividends
paid by the Fund may qualify for the dividends received deduction available to
corporations, but only to the extent that the Fund's income consists of
qualified dividends received from U.S. corporations. The Fund expects to
distribute a relatively small amount of income that would be eligible for the
dividends received deduction. The amount of any dividend distribution eligible
for the dividends received deduction will be designated by the Fund in a
written notice to stockholders within 60 days of the close of the taxable
year. Distributions of net capital gain designated as capital gain dividends,
if any, are taxable to shareholders at rates applicable to long- term capital
gains, whether paid in cash or in shares, regardless of how long the
stockholder has held the Fund's shares, and are not eligible fo the dividends
received deduction. 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 shares are held as a capital asset). For non-corporate
taxpayers, net investment income will currently be taxed at a maximum rate of
38.6% while net capital gain generally will be taxed at a maximum rate of 20%.
For corporate taxpayers, both net investment 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 loses 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.
Stockholders receiving distributions in the form of newly issued
shares will have a basis in such shares of the Fund equal to the fair market
value of such shares on the distribution date. If the net asset value of
shares is reduced below a stockholder's cost as a result of a distribution by
the Fund, such distribution will be taxable even though it represents a return
of invested capital. The price of shares purchased at any time may reflect the
amount of a forthcoming distribution. Those purchasing shares 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 shares, a stockholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such gain
or loss will be treated as long-term capital gain or loss if the shares have
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund shares 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 shares.
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.
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.
The Bush Administration has announced a proposal to reduce or
eliminate the tax on dividends; however, many of the details of the proposal
(including how the proposal would apply to dividends paid by a regulated
investment company) have not been specified. Moreover, the prospects for this
proposal are unclear. Accordingly, it is not possible to evaluate how this
proposal might affect the tax discussion above.
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 Internal Revenue
Service.
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 B Preferred or Series C Auction Rate Preferred should
consult their own tax advisers regarding the purchase, ownership and
disposition of Series B Preferred or Series C Auction Rate Preferred.
ADDITIONAL INFORMATION
CONCERNING AUCTIONS FOR SERIES C AUCTION RATE PREFERRED
General
The Articles Supplementary provide that the Applicable Rate for each
Dividend Period of the Series C 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 shares of such Series. Each periodic implementation of the Auction
Procedures is referred 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 C 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 C Auction Rate Preferred. See "Broker-Dealers"
below.
Securities Depository. The Depository Trust Company ("DTC") will act
as the Securities Depository for the Agent Members with respect to the Series
C Auction Rate Preferred. One certificate for all of the Series C Auction Rate
Preferred shares 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 C Auction Rate Preferred contained in the Articles Supplementary. The
Fund will also issue stop-transfer instructions to the transfer agent for the
Series C 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 B Preferred and Series C Auction
Rate Preferred -- Voting Rights" in the Prospectus, Cede & Co. will be the
Holder of all the Series C 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 C 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 C Auction Rate Preferred:
(i) each Beneficial Owner of Series C Auction Rate Preferred may
submit to its Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding
Series C Auction Rate Preferred shares, 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 Series C
Auction Rate Preferred shares, if any, that such
Beneficial Owner offers to sell if the Applicable Rate
for such Series C 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
(c) "Sell Order" - indicating the number of Outstanding
Series C Auction Rate Preferred shares, if any, that
such Beneficial Owner offers to sell without regard to
the Applicable Rate for such Series C 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 Series C Auction Rate
Preferred shares that they offer to purchase if the Applicable
Rate for Series C 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 C 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 C Auction Rate Preferred an Order or
Orders covering all the Outstanding Series C 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 C 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 C Auction Rate Preferred an Order or Orders covering all of the
Outstanding Series C 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 Series C
Auction Rate Preferred shares held by such Beneficial Owner and not subject to
Orders submitted to its Broker-Dealer.
A Potential Beneficial Owner of Series C Auction Rate Preferred may
submit to its Broker- Dealer Bids in which it offers to purchase Series C
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 Series C Auction
Rate Preferred shares 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 C Auction Rate Preferred that offers to become the
Beneficial Owner of additional Series C Auction Rate Preferred is, for
purposes of such offer, a Potential Beneficial Owner.
As described more fully below under " -- Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise
permitted by the Fund) as Existing Holders in respect of Series C Auction Rate
Preferred subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of Series C 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 C 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 C 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 " -- Submission of
Orders by Broker-Dealers to Auction Agent" below.
The Fund may not submit an Order in any Auction.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold
or selling, or a Potential Holder purchasing, a number of Series C Auction
Rate Preferred shares that is fewer than the number of Series C Auction Rate
Preferred shares 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 made in good faith unless the Auction Agent will have been grossly
negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Series C 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 C Auction Rate Preferred --
Secondary Market Trading and Transfer of Series C Auction Rate Preferred" in
the Prospectus and notices from the Fund. The Auction 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, the Fund will use
its best efforts 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 with a successor Auction
Agent.
Broker-Dealers
The Auction Agent after each Auction for Series C 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 Series C 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 C 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 C Auction Rate Preferred
will be placed by a Broker-Dealer if such shares were (x) 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 (y) 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 (other than
an affiliate of the Fund) 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. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own
account. 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.
Submission of Orders by Broker-Dealers to Auction Agent
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 C 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 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
Series C Auction Rate Preferred shares 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 C Auction Rate Preferred will be
considered valid, but only up to and including in the
aggregate the number of Outstanding shares of Series C Auction
Rate Preferred held by such Existing Holder, and, if the
number of Series C Auction Rate Preferred shares subject to
such Hold Orders exceeds the number of Outstanding shares of
Series C 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 C Auction Rate Preferred will be
considered valid up to and including the excess of the
number of Outstanding shares of Series C Auction Rate
Preferred held by such Existing Holder over the number
of Series C Auction Rate Preferred shares 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 C Auction Rate Preferred is
submitted to the Auction Agent with the same rate and
the number of Outstanding shares of Series C 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 C Auction Rate Preferred subject to
each Bid with the same rate will be reduced pro rata to
cover the number of shares of Series C 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 C 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 C 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 C Auction Rate
Preferred by or on behalf of a Potential Holder at the
rate specified therein; and
(iii) all Sell Orders for Series C Auction Rate Preferred will be
considered valid up to and including the excess of the number
of Outstanding shares of Series C 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.
If more than one Bid of a Potential Holder for Series C 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
Series C Auction Rate Preferred shares 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 C 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 C Auction Rate Preferred
over the number of Outstanding shares of Series C Auction Rate Preferred
subject to Submitted Hold Orders (such excess being herein referred to as the
"Available Series C 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 C 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 C Auction Rate Preferred that are the subject of Submitted
Sell Orders (including the number of Series C Auction Rate Preferred shares
subject to Bids of Existing Holders specifying rates higher than the Maximum
Rate).
If Sufficient Clearing Bids for Series C 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 C Auction Rate Preferred shares which, when added to the number of
Outstanding Series C 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 C 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 C Auction Rate Preferred is subject to Submitted
Hold Orders), the Applicable Rate for the next Dividend Period for all Series
C 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 C Auction Rate
Preferred subject to such Sell Orders but will continue to own Series C
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 C Auction Rate Preferred is subject
to Submitted Hold Orders, the Applicable Rate for all Series C 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 and Potential Holders of
Series C 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 C Auction
Rate Preferred subject to such Hold Orders.
If Sufficient Clearing Bids for Series C 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 C 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 C 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 C 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 C Auction Rate Preferred
subject to such Submitted Bid, unless the number of
Outstanding Series C Auction Rate Preferred shares subject to
all such Submitted Bids is greater than the number of Series C
Auction Rate Preferred shares ("remaining shares") in excess
of the Available Series C Auction Rate Preferred over the
number of Series C 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
C Auction Rate Preferred subject to such Submitted Bid
determined on a pro rata basis based on the number of
Outstanding Series C 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 C Auction Rate Preferred will purchase any
Available Series C Auction Rate Preferred not accounted for in
clauses (ii) through (iv) above on a pro rata basis based on
the Outstanding Series C Auction Rate Preferred shares subject
to all such Submitted Bids.
If Sufficient Clearing Bids for Series C Auction Rate Preferred
shares have not been made (unless this results because all Outstanding Series
C 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 C 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 C
Auction Rate Preferred shares subject to such Submitted Bid;
and
(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 C
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 C 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 C 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 C Auction Rate Preferred shares being sold or
purchased on such Auction Date so that the number of Series C 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 C
Auction Rate Preferred share, the Auction Agent will, in such manner as, in
its sole discretion, it will determine, allocate Series C Auction Rate
Preferred for purchase among Potential Holders so that only whole Series C
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 C Auction Rate Preferred
as a result of the Auction and will be required to advise each customer
purchasing or selling Series C 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 C 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 C 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 C 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 C Auction Rate Preferred shares that is less than the
number of Series C Auction Rate Preferred shares that otherwise was to be
purchased by such person. In such event, the number of Series C Auction Rate
Preferred shares to be so delivered will be determined by the Broker-Dealer.
Delivery of such lesser number of Series C Auction Rate Preferred shares will
constitute good delivery.
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND SERIES C AUCTION RATE PREFERRED
The additional information concerning the Series B Preferred and
Series C 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 B Preferred and Series C
Auction Rate Preferred contained in the Prospectus under "Description of the
Series B Preferred and Series C 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 B Preferred and the Series C 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 C Auction Rate Preferred
Holders of Series C 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 C 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 C 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
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 C
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 C Auction Rate Preferred is set forth in the Prospectus. See
"The Auction of Series C 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 C 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 C Auction Rate
Preferred Basic Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for
Series C Auction Rate Preferred in which Sufficient Clearing Bids have not
been made (other than because all Series C 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 C
Auction Rate Preferred shares are subject (or are deemed to be subject) to
Hold Orders.
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 C 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 C 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 C Auction Rate Preferred Basic Maintenance
Amount and has consulted with the Broker-Dealers and has provided notice and a
Series C Auction Rate Preferred Basic Maintenance Report to each Rating Agency
which is then rating the Series C 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., 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 Series C 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 C 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 C
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 C 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 (i) 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
senior securities representing stock, including the Series B Preferred or
Series C Auction Rate Preferred, would be less than 200% (or such higher
percentage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring distributions,
purchases or redemptions of its capital stock), or (ii) declare any dividend
(except a dividend payable in stock of the issuer) or other distributions upon
any of its outstanding capital stock, including the Series B Preferred or
Series C Auction Rate Preferred, or purchase any such capital stock if, at the
time of such declaration, distribution or purchase, as applicable (and after
giving effect thereto), asset coverage with respect to the senior securities
representing indebtedness would be less than 300% (or such other percentage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing stock of a closed-end investment
company as a condition of declaring dividends on its Preferred Stock), except
that dividends may be declared upon any Preferred Stock, including the Series
B Preferred or Series C Auction Rate Preferred, if, at the time of such
declaration (and after giving effect thereto), asset coverage with respect to
the senior securities representing indebtedness would be equal to or greater
than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its Preferred Stock). A declaration of a dividend or
other distribution on or purchase or redemption of Series B Preferred or
Series C Auction Rate Preferred is prohibited, unless there is no event of
default under indebtedness senior to the Series B Preferred and/or Series C
Auction Rate Preferred and, immediately after such transaction, the Fund would
have Eligible Assets with an aggregated Discounted Value at least equal to the
asset coverage requirements under indebtedness senior to its Preferred Stock
(including the Series B Preferred and/or Series C Auction Rate Preferred).
For so long as the Series B Preferred or Series C 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 B Preferred and/or Series C 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 B
Preferred and/or Series C 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 B Preferred and/or Series C Auction Rate Preferred (except by
conversion into or exchange for shares of the Fund ranking junior to the
Series B Preferred and/or Series C 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 B Preferred or Series C Auction Rate Preferred and the
1940 Act Asset Coverage with respect to the Fund's Outstanding Preferred
Stock, including the Series B Preferred and/or Series C 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 B Preferred and/or
Series C 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 B Preferred and/or Series C 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 B Preferred
or Series C 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 B Preferred
and/or Series C Auction Rate Preferred) have been or contemporaneously are
declared and paid. If full 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 B Preferred and/or Series C 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 B
Preferred and/or Series C 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 B
Preferred and/or Series C 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 B
Preferred and/or Series C 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 B Preferred or Series C
Auction Rate Preferred at the request of the Fund) and Fitch (if Fitch is then
rating the Series B Preferred or Series C 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 B Preferred or Series C 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 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 whether the
assets held in the Fund's portfolio are Eligible Assets, and guidelines for
determining the market value of the Fund's portfolio holdings for purposes of
determining compliance with the Basic Maintenance Amount are based on the
criteria established in connection with rating the Series B Preferred or
Series C Auction Rate Preferred, as the case may be. 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.
The Discount Factor relating to any asset of the Fund, the Basic
Maintenance Amount, the assets eligible for inclusion in the calculation of
the Discounted Value of the Fund's portfolio and certain definitions and
methods of calculation relating thereto may be changed from time to time by
the Fund, without stockholder approval, but only in the event that the Fund
receives written confirmation from each Rating Agency which is then rating the
Series B Preferred or Series C Auction Rate Preferred, as the case may be, and
which so requires that any such changes would not impair an applicable Aaa
credit rating from Moody's or AAA rating from Fitch.
A Rating Agency's Guidelines will apply to the Series B Preferred or
Series C Auction Rate Preferred only so long as such Rating Agency is rating
such shares at the request of the Fund. The Fund will pay certain fees to
Moody's and Fitch for rating, as the case may be, the Series B Preferred
and/or Series C Auction Rate Preferred. The ratings assigned to the Series B
Preferred or Series C Auction Rate Preferred are not recommendations to buy,
sell or hold Series B Preferred or Series C Auction Rate Preferred. Such
ratings may be subject to revision or withdrawal by the assigning Rating
Agency at any time. Any rating of the Series B Preferred or Series C Auction
Rate Preferred should be evaluated independently of any other rating.
Upon any failure to maintain the required Discounted Value of the
Fund's 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.
Under certain circumstances, as described in the Articles
Supplementary, the Board of Directors without further action by the
stockholders may modify the calculation of Adjusted Value (as defined in the
Articles Supplementary), Basic Maintenance Amount and the elements of each of
them and the definitions of such terms and elements if the Board of Directors
determines that such modification is necessary to prevent a reduction in
rating of the shares of Preferred Stock by a rating agency rating such shares
at the request of the Fund or is in the best interests of the holders of
common stock and is not adverse to the holders of Preferred Stock in view of
advice to the Fund by the relevant rating agency that such modification would
not adversely affect the then-current rating of the affected Preferred Shares.
In addition, subject to compliance with applicable law, the Board of Directors
may amend the definition of Maximum Rate to increase the percentage amount by
which the Reference Rate is multiplied to determine the Maximum Rate shown
therein without the vote or consent of the Holders of shares of Preferred
Stock, including the Series C Auction Rate Preferred Shares, or any other
stockholder of the Fund, after consultation with the Broker-Dealers, and with
confirmation from each Rating Agency that immediately following any such
increase the Fund would meet the Series C Auction Rate Preferred Basic
Maintenance Amount Test.
1940 Act Series C Auction Rate Preferred 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 to the Auction Agent and each
Rating Agency a 1940 Act Asset Coverage Certificate which sets forth the
determination of the preceding sentence (i) as of the Date of Original Issue
and, thereafter, (ii) as of (a) the last Business Day of each March, June,
September and December and (b) 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 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 seventh Business Day after the relevant
Valuation Date or Cure Date.
Deposit Assets Requirements Relating to the Series C 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 C 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 C Auction Rate Preferred
Series C 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 C Auction Rate Preferred through
different Broker-Dealers, advises the Auction Agent of such transfer. Any
certificates representing the Series C 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 FITCH GUIDELINES
The descriptions of the Moody's and Fitch 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 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 Fitch,
each a Rating Agency, in connection with the Fund's receipt of a rating of Aaa
from Moody's and AAA from Fitch, respectively, for the Series C Auction Rate
Preferred and a rating of Aaa from Moody's for the Series B 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 the
Guidelines, greater than the aggregate liquidation preference of the
Outstanding shares of Series B Preferred, Series C 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 B Preferred, Series C 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 Shares. See "Additional Information
Concerning The Series B Preferred and Series C 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 would not apply if the Fund in the future elected
not to use investment leverage consisting of senior securities rated by either
Moody's or Fitch, although other similar arrangements might apply with respect
to other rated senior securities that the Fund may issue.
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 B Preferred and Series C
Auction Rate Preferred -- Asset Maintenance." Moody's and Fitch 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. To the extent any such failure is not
cured in a timely manner, the holders of the Series B Preferred and Series C
Auction Rate Preferred will acquire certain rights. See "Additional
Information Concerning The Series B Preferred and Series C Auction Rate
Preferred -- Asset Maintenance."
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 Fitch) indicates strong asset protection, conservative
balance sheet ratios and positive indications of continued protection of
preferred dividend requirements. A Moody's or Fitch 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 Fitch,
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.
Ratings are not recommendations to purchase, hold or sell Series B
Preferred or Series C 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 Fitch by the
Fund and obtained by Moody's and Fitch from other sources. The rating may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information.
MOODY'S GUIDELINES
Under the Moody's guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Basic
Maintenance Amount. 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:
(a) Convertible securities (including convertible preferreds):
DISCOUNT FACTORS (1)
RATINGS(2) UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
----------------------------- -------------- ------------------ ----------------- -------------------------
Aaa.......................... 162% 256% 233% 250%
Aa........................... 167% 261% 238% 265%
A............................ 172% 266% 243% 275%
Baa.......................... 188% 282% 259% 285%
Ba........................... 195% 290% 265% 290%
B............................ 199% 293% 270% 295%
NR(3)........................ 300% 300% 300% 300%
(1) Discount factors are for 7-week exposure period.
(2) If a convertible security is unrated by Moody's but is rated by S&P, a rating two numeric ratings below the
S&P rating will be used (e.g., where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(3) Unrated fixed-income and convertible securities, which are rated by neither Moody's nor S&P, are limited
to 10% of discounted Moody's Eligible Assets. If a corporate debt security is unrated by both Moody's and
S&P, the Fund will use the percentage set forth under "Unrated" in this table.
Upon conversion to common stock, the Discount Factors applicable to
common stock will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
----------------------------- ------------- ----------------- --------------------
7 week exposure period....... 170% 264% 241%
(b) Corporate Debt Securities (non-convertible): The percentage
determined by reference to the rating on such asset with reference to the
remaining term to maturity of such asset, in accordance with the table set
forth below.
MOODY'S RATING CATEGORY(1)
--------------------------
TERMS TO MATURITY OF
CORPORATE DEBT SECURITY AAA AA A BAA BA B UNRATED(2)
----------------------- --- -- - --- -- - ----------
1 year or less.................................. 109% 112% 115% 118% 119% 125% 225%
2 years or less (but longer than 1 year)........ 115 118 122 125 127 133 225
3 years or less (but longer than 2 years)....... 120 123 127 131 133 140 225
4 years or less (but longer than 3 years)....... 126 129 133 138 140 147 225
5 years or less (but longer than 4 years)....... 132 135 139 144 146 154 225
7 years or less (but longer than 5 years)....... 139 143 147 152 156 164 225
10 years or less (but longer than 7 years)...... 145 150 155 160 164 173 225
15 years or less (but longer than 10 years)..... 150 155 160 165 170 180 225
20 years or less (but longer than 15 years)..... 150 155 160 165 170 190 225
30 years or less (but longer than 20 years)..... 150 155 160 165 170 191 225
Greater than 30 years........................... 165 173 181 189 205 221 225
_____________________
(1) If a corporate debt security is unrated by Moody's but is rated by
S&P, a rating two numeric ratings below the S&P rating will be used
(e.g., where the S&P rating is AAA, a Moody's rating of Aa2 will be
used; where the S&P rating is AA+, a Moody's rating of Aa3 will be
used).
(2) Unrated corporate debt securities, which are corporate debt
securities rated by neither Moody's nor S&P, are limited to 10% of
discounted Moody's Eligible Assets. If a corporate debt security is
unrated by both Moody's and S&P, the Fund will use the percentage set
forth under "Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding
table will also apply to corporate debt securities that do not pay interest in
U.S. dollars or euros, provided that the Moody's Discount Factor determined
from the table shall be multiplied by a factor of 120% for purposes of
calculating the Discounted Value of such securities.
(c) Preferred Stock: The Moody's Discount Factor for preferred stock
shall be (i) for preferred stocks issued by a utility, 146%; (ii) for
preferred stocks of industrial and financial issuers, 209%; (iii) for
preferred stocks issued by real estate related issuers, 154%; and (iv) for
auction rate preferred stocks, 350%.
(d) U.S. Government Obligations and U.S. Treasury Strips:
U.S. GOVERNMENT SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- -------------------------- --------------------
1 year or less.................................. 107% 107%
2 years or less (but longer than 1 year)........ 113 115
3 years or less (but longer than 2 years)....... 118 121
4 years or less (but longer than 3 years)....... 123 128
5 years or less (but longer than 4 years)....... 128 135
7 years or less (but longer than 5 years)....... 135 147
10 years or less (but longer than 7 years)...... 141 163
15 years or less (but longer than 10 years)..... 146 191
20 years or less (but longer than 15 years)..... 154 218
30 years or less (but longer than 20 years)..... 154 244
(e) Short-Term Instruments and Cash: The Moody's Discount Factor
applied to short-term portfolio securities, including without limitation
short-term corporate debt securities, Short-Term Money Market Instruments and
short-term municipal debt obligations, will be (i) 100%, so long as such
portfolio securities mature or have a demand feature at par exercisable within
the Moody's Exposure Period; (ii) 115%, so long as such portfolio securities
mature or have a demand feature at par not exercisable within the Moody's
Exposure Period; and (iii) 125%, if such securities are not rated by Moody's,
so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period. A Moody's Discount Factor of 100% will be applied to cash.
Moody's rated Rule 2a-7 money market funds will also have a discount factor of
100%.
(f) Rule 144A Securities: The Moody's Discount Factor applied to Rule
144A Securities for Rule 144A Securities will be 130% of the Moody's Discount
Factor which would apply were the securities registered under the Securities
Act.
"Moody's Eligible Assets" means:
(a) cash (including interest and dividends due on assets rated (i)
Baa3 or higher by Moody's if the payment date is within five Business Days of
the Valuation Date, (ii) A2 or higher if the payment date is within thirty
days of the Valuation Date, and (iii) A1 or higher if the payment date is
within the Moody's Exposure Period) and receivables for Moody's Eligible
Assets sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are (1)
settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (2) (A) with
counterparties having a Moody's long-term debt rating of at least Baa3 or (B)
with counterparties having a Moody's Short-Term Money Market Instrument rating
of at least P-1;
(b) Short-Term Money Market Instruments, so long as (i) such
securities are rated at least P-1, (ii) in the case of demand deposits, time
deposits and overnight funds, the supporting entity is rated at least A2, or
(iii) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security matures
within three months or (3) is rated at least Aa3 and the security matures
within six months. In addition, Moody's rated Rule 2a-7 money market funds are
also eligible investments.
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Rule 144A Securities;
(e) Corporate debt securities if (i) such securities are rated B3 or
higher by Moody's; (ii) such securities provide for the periodic payment of
interest in cash in U.S. dollars or euros, except that such securities that do
not pay interest in U.S. dollars or euros shall be considered Moody's Eligible
Assets if they are rated by Moody's or S&P, (iii) for debt securities rated
Ba1 and below, no more than 10% of the original amount of such issue may
constitute Moody's Eligible Assets; (iv) such securities have been registered
under the Securities Act or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A under the
Securities Act as determined by the Fund's investment manager or portfolio
manager acting pursuant to procedures approved by the Board of Directors,
except that such securities that are not subject to U.S. federal securities
laws shall be considered Moody's Eligible Assets if they are publicly traded;
and (v) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (1) corporate debt
securities not rated at least B3 by Moody's shall be considered to be Moody's
Eligible Assets only to the extent the Market Value of such corporate debt
securities does not exceed 10% of the aggregate Market Value of all Moody's
Eligible Assets; provided, however, that if the Market Value of such corporate
debt securities exceeds 10% of the aggregate Market Value of all Moody's
Eligible Assets, a portion of such corporate debt securities (selected by the
Fund) shall not be considered Moody's Eligible Assets, so that the Market
Value of such corporate debt securities (excluding such portion) does not
exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; and
(2) corporate debt securities rated by neither Moody's nor S&P shall be
considered to be Moody's Eligible Assets only to the extent such securities
are issued by entities which (A) have not filed for bankruptcy within the past
three years, (B) are current on all principal and interest in their fixed
income obligations, (C) are current on all preferred stock dividends, and (D)
possess a current, unqualified auditor's report without qualified, explanatory
language.
(f) Convertible bonds, provided that (i) the issuer of common stock
must have a Moody's senior unsecured debt of B3 or better, or an S&P rating of
BB or better, (ii) the common stocks must be traded on the NYSE, AMEX, or
NASDAQ, (iii) dividends must be paid in U.S. dollars, (iv) the portfolio of
convertible bonds must be diversified as set forth in Figure 1 below, (v) the
company shall not hold shares exceeding the average weekly trading volume
during the preceding month, (vi) synthetic convertibles are excluded from
asset eligibility.
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
----------------------------------------------------------------------------------------------------------
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
TYPE ISSUER (%) (1) INDUSTRY (%) STATE (%) (1)
--------------------- ----------------------------- ---------------------------- -------------------------
Utility.............. 4 50 7(2)
Other................ 6 20 n/a
(1) Percentage represent a portion of the aggregate market value and number of outstanding
shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be diversified according to the
state in which they generate the largest part of their revenues. Publicly available information
on utility company revenues by state is available from the Uniform Statistical Report (USR)
or the Federal Energy Regulation commission (FERC).
(g) Preferred stocks if (i) dividends on such preferred stock are
cumulative, (ii) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars or euros and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive,
equity capital at any time over the respective lives of such securities, (iii)
the issuer of such a preferred stock has common stock listed on either the New
York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a
preferred stock has a senior debt rating from Moody's of Baa1 or higher or a
preferred stock rating from Moody's of Baa3 or higher and (v) such preferred
stock has paid consistent cash dividends in U.S. dollars or euros over the
last three years or has a minimum rating of A1 (if the issuer of such
preferred stock has other preferred issues outstanding that have been paying
dividends consistently for the last three years, then a preferred stock
without such a dividend history would also be eligible). In addition, the
preferred stocks must have the following diversification requirements: (1) the
preferred stock issue must be greater than $50 million and (2) the minimum
holding by the Fund of each issue of preferred stock is $500,000 and the
maximum holding of preferred stock of each issue is $5 million. In addition,
preferred stocks issued by transportation companies will not be considered
Moody's Eligible Assets.
(h) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in
this definition but only upon receipt by the Fund of a letter from Moody's
specifying any conditions on including such financial contract in Moody's
Eligible Assets and assuring the Fund that including such financial contract
in the manner so specified would not affect the credit rating assigned by
Moody's to the Series C Auction Rate Preferred.
(i) Interest rate swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (i) the counterparty to the swap
transaction has a short-term rating of not less than P-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is Aa3 or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
Series C Auction Rate Preferred originally issued. The interest rate swap
transaction will be marked-to-market daily.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included
in Moody's Eligible Assets:
MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE MAXIMUM
SINGLE INDUSTRY(3)(4) INDUSTRY (3)(4) ISSUE SIZE
RATINGS(1) ISSUER(2)(3) NON-UTILITY UTILITY ($ IN MILLION) (5)
----------------------------- -------------- --------------- ---------------- ------------------
Aaa.......................... 100% 100% 100% $100
Aa........................... 20 60 30 100
A............................ 10 40 25 100
Baa.......................... 6 20 20 100
Ba........................... 4 12 12 50(6)
B1-B2........................ 3 8 8 50(6)
B3 or below.................. 2 5 5 50(6)
(1) Refers to the preferred stock and senior debt rating of the portfolio holding.
(2) Companies subject to common ownership of 25% or more are considered as one issuer.
(3) Percentages represent a portion of the aggregate Market Value of corporate debt securities.
(4) Industries are determined according to Moody's Industry Classifications, as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50 million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million are limited to 20%
of the Fund's total assets.
FITCH GUIDELINES
Under the Fitch guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Basic
Maintenance Amount. The Fitch Discount Factor for any Fitch Eligible Asset
other than the securities set forth below will be the percentage provided in
writing by Fitch. The following Discount Factors apply to portfolio holdings
as described below, subject to diversification, issuer size and other
requirements, in order to constitute Fitch Eligible Assets includable within
the calculation of Discounted Value:
(a) Corporate debt securities. The percentage determined by reference
to the rating of a corporate debt security in accordance with the table set
forth below.
NOT
TERM TO MATURITY OF CORPORATE RATED OR
DEBT SECURITY UNRATED (1) AAA AA A BBB BB BELOW BB
----------------------------- --------- ------- -------- -------- ======== ---------
3 years or less (but longer than 1 year)............ 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years)........... 111.11% 112.99 % 114.94% 116.96% 134.24% 151.52%
7 years or less (but longer than 5 years)........... 113.64% 115.61% 117.65% 119.76% 135.66% 151.52%
10 years or less (but longer than 7 years).......... 115.61% 117.65% 119.76% 121.95% 136.74% 151.52%
15 years or less (but longer than 10 years)......... 119.76% 121.95% 124.22% 126.58% 139.05% 151.52%
More than 15 years.................................. 124.22% 126.58% 129.03% 131.58% 144.55% 151.52%
__________________
(1) If a security is not rated by Fitch but is rated by two other rating
agencies, then the lower of the ratings on the security from the two
other rating agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1,
a Fitch rating of BBB+ will be used). If a security is not rated by
Fitch but is rated by only one other NRSRO, then the rating on the
security from the other NRSRO will be used to determine the Fitch
Discount Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba3, a Fitch rating of BB-
will be used). If a security is not rated by any NRSRO, the Fund will
use the percentage set forth under "Not Rated" in this table.
(b) Convertible debt securities. The Fitch Discount Factor applied to
convertible debt securities is (i) 200% for investment grade convertibles and
(ii) 222% for below investment grade convertibles so long as such convertible
debt securities have neither (1) conversion premium greater than 100% nor (2)
have a yield to maturity or yield to worst of >15.00% above the relevant
Treasury curve.
The Fitch Discount Factor applied to convertible debt securities
which have conversion premiums of greater than 100% is (i) 152% for investment
grade convertibles and (ii) 179% for below investment grade convertibles so
long as such convertible debt securities do not have a yield to maturity or
yield to worst of > 15.00% above the relevant Treasury curve. The Fitch
Discount Factor applied to convertible debt securities which have a yield to
maturity or yield to worst of > 15.00% above the relevant Treasury curve is
370%.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g.,
where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of
BBB+ will be used). If a security is not rated by Fitch but is rated by only
one other NRSRO, then the rating on the security from the other NRSRO will be
used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a Fitch rating of AAA will be used, and
where the only rating on a security is a Moody's rating of Ba3, a Fitch rating
of BB- will be used). If a security is not rated by any NRSRO, the Fund will
treat the security as if it were below investment grade.
(c) Preferred securities: The percentage determined by reference to
the rating of a preferred security in accordance with the table set forth
below.
NOT RATED
OR
NOT RATED OR BELOW PREFERRED SECURITY(1) AAA AA A BBB BB BELOW BB
---------------------------------------- ------- ------ ------ ------ ------ ---------
Taxable Preferred.................................... 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction (DRD) Preferred.......... 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
(1) If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of
the ratings on the security from the two other Rating Agencies will be used to determine the
Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a
Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one
other NRSRO, then the rating on the security from the other NRSRO will be used to determine
the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a
Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating
of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any NRSRO, the Fund
will use the percentage set forth under "Not Rated" in this table.
(d) U.S. Government Obligations and U.S. Treasury Strips:
DISCOUNT TIME REMAINING TO MATURITY FACTOR
1 year or less........................................................... 100%
2 years or less (but longer than 1 year)................................. 103%
3 years or less (but longer than 2 years)................................ 105%
4 years or less (but longer than 3 years)................................ 107%
5 years or less (but longer than 4 years)................................ 109%
7 years or less (but longer than 5 years)................................ 112%
10 years or less (but longer than 7 years)............................... 114%
15 years or less (but longer than 10 years).............................. 122%
20 years or less (but longer than 15 years).............................. 130%
25 years or less (but longer than 20 years).............................. 146%
Greater than 30 years.................................................... 154%
(e) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without limitation Debt
Securities, Short Term Money Market Instruments and municipal debt
obligations, will be (i) 100%, so long as such portfolio securities mature or
have a demand feature at par exercisable within the Fitch Exposure Period;
(ii) 115%, so long as such portfolio securities mature or have a demand
feature at par not exercisable within the Fitch Exposure Period; and (iii)
125%, so long as such portfolio securities neither mature nor have a demand
feature at par exercisable within the Fitch Exposure Period. A Fitch Discount
Factor of 100% will be applied to cash.
(f) Rule 144A Securities: The Fitch Discount Factor applied to Rule
144A Securities will be 110% of the Fitch Discount Factor which would apply
were the securities registered under the Securities Act.
(g) Foreign Bonds: The Fitch Discount Factor (i) for a Foreign Bond
the principal of which (if not denominated in U.S. dollars) is subject to a
currency hedging transaction will be the Fitch Discount Factor that would
otherwise apply to such Foreign Bonds in accordance with this definition and
(ii) for (1) a Foreign Bond the principal of which (if not denominated in U.S.
dollars) is not subject to a currency hedging transaction and (2) a bond
issued in a currency other than U.S. dollars by a corporation, limited
liability company or limited partnership domiciled in, or the government or
any agency, instrumentality or political subdivision of, a nation other than
an Approved Foreign Nation, will be 370%.
"Fitch Eligible Assets" means:
(a) Cash (including interest and dividends due on assets rated (i)
BBB or higher by Fitch or the equivalent by another NRSRO if the payment date
is within five Business Days of the Valuation Date, (ii) A or higher by Fitch
or the equivalent by another NRSRO if the payment date is within thirty days
of the Valuation Date, and (iii) A+ or higher by Fitch or the equivalent by
another NRSRO if the payment date is within the Fitch Exposure Period) and
receivables for Fitch Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades which generated
such receivables are settled within five Business Days;
(b) Short Term Money Market Instruments so long as (i) such
securities are rated at least F1+ by Fitch or the equivalent by another NRSRO,
(ii) in the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A by Fitch or the equivalent by another
NRSRO, or (iii) in all other cases, the supporting entity (1) is rated at
least A by Fitch or the equivalent by another NRSRO and the security matures
within one month, (2) is rated at least A by Fitch or the equivalent by
another NRSRO and the security matures within three months or (3) is rated at
least AA by Fitch or the equivalent by another NRSRO and the security matures
within six months;
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Debt securities if such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws
but are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's investment manager or portfolio manager acting
pursuant to procedures approved by the Board of Directors of the Fund; and
such securities are issued by (i) a U.S. corporation, limited liability
company or limited partnership, (ii) a corporation, limited liability company
or limited partnership domiciled in Argentina, Australia, Brazil, Chile,
France, Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom (the
"Approved Foreign Nations"), (iii) the government of any Approved Foreign
Nation or any of its agencies, instrumentalities or political subdivisions
(the debt securities of Approved Foreign Nation issuers being referred to
collectively as "Foreign Bonds"), (iv) a corporation, limited liability
company or limited partnership domiciled in Canada or (v) the Canadian
government or any of its agencies, instrumentalities or political subdivisions
(the debt securities of Canadian issuers being referred to collectively as
"Canadian Bonds"). Foreign Bonds held by the Fund will qualify as Fitch
Eligible Assets only up to a maximum of 20% of the aggregate Market Value of
all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20%
of the aggregate Market Value of all assets constituting Fitch Eligible
Assets. Notwithstanding the limitations in the two preceding sentences,
Foreign Bonds and Canadian Bonds held by the Fund will qualify as Fitch
Eligible Assets only up to a maximum of 30% of the aggregate Market Value of
all assets constituting Fitch Eligible Assets. In addition, bonds which are
issued in connection with a reorganization under U.S. federal bankruptcy law
("Reorganization Bonds") will be considered debt securities constituting Fitch
Eligible Assets if (1) they provide for periodic payment of interest in cash
in U.S. dollars or euros; (2) they do not provide for conversion or exchange
into equity capital at any time over their lives; (3) they have been
registered under the Securities Act or are restricted as to resale under
federal securities laws but are eligible for trading under Rule 144A
promulgated pursuant to the Securities Act as determined by the Fund's
investment manager or portfolio manager acting pursuant to procedures approved
by the Board of Directors of the Fund; (4) they were issued by a U.S.
corporation, limited liability company or limited partnership; and (5) at the
time of purchase at least one year had elapsed since the issuer's
reorganization. Reorganization Bonds may also be considered debt securities
constituting Fitch Eligible Assets if they have been approved by Fitch, which
approval shall not be unreasonably withheld. All debt securities satisfying
the foregoing requirements and restrictions of this paragraph (d) are herein
referred to as "Debt Securities;"
(e) Preferred stocks if (i) dividends on such preferred stock are
cumulative, (ii) such securities provide for the periodic payment of dividends
thereon in cash in U.S. dollars or euros and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive
equity capital at any time over the respective lives of such securities, (iii)
the issuer of such a preferred stock has common stock listed on either the New
York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a
preferred stock has a senior debt rating or preferred stock rating from Fitch
of BBB- or higher or the equivalent rating by another NRSRO. In addition, the
preferred stocks issue must be at least $50 million;
(f) Asset-backed and mortgage-backed securities;
(g) Rule 144A Securities;
(h) Bank Loans;
(i) Municipal debt obligation that (i) pays interest in cash (ii) is
part of an issue of municipal debt obligations of at least $5 million, except
for municipal debt obligations rated below A by Fitch or the equivalent rating
by another NRSRO, in which case the minimum issue size is $10 million;
(j) Tradable credit baskets (e.g., Traded Custody Receipts or TRACERS
and Targeted Return Index Securities Trust or TRAINS);
(k) Convertible debt and convertible preferred stocks;
(l) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in
this definition may be included in Fitch Eligible Assets, but, with respect to
any financial contract, only upon receipt by the Fund of a writing from Fitch
specifying any conditions on including such financial contract in Fitch
Eligible Assets and assuring the Fund that including such financial contract
in the manner so specified would not affect the credit rating assigned by
Fitch to the Series C Auction Rate Preferred;
(m) Interest rate swaps entered into according to International Swap
Dealers Association ("ISDA") standards if (i) the counterparty to the swap
transaction has a short- term rating of not less than F1 by Fitch or the
equivalent by another NRSRO or, if the swap counterparty does not have a
short-term rating, the counterparty's senior unsecured long-term debt rating
is AA or higher by Fitch or the equivalent by another NRSRO and (ii) the
original aggregate notional amount of the interest rate swap transaction or
transactions is not greater than the liquidation preference of the Series C
Auction Rate Preferred originally issued.
Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Fitch
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such asset will count as a liability for the purposes of the Preferred Shares
Basic Maintenance Amount. Where the Fund purchases an asset and agrees to sell
it to a third party in the future, cash receivable by the Fund thereby will
constitute a Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another and such agreement has
a term of 30 days or less; otherwise the Discounted Value of such purchased
asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Fitch Eligible Asset to the extent that it has been irrevocably deposited for
the payment of (a)(i) through (a)(iv) under the definition of Basic
Maintenance Amount or to the extent it is subject to any liens, except for (1)
liens which are being contested in good faith by appropriate proceedings and
which Fitch has indicated to the Fund will not affect the status of such asset
as a Fitch Eligible Asset, (2) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (3) liens to secure
payment for services rendered or cash advanced to the Fund by its investment
manager or portfolio manager, the Fund's custodian, transfer agent or
registrar or the Auction Agent and (4) liens arising by virtue of any
repurchase agreement.
Portfolio holdings as described above must be within the following
diversification and issue size requirements in order to be included in Fitch's
Eligible Assets:
MAXIMUM MAXIMUM MAXIMUM
MINIMUM SINGLE SINGLE ISSUE SIZE
SECURITY ISSUER (1) INDUSTRY (1)(2) ($ IN MILLION)(3)
------------------------ ------------- --------------- -----------------
AAA..................... 100% 100% $100
AA-..................... 20 75 100
A-...................... 10 50 100
BBB-.................... 6 25 100
BB-..................... 4 16 50
B-...................... 3 12 50
CCC..................... 2 8 50
(1) Percentages represent a portion of the aggregate market value of
corporate debt securities.
(2) Industries are determined according to Fitch's Industry Classifications,
as defined herein.
(3) Preferred stock has a minimum issue size of $50 million.
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 New York Stock Exchange.
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
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 February 14, 2003 Title of Class Nature of Ownership Percent of Class
----------------------- -------------- --------------------- -----------------
Cede & Co.* Common 7,182,489 64.63%
P.O. Box 20 (record)
Bowling Green Station
New York, NY 10274
Bear Stearns Securities Corp** Common 1,799,857 16.20%
One Metrotech Center North, 4th Floor (record)
Brooklyn, NY 11201
Mario J. Gabelli and affiliates Common 1,568,548 14.11%
One Corporate Center*** (beneficial)
Rye, NY 10580
Charles Schwab & Co., Inc.** Common 627,152 5.64%
c/o ADP Proxy Services, (record)
51 Mercedes Way
Edgewood, NY 11717
Prudential Securities Inc. Common 573,466 5.16%
c/o ADP Proxy Services (record)
51 Mercedes Way
Edgewood, NY 11717
* A nominee partnership of The Depository Trust Company.
** Shares held at The Depository Trust Company.
*** Includes 209,110 shares owned directly by Mr. Gabelli, 13,334 shares owned by a family
partnership for which Mr. Gabelli serves as general partner, 46,016 shares held by custodial
accounts for which Mr. Gabelli serves as Trustee, 1,089,415 shares owned by Gabelli Asset
Management Inc. or its affiliates, 78,248shares owned by the Gabelli & Company, Inc. Profit-
Sharing Plan, and 132,425 shares owned by discretionary accounts managed by GAMCO
Investors, Inc., a wholly-owned subsidiary of Gabelli Asset Management Inc. Mr. Gabelli
disclaims beneficial ownership of the shares held by custodial accounts, the discretionary
accounts, and by the entities named except to the extent of his interest in such entities.
As of February 14, 2003, the Directors and Officers of the Fund as a
group beneficially owned approximately 15.25% 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 B
Preferred and/or Series C 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 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.
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 B Preferred and/or Series C 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.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Shareholders for the fiscal year ended December 31, 2002, together with
the report of PricewaterhouseCoopers LLP thereon, are also incorporated herein
by reference from the Fund's Annual Report to Shareholders. All other portions
of the Annual Report to Shareholders are not incorporated herein by reference
and are not part of the Registration Statement. A copy of the Annual Report to
Shareholders may be obtained without charge by writing to the Fund at its
address at One Corporate Center, Rye, New York 10580-1434 or by calling the
Fund toll-free at 800-GABELLI (422-3554).
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)
Salomon Smith Barney 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.
"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 corporation or any Person controlled by, in control of or under
common control with such corporation 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.
"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 C 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 C Auction Rate Preferred is the subject of Submitted Hold Orders
for the Auction in respect thereof, the All Hold Rate.
"Approved Foreign Nations" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"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. 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 C Auction Rate
Preferred."
"Available Series C Auction Rate Preferred" has the meaning set forth in
"Additional Information Concerning the Auction for Series C 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 B Preferred and Series C Auction Rate
Preferred-- Asset Maintenance."
"Basic Maintenance Report" means, with respect to the Series C Auction Rate
Preferred, a report prepared by the Administrator which sets forth, as of the
related Valuation Date, Moody's Eligible Assets and Fitch Eligible Assets
sufficient to meet or exceed the Basic Maintenance Amount, the Market Value
and Discounted Value thereof (seriatim and in the aggregate), and the Basic
Maintenance Amount, and shall have a correlative meaning with respect to any
other class or series of Preferred Stock.
"Beneficial Owner" with respect to Series C 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 C Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"Bidder" has the meaning set forth in "Additional Information Concerning the
Auction for Series C Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"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.
"Canadian Bonds" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"Charter" means the Articles of Amendment and Restatement 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.
"Commission" means the Securities and Exchange Commission.
"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 B Preferred and paragraph 3(a)(ii)
of Article I of the Articles Supplementary for the Series C Auction Rate
Preferred.
"Date of Original Issue" means the date on which the Series B Preferred or
Series C Auction Rate Preferred, as the case may be, is originally issued by
the Fund.
"Debt Securities" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch
Guidelines."
"Default Period" has the meaning set forth in "Additional Information
Concerning the Series B Preferred and Series C 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 B
Preferred or Series C Auction Rate Preferred at the Fund's request, the
Moody's Discount Factor, (ii) so long as Fitch is rating the Series C Auction
Rate Preferred, the Fitch 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, 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 B Preferred and Series C Auction Rate Preferred --
Dividends and Dividend Period."
"Dividend Payment Date" means, with respect to the Series B 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 Article
Supplementary of the Series B preferred, and, with respect to the Series C
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, and shall have a correlative meaning
with respect to any other class or series of Preferred Stock.
"Dividend Period" means, with respect to Series B Preferred, the quarterly
dividend specified in paragraph 1(a) of Article II of the Articles
Supplementary for the Series B Preferred and, with respect to Series C Auction
Rate Preferred, the initial period determined in the manner set forth under
"Designation" in the Articles Supplementary of the Series C 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 B Preferred or Series C Auction Rate Preferred at the request of the
Fund), Fitch Eligible Assets (if Fitch is then rating the Series C 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 B
Preferred or Series C Auction Rate Preferred, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those shares of
Series C 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 C 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.
"Fitch" means Fitch, Inc. and its successors at law.
"Fitch Discount Factor" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"Fitch Eligible Assets" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"Fitch Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 49 days thereafter.
"Fitch Industry Classifications" means, for the purposes of determining Fitch
Eligible Assets, each of the following industry classifications:
1. Aerospace & Defense
2. Automobiles
3. Banking, Finance & Real Estate
4. Broadcasting & Media
5. Building & Materials
6. Cable
7. Chemicals
8. Computers & Electronics
9. Consumer Products
10. Energy
11. Environmental Services
12. Farming & Agriculture
13. Food, Beverage & Tobacco
14. Gaming, Lodging & Restaurants
15. Healthcare & Pharmaceuticals
16. Industrial/Manufacturing
17. Insurance
18. Leisure & Entertainment
19. Metals & Mining
20. Miscellaneous
21. Paper & Forest Products
22. Retail
23. Sovereign
24. Supermarkets & Drugstores
25. Telecommunications
26. Textiles & Furniture
27. Transportation
28. Utilities
"Foreign Bonds" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"Hold Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series C Auction Rate Preferred -- Orders By Existing Holders
and Potential Holders."
"Holder" means, with respect to the Series C Auction Rate Preferred, the
registered holder of Series C 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.
"ISDA" has the meaning ascribed to it in "Moody's and Fitch Guidelines --
Fitch Guidelines."
"Liquidation Preference" means $25 per share of Series B Preferred and $25,000
per share of Series C Auction Rate Preferred Stock 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 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 Fitch) or by one such securities
dealer and any other source (provided that the utilization
of such source would not adversely affect Moody's and
Fitch's then-current rating of the Series C Auction Rate
Preferred), 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;
(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 lower of the bid
prices for the same kind of instru ments 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 Fitch) or by one such dealer and
any other source (provided that the utilization of such
source would not adversely affect Moody's and Fitch's
then-current rating of the Series B Preferred or Series C
Auction Rate Preferred, as the case may be,) to the
administrator, at least one of which will be provided in
writing or by telecopy, telex, other electronic transcrip
tion, computer obtained quotation reducible to written form
or similar means, and in turn provided to the Fund by any
such means by such admin istrator, or, if two bid prices
cannot be obtained, such Eligible Asset will have a Market
Value of zero;
(iii) as to cash, demand 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;
(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 or if such
indebtedness is not traded on a national securi ties
exchange or quoted on the Nasdaq System, 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 Fitch) or
by one such dealer and any other source (provided that the
utilization of such source would not adversely affect
Moody's and Fitch's then-current rating of the Series B
Preferred or Series C Auction Rate Preferred , as the case
may be,) 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.
"Maximum Rate" means, on any date on which the Applicable Rate is determined,
the applicable percentage of (i) in the case of 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 C Auction Rate Preferred by Moody's and Fitch 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 C Auction Rate Preferred Basic Maintenance Amount or (ii) in the
case of a dividend period of longer than 184 days, the Treasury Index Rate.
MOODY'S CREDIT RATING FITCH 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 Fitch
Guidelines -- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning ascribed to it in "Moody's and Fitch
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 B Preferred and Series C 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 C 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 C Auction Rate
Preferred Stock 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.
"Order" has the meaning set forth in "Additional Information Concerning the
Auction for Series C Auction Rate Preferred -- Orders By Existing Holders and
Potential Holders."
"Other Rating Agency" means any rating agency other than Moody's or Fitch then
providing a rating for the Series C 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 C 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 deliv ered to the Fund for cancellation;
(ii) any such share of Preferred Stock other than the Series C
Auction Rate Preferred (or other auction market preferred
stock) shares 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
on in trust for or were paid by the Fund to the holder of
such share pursuant to the Articles Supplementary with
respect thereto;
(iii) in the case of shares of the Series C Auction Rate Preferred
or other auction market preferred stock, any such shares
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 share 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; (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; and (z) for purposes of determining
the Basic Maintenance Amount, Series C Auction Rate Preferred held by the Fund
will be disregarded and deemed not Outstanding.
"Paying Agent" means with respect to Series C 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.
"Potential Beneficial Owner or Holder" means (i) any Existing Holder who may
be interested in acquiring additional shares of Series C Auction Rate
Preferred or (ii) any other person who may be interested in acquiring shares
of Series C 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 B Preferred and Series C 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 Preerence 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 Fitch as long as such rating agency is then
rating the Series B Preferred or Series C Auction Rate Preferred at the
request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's
and Fitch 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 B Preferred and Series C Auction Rate Preferred --
Dividends and Dividend Period."
"Redemption Price" means, with respect to the Series B Preferred, the price
set forth in paragraph 3(a) of Article II of the Articles Supplementary for
the Series B Preferred Stock and, with respect to the Article C Auction Rate
Preferred, the price set forth in paragraph 3(a)(i) of Article I of the
Articles Supplementary for the Series C Auction Rate Preferred Stock.
"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.
"Reorganization Bonds" has the meaning ascribed to it in "Moody's and Fitch
Guidelines -- Fitch Guidelines."
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"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 B Preferred or Series C
Auction Rate Preferred.
"Sell Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series C Auction Rate Preferred -- Submission of Orders by
Broker-Dealers to Auction Agent."
"Series A Preferred" means the Fund's 8% Cumulative Preferred Stock, $.001 par
value per share and liquidation preference $25 per share.
"Series B Preferred" means the Fund's Series B 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, $.001 par value per share and liquidation
preference $25,000 per share.
"Series C 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 Fitch Eligible Assets if both Moody's and Fitch are
then rating the Series C Auction Rate Preferred at the request of the Fund, or
the Eligible Assets of whichever of Moody's or Fitch is then doing so if only
one of Moody's or Fitch is then rating the Series C Auction Rate Preferred at
the request of the Fund, meets or exceeds the Basic Maintenance Amount with
respect to the Series C 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) 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 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);
(iii) overnight funds; and
(iv) U.S. Government Obligations.
"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 1:00 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 C 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 C 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 C 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 C 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 C 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 C Auction Rate Preferred --
Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and
Applicable Rate."
"Sufficient Clearing Orders" means that all shares of Series C Auction Rate
Preferred are the subject of Submitted Hold Orders or that the number of
shares of Series C 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 C 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 C 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 month, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Basic Maintenance Amount.
"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 Outstanding Series C Auction Rate
Preferred shares which, when added to the number of Outstanding Series C
Auction Rate Preferred shares to be purchased by such Potential Holders
described in subclause (ii) above, would equal not less than the Available
Series C Auction Rate Preferred shares.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements (audited) for the fiscal year 2001(1)
(i) Portfolio of Investments as of December 31, 2001
(ii) Statement of Assets and Liabilities as of December
31, 2001
(iii) Statement of Operations for the year ended December
31, 2001
(iv) Statement of Changes in Net Assets for the year
ended December 31, 2001
(v) Financial highlights for a share outstanding
throughout the periods 1992 through 2001
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) (i) Articles of Amendment and Restatement(2)
(ii) Articles Supplementary for the 8% Cumulative
Preferred Stock(3)
(iii) Articles Supplementary for the Series B %
Cumulative Preferred Stock(5)
(iv) Articles Supplementary for the Series C Auction Rate
Cumulative Preferred Stock(5)
(b) Amended and Restated By-Laws of Registrant(2)
(c) Not applicable
(d) (i) Specimen Stock Certificate:
(A) 8% Cumulative Preferred Stock(6)
(B) Series B % Cumulative Preferred
Stock (5)
(C) Series C Auction Rate Cumulative
Preferred Stock (5)
(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(3)
(h) Form of Underwriting Agreement(5)
(i) Not applicable
(j) Custodian Contract between Registrant and Boston Safe Deposit
and Trust Company(3)(8)
(k) (i) Registrar, Transfer Agency and Service Agreement
between Registrant and EquiServe Trust Company
relating to the common stock(2)
(ii) Form of Auction Agency Agreement(7)
(iii) Form of Broker-Dealer Agreement(7)
(iv) Form of DTC Agreement(7)
(l) Opinion and Consent of Miles & Stockbridge(5)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(7)
(ii) Powers of Attorney(4)
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Codes of Ethics of the Fund and the Adviser(2)
___________________
(1) Incorporated by reference to the Fund's annual report filed on March 8,
2002. To be updated prior to effectiveness.
(2) Incorporated by reference from the Registrant's Registration Statement
on Form N-2, File No. 811-05715, as filed with the Securities and
Exchange Commission on March 31, 1995
(3) Incorporated by reference from the Registrant's Registration Statement
on Form N-2, File No. 333-24541 and 811-05715, as filed with the
Securities and Exchange Commission on May 9,
1997.
(4) Incorporated by reference from the Registrant's Registration Statement
on Form N-2, File No. 102494 and 811-05715, as filed with the
Securities and Exchange Commission on January 13, 2003.
(5) To be filed by amendment.
(6) Incorporated by reference from the Fund's Registrant's Registration
Statement on Form N-2, File No. 333-24541 and 811-05715, as filed with
the Securities and Exchange Commission on April 4, 1997.
(7) Filed Herewith.
(8) Subsequently assigned to State Street Bank and Trust Company.
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:
SEC registration fees.............................................. $ 4,046
New York Stock Exchange listing fee................................ 14,750
Rating Agency Fees................................................. 50,000
Printing and engraving expenses ................................... 100,000
Auditing fees and expenses ........................................ 50,000
Legal fees and expenses............................................ 150,000
Blue Sky fees and expenses......................................... 40,000
Miscellaneous...................................................... 53,704
Total..................................................... $462,500
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
-------------- -------
Capital Stock, par value $.001 per share 2,568
8.00% Cumulative Preferred Stock, par value $.001 per 26
share
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 trustees, 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 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- 1434, in part at the offices of the Custodian, State Street Bank and
Trust Company, 150 Royall Street, Canton, Massachusetts 02021, 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., P.O. 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. Not applicable.
5. 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.
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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment
to its registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rye, State of New York, on the 10th
day of March, 2003.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
By: /s/ Bruce N. Alpert
-------------------------------
Bruce N. Alpert
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
___________________________ Director and Chief March 10, 2003
Mario J. Gabelli Investment Officer
*
___________________________ Director March 10, 2003
Karl Otto Pohl
*
___________________________ Director March 10, 2003
E. Val Cerutti
*
___________________________ Director March 10, 2003
Anthony J. Colavita
*
___________________________ Director March 10, 2003
Dugald A. Fletcher
*
___________________________ Director March 10, 2003
Anthony R. Pustorino
*
___________________________ Director March 10, 2003
Werner J. Roeder, MD
*
___________________________ Director March 10, 2003
Anthonie C. van Ekris
*
___________________________ Director March 10, 2003
Salvatore J. Zizza
/s/ Bruce N. Alpert President March 10, 2003
___________________________
Bruce N. Alpert
As Attorney-in-Fact
* Pursuant to a Power of Attorney, incorporated by reference as Exhibit
N(ii) to the Registrant's Registration Statement filed on Form N-2, as
filed with the Securities and Exchange Commission on January 13, 2003.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
EX-99 (a) (i) Articles of Amendment and Restatement*
EX-99 (a) (ii) Articles Supplementary relating to the 8%
Cumulative Preferred Stock*
EX-99 (a) (iii) Articles Supplementary relating to the
Series B __% Cumulative Preferred Stock**
EX-99 (a) (iv) Articles Supplementary relating to the Series C
Auction Rate Cumulative Preferred Stock**
EX-99 (b) Amended and Restated By-Laws of Registrant*
EX-99 (d) (i) (A) Specimen Stock Certificate, 8% Cumulative
Preferred Stock*
EX-99 (d) (i) (B) Specimen Stock Certificate, Series B Cumulative
Preferred Stock**
EX-99 (d) (i) (C) Specimen Stock Certificate, Series C Auction Rate
Cumulative Preferred Stock**
EX-99 (e) Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan of Registrant*
EX-99 (g) Investment Advisory Agreement between Registrant
and Gabelli Funds, LLC*
EX-99 (h) Form of Underwriting Agreement**
EX-99(i) Not applicable
EX-99 (j) Custodian Contract between Registrant and Boston
Safe Deposit and Trust Company (subsequently
assigned to State Street Bank and Trust Company)*
EX-99 (k) (i) Registrar, Transfer Agency and Service Agreement
between Registrant and EquiServe Trust Company
relating to the common stock*
EX-99 (k) (ii) Form of Auction Agency Agreement**
EX-99 (k) (iii) Form of Broker-Dealer Agreement**
EX-99 (k) (iv) Form of DTC Agreement**
EX-99 (l) Opinion and Consent of Miles & Stockbridge**
EX-99 (m) Not applicable
EX-99 (n) (i) Consent of PricewaterhouseCoopers LLP
EX-99 (n) (ii) Powers of Attorney*
EX-99 (o) Not applicable
EX-99(p) Not applicable
EX-99(q) Not applicable
EX-99 (r) Code of Ethics of the Fund and the Adviser*
* Previously filed and incorporated by reference.
** To be filed by amendment.