As filed with the Securities and Exchange Commission on January 13, 2003
Securities Act File No.
Investment Company Act File No. 811-05715
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM N-2
________________________
[X] Registration Statement under the Securities Act of 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940
[X] Amendment No. 6
(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.
Skadden, Arps, Slate, The Gabelli Convertible and Income
Meagher & Flom LLP Securities Fund Inc.
Four Times Square One Corporate Center
New York, New York 10036 Rye, New York 10580-1422
(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. [X]
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 .
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed
Proposed Maximum
Maximum Aggregate
Amount Being Offering Price Offering Amount of
Title of Securities Registered Per Share Price (1) Registration Fee
------------------- ---------------- -------------- ---------- ----------------
Series B ___% Cumulative 40,000 Shares $ 25 $ 1,000,000 $ 92
Preferred Stock
Series C Auction Rate Cumulative 100 Shares $25,000 $ 2,500,000 $ 230
Preferred Stock
(1) Estimated solely for the purpose of calculating the registration fee.
________________________
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.
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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; Prospectus Summary; Underwriting
6. Selling Shareholders...............................Not Applicable
7. Use of Proceeds....................................Use of Proceeds; Investment Objectives and Policies
8. General Description of the Registrant..............Outside Front Cover Page; Prospectus Summary; The
Fund; Investment Objectives and Policies; Risk Factors & Special
Considerations; Description of Series B Preferred and Series C AMPS;
Anti-takeover Provisions of the Charter and By-laws
9. Management.........................................Outside Front Cover Page; Prospectus Summary; Management of the Fund;
Custodian, Transfer Agent and Dividend-Disbursing Agent
10. Capital Stock, Long-Term Debt,
and Other Securities.............................Outside Front Cover Page; Prospectus
Summary; Investment Objectives and Policies; Description of Series B
Preferred; Description of Series C AMPS; 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
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14. Cover Page.........................................Outside Front Cover Page
15. Table of Contents..................................Outside Front Cover Page
16. General Information and History....................The Fund
17. Investment Objectives and Policies.................Investment Objectives and Policies; Investment
Restrictions
18. Management.........................................Management of the Fund
19. Control Persons and Principal
Holders of Securities............................Management of the Fund; Beneficial Owners
20. Investment Advisory and Other Services.............Management of the Fund
21. Brokerage Allocation and Other Practices... .......Portfolio Transactions
22. Tax Status.........................................Taxation
23. Financial Statements...............................Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
[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 January 13, 2003
PROSPECTUS [GABELLI LOGO]
The Gabelli
Convertible and Income Securities Fund, Inc.
[__] Shares, Series B [__]% Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
[__] 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. The Fund's
investment objective is a high level of total return on its assets. The Fund's
investments are selected by Investment Adviser, Gabelli Funds, LLC. 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 securities that are expected to periodically accrue or
generate income for their holders.
This prospectus offers shares of the Fund's Series B [__]%
Cumulative Preferred Stock (the "Series B Preferred"), liquidation preference
$25 per share, and shares of the Fund's Series C Auction Rate Cumulative
Preferred Stock (the "Series C AMPS"), liquidation preference $25,000 per
share. Dividends on the Series B Preferred are cumulative from the date of
original issuance of the shares at the annual rate of [__]% of the liquidation
preference of $25 per share and are payable quarterly on [__] in each year,
commencing on [__], 2003. The dividend rate for the Series C AMPS will vary
from dividend period to dividend period. The annual dividend rate for the
initial dividend period for the Series C AMPS will be [__]% of the liquidation
preference of $25,000 per share. The initial dividend period is from the date
of issuance though [__], 2003. For subsequent dividend periods, the Series C
AMPS will pay dividends based on a rate set at auction, usually held weekly.
Investing in our Series B Preferred or Series C AMPS involves risks. See "Risk
Factors and Special Considerations" beginning on page [__].
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Per Series B Preferred Per Series C AMPS Total
---------------------- ----------------- -----
Public Offering Price(1) $ $ $
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 $[ ].
_________________
[__________________]
Gabelli & Company, Inc.
[__], 2003
(Continued from previous page)
The shares of Series B Preferred and Series C AMPS 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 the shares of Series B Preferred and Series C AMPS will be
made in book-entry form through the facilities of The Depository Trust Company
on or about [__], 2003.
The shares of Series B Preferred will be listed and traded on the New
York Stock Exchange. Application has been made to list the Series B Preferred
on the New York Stock Exchange. 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 AMPS will not be listed on an exchange. Investors may
only buy or sell Series C AMPS 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 Series C
AMPS 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 Objectives and Polices" beginning on page [__].
The Fund expects that dividends paid on the Series B Preferred and
Series C AMPS will consist of long-term capital gains (consisting of [__]%
federal tax rate capital gains from the sale of assets held longer than 12
months), net investment income, short-term capital gains, and, in unusual
circumstances, 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 [__%],[___%], and [__%] 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 AMPS 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 AMPS may be issued
unless it is rated [__] by the [__]. In addition, the Series C AMPS cannot be
issued unless it is rated [__] by [__]. 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 AMPS under
guidelines established by each of [__] and [__]. See "Description of the
Series B Preferred and Series C AMPS -- 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 that some or
all of its outstanding preferred stock, including the Series B Preferred or
Series C AMPS, be sold back to it (redeemed). Otherwise, prior to [__], 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,
the Fund, at its option, may redeem (i) the Series B Preferred beginning on [__]
and (ii) the Series C AMPS 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 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 AMPS, such redemptions
generally will be for cash at a 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 AMPS. You should read the prospectus and retain it for
future reference.
The Fund has also filed with the Securities Exchange Commission a
Statement of Additional Information, dated [__], 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 this offering 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.
PROSPECTUS 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. The average weekly
trading volume of the Fund's common stock on the NYSE during the period
from January 1, 2002 through December 31, 2002 was [__] shares. As of
December 31, 2002, the net assets of the Fund were approximately $[__]
million. As of December 31, 2002, the Fund had outstanding [__] shares of
common stock and 600,000 shares of 8% Cumulative Preferred Stock (the
"Series A Preferred"). The Fund expects to redeem all of its outstanding
Series A Preferred on February 11, 2003.
The Fund is offering shares of its Series B Preferred and Series C AMPS
pursuant to this prospectus. Upon issuance, the Series B Preferred and the
Series C AMPS will have the same seniority with respect to dividends and
liquidation preference.
Investment Objectives 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 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 objectives. See "Investment Objectives and
Policies."
Dividends
and Distributions Series B Preferred. Dividends on the Series B Preferred, at the annual rate
of [__]% of its liquidation preference, are cumulative from the 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 [__] in each year, commencing [__].
Series C AMPS. The holders of Series C AMPS are entitled to receive cash
dividends at annual rates 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
AMPS.
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
---- --------------- ---------------
Series C [__]% [__], 2003 [___]
AMPS.............
For subsequent dividend periods, the Series C AMPS 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 than seven
days. The dividend payment date for any such special dividend period of more
than seven days will be set out in the notice designating a special dividend
period. Dividends on the Series C AMPS will be cumulative from the original
issue date and will be paid out of legally available funds.
In no event will the dividend rate set at auction for the Series C AMPS
exceed the maximum applicable rate. The maximum applicable 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 AMPS by [__]
and [__] or (ii) in the case of a dividend period of longer than 184 days,
the applicable percentage of the Treasury Index Rate.
Applicable
[__] Credit Rating [__] Credit Rating Percentage
------------------ ------------------ ----------
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__] 275%
See "Description of the Series B Preferred and Series C AMPS -- Dividends
on the Series C AMPS -- Maximum Applicable Rate." For example, calculated
as of [__], 2002 and [__], 2002, respectively, the maximum applicable rate
for the Series C AMPS (assuming a rating of [__] or above by [__] and [__]
or above by [__]) would have been [__]% and [ ]%, for dividend periods of
90 days, and [__]% and [__]% for dividend periods of two years.* There is
no minimum applicable rate in respect of any dividend period.
_______________
* Dividend periods presented for illustrative purposes only. Actual dividend
periods may be of greater or lesser duration.
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 Series C AMPS Basic Maintenance Amount (as defined in
the applicable rating agency guidelines). See "Description of the Series B
Preferred and Series C AMPS -- Dividends on the Series C AMPS" and "The
Auction."
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 or set apart for payment 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 preferred stock of the Fund are declared,
paid or set apart for payment. If full cumulative dividends due have not
been declared, paid or set apart for payment on all shares of preferred
stock of the Fund ranking on a parity with the Series B Preferred and
Series C AMPS as to the payment of dividends, any dividends being paid on
the shares of such preferred stock (including the Series B Preferred or
Series C AMPS) will be paid as nearly pro rata as possible taking in to
account all such outstanding preferred shares on the dividend payment
dates therefor in proportion to the respective amounts of dividends
accumulated but unpaid on each such series of preferred stock.
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.
Common Stock. 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.
The Offering Series B Preferred. The Fund is offering [__] shares of [__]% Series B
Cumulative Preferred, par value $.001 per share, liquidation preference $25
per share, at a purchase price of $25 per share. The Series B Preferred
will be listed and traded on the New York Stock Exchange.
Series C AMPS. The Fund is offering [__] shares of Series C AMPS, par value
$.001, 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 AMPS
are issued.
The Series C AMPS will not be listed on an exchange. Instead, investors may
buy or sell Series C AMPS 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 AMPS 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.
The Series B Preferred and Series C AMPS are being offered by [__] and
Gabelli & Company, Inc. as underwriters.
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 [__]%, the difference between [__]% on ordinary income and
short-term capital gains and 20% 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, 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 [__]%,
[__]%, and [__]% long-term capital gains. If the Fund continues 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 Series C AMPS dividends than if the Fund did not distribute
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 [__] from [__]. The Fund's Articles Supplementary,
which set 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 [__] from [__] on the Series B Preferred. See "Description of the
Series B Preferred and Series C AMPS -- Rating Agency Guidelines."
Similarly, before it can be issued, the Series C AMPS must receive a rating
of [__] from [__] and a rating of [__] from [__]. As with the Series B
Preferred, the Articles Supplementary of the Fund setting forth the rights
and preferences of the Series C AMPS contain certain tests that the Fund
must satisfy to obtain and maintain a rating of [__] from [__] and [__]
from [__]. See "Description of the Series B Preferred and Series C AMPS--
Rating Agency Guidelines."
The Articles Supplementary for the Series B Preferred and the Series C
AMPS, 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 Securities and
Exchange Commission (http://www.sec.gov).
Under the asset coverage tests to which each of the Series B Preferred and
Series C AMPS is subject, the Fund is required to maintain (i) adjusted
assets greater than or equal to a basic maintenance amount 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 AMPS. See "Description of the Series B Preferred and Series
C AMPS -- Asset Maintenance Requirements."
The Fund estimates that if the shares offered hereby had been issued and
sold as of [__], 2002, the asset coverage under the 1940 Act would have
been approximately [__]% immediately following such issuance and sale
(after giving effect to the deduction of the underwriting discounts and
estimated offering expenses for such shares of $[__] as well as giving
effect to the anticipated redemption of the Series A Preferred). The asset
coverage would have been computed as follows:
value of Fund assets less liabilities not constituting senior securities
($[__]) / senior securities representing indebtedness plus liquidation
preference of each class of preferred stock ($[ ]), expressed as a
percentage = [__]%.
Mandatory
Redemption The Series B Preferred and the Series C AMPS 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%. See "Description of the Series B Preferred and Series
C AMPS -- Redemption -- Mandatory Redemption."
With respect to the Series B Preferred, any such redemption will be made
for cash at a 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 AMPS, any such redemption will be made for
cash at a 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 AMPS having a
dividend period of more than one year, any applicable redemption premium
determined by the Board of Directors.
Optional Redemption Series B Preferred. Commencing [__] 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 per share plus accumulated and
unpaid dividends (whether or not earned or declared) to the redemption
date. Prior to [__], the Series B Preferred will be redeemable at the
option of 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 AMPS --
Redemption -- Optional Redemption of the Series B Preferred."
Series C AMPS. The Fund generally may redeem Series C AMPS, 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.
The redemption price per Series C AMPS 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
AMPS 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 limitations of the 1940 Act and
Maryland law. See "Description of the Series B Preferred and Series C AMPS
-- Redemption -- Optional Redemption of the Series C AMPS."
Voting Rights At all times, holders of shares of the Fund's preferred stock (including
the Series B Preferred and Series C AMPS) outstanding, 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 Series B Preferred, Series C AMPS and any other
preferred stock will vote separately as a class on certain other matters,
as required under the 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 Series C AMPS
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 AMPS -- Voting Rights."
Liquidation
Preference The liquidation preference of each share of Series B Preferred is $25. The
liquidation preference of the Series C AMPS is $25,000 per share. Upon
liquidation, shareholders will receive the liquidation preference plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date of distribution. See "Description of the Series B
Preferred and Series C AMPS -- Liquidation Rights."
Use of Proceeds The Fund will use the net proceeds from the Offering to
purchase additional portfolio securities in accordance with its investment
objectives and policies. See "Use of Proceeds."
Listing Series B Preferred. Prior to the Offering, there has been no public market
for the Series B Preferred. Series B Preferred will 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 this prospectus, the Series B
Preferred will not be listed on any securities exchange.
Series C AMPS. The Series C AMPS will not be listed on an exchange.
Broker-dealers may, but are not obliged to, maintain a secondary trading
market in Series C AMPS outside of auctions. There can be no assurance that
a secondary market will provide owners with liquidity. You may transfer
Series C AMPS outside of auctions only to or through a broker-dealer that
has entered into an agreement with an auction agent and the Fund or other
persons as the Fund permits.
Special Characteristics
and Risks 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 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. 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 AMPS.
Primary risks associated with an investment in Series C AMPS, include:
If an auction fails, you may not be able to sell some or all of your Series
C AMPS. The Fund is not obliged to redeem your Series C AMPS if an auction
fails. The underwriters are not required to make a market in the Series C
AMPS. No broker-dealer is obligated to maintain a secondary market for the
Series C AMPS apart from the auctions.
You may receive less than the price you paid for your Series C AMPS if you
sell them outside of the auction, especially when market interest rates are
rising.
Both the Series B Preferred and Series C AMPS.
An investment in either the Series B Preferred or Series C AMPS also
includes the following primary risks:
A rating agency could downgrade or withdraw the rating assigned to the
preferred shares, which would likely have an adverse effect on the
liquidity and market value of the preferred shares. The present credit
rating does not eliminate or mitigate the risks of investing in the
preferred shares.
The Fund may be required to redeem your preferred shares to meet regulatory
or rating agency requirements or may voluntarily redeem your preferred
shares. Subject to such redemptions, the 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 preferred shares.
The preferred shares are not an obligation 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 preferred shares for
the full redemption price.
The value of the Fund's investment portfolio may decline, reducing the
asset coverage for the preferred shares. 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 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. 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 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 opportunity
considerations 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, Series C AMPS or
Series A Preferred for any calendar year in which the net asset value total
return of the Fund allocable to the common stock, including distributions
and the advisory fee subject to potential waiver, is less than (i) in the
case of the Series B Preferred and Series A Preferred, the stated annual
dividend rate of such series and (ii) in the case of the Series C AMPS, the
dividend rate for the Series C AMPS at the beginning of such year
(including the anticipated cost of a swap or cap if the Fund hedges its
Series C AMPS dividend obligations), in every case prorated during the year
such series is issued and the final year such series is outstanding.
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 Board may determine from time
to time) from net asset value. Through June 30, 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 is 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,
Dividend-Disbursing Agent,
Auction 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 PO 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 stock of the Fund.
Series B Preferred. State Street Bank and Trust Company serves as the
Fund's custodian with respect to the Series B Preferred. The Bank of New
York, located at 5 Penn Plaza, 13th Floor, New York, NY 10001, will serve
as the Fund's transfer agent, registrar, dividend and paying agent and
redemption agent with respect to the Series B Preferred.
Series C AMPS. The Bank of New York will also serve as the Fund's auction
agent, transfer agent, registrar, dividend paying agent and redemption
agent with respect to the Series C AMPS.
Auction Procedures You may buy, sell or hold Series C AMPS 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 AMPS, but each
dividend rate will not be higher than the maximum applicable rate. See
"Description of the Series B Preferred and Series C AMPS -- Dividends on
the Series C AMPS."
If you own shares of Series C AMPS, 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 AMPS
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 AMPS 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 AMPS, 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 AMPS. You may also enter an order to buy additional Series C AMPS.
All orders must be for whole shares. All orders you submit are irrevocable.
There is a fixed number of Series C AMPS 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 AMPS and general economic conditions including current interest
rates. If you own Series C AMPS and submit a bid for them higher than the
maximum applicable 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 AMPS, 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 AMPS, 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 already own specifies a rate higher than the maximum
applicable rate, your bid will not be considered.
Broker-dealers will submit orders from existing and potential holders of
Series C AMPS 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 AMPS. A broker-dealer's failure
to submit orders for Series C AMPS 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 AMPS 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 AMPS 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 AMPS placed
by the broker-dealers at the auction agreed to by the Fund and the
broker-dealers.
If the number of Series C AMPS shares subject to bid orders by potential
holders with a dividend rate equal to or lower than the maximum applicable
rate is at least equal to the number of Series C AMPS 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 AMPS
available for purchase in the auction.
If the number of Series C AMPS shares subject to bid orders by potential
holders with a dividend rate equal to or lower than the maximum applicable
rate is less than the number of Series C AMPS shares subject to sell
orders, then the auction is considered to be a failed auction, and the
dividend rate will be the maximum applicable 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 AMPS for
which they submitted sell orders.
The auction agent will not consider a bid above the maximum applicable
rate. The purpose of the maximum applicable rate is to place an upper limit
on dividends with respect to the Series C AMPS 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 AMPS 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 AMPS, the auction is considered an "all hold" auction
and the dividend rate for the next dividend period will be the "all hold
rate," which is 80% of the "AA" Financial Composite Commercial Paper Rate.
The auction procedures include a pro rata allocation of Series C AMPS
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 AMPS 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 AMPS
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 AMPS 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 AMPS 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 AMPS 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 next succeeding the end of such period.
Interest Rate Transactions In connection with the sale of the Series C AMPS, 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 AMPS or obtain the equivalent
of a fixed rate for the Series C AMPS 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 AMPS. 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 AMPS.
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 AMPS. 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, and in certain circumstances will be required to, mandatorily
redeem some or all of these shares (including the Series C AMPS). 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 AMPS in a notional amount in
excess of the outstanding amount of the Series C AMPS. See "Investment
Practices -- 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 AMPS 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% (or 18% 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, are currently taxable to individuals at a
maximum rate of [__]%.
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 AMPS 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 [__]%,
[__]%, and [__]% long-term capital gains. The Fund has no reason to expect
that these percentages will decrease materially in the future although it
cannot provide any assurances in this regard.
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 federal income tax characteristics of the Fund and the taxation
of its stockholders are described more fully under "Taxation."
Assumptions
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 AMPS, 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 [__]% and [__]% 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
Annual Annual
Dividend Rate Dividend Rate
------------- -------------
[--]% [--]%
Percentage of Series B Preferred Stated Tax Equivalent Yield for an Tax Equivalent Yield for an
Annual Dividend Comprised of Individual in the 39.1% Individual in the 30.5%
---------------------------------------- federal Income Tax Bracket(1) federal Income Tax Bracket(1)
Long-Term Ordinary --------------------------- ----------------------------
Capital Gains Income
------------- ------
83.3% 16.7% % %
75.0% 25.0% % %
66.7% 33.3% % %
50.0% 50.0% % %
33.3% 66.7% % %
25.0% 75.0% % %
16.7% 83.3% % %
0.0% 100.0% % %
________________________
(1) Annual taxable income levels corresponding to the 2003 federal marginal
tax brackets are as follows:
2003 federal Income Tax Bracket* Single Joint
-------------------------------- ------ -----
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, 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,
effective for taxable years beginning after December 31, 2000,
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.
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 C AMPS Illustrative Annual Series C AMPS Illustrative
Dividend Rate** Annual Dividend Rate**
----------------------------------- ----------------------------
% % % %
Percentage of Series C AMPS Share
Illustrative Annual Dividend Comprised of
----------------------------------------------
Long-Term Tax Equivalent Yield for an Tax Equivalent Yield for
Capital Gains Ordinary Income Individual in the [ ]% an Individual in the [ ]%
------------- --------------- federal Income Tax Bracket(1) federal Income Tax Bracket(1)
----------------------------------- ----------------------------
90.0% 10.0% % % % %
83.3% 16.7% % % % %
75.0% 25.0% % % % %
66.7% 33.3% % % % %
50.0% 50.0% % % % %
33.3% 66.7% % % % %
25.0% 75.0% % % % %
16.7% 83.3% % % % %
10.0% 90.0% % % % %
0.0% 100.0% % % % %
__________________
** Actual dividend rates for the Series C AMPS will vary. See
"Description of the Series B Preferred and Series C AMPS-Dividends."
(1) Annual taxable income levels corresponding to the 2003 federal
marginal tax brackets are as follows:
2003 federal Income Tax Bracket*** Single Joint
-------------------------------- ------ -----
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,
effective for taxable years beginning after December 31, 2000,
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 table below sets forth selected financial data for a share of
common stock outstanding throughout the periods presented. The per share
operating performance and ratios for the fiscal years ended December 31, 2002,
2001, 2000, 1999, and 1998 have been audited by [__], the Fund's independent
accountants, as stated in their report, which is incorporated by reference
into the SAI. The following information should be read in conjunction with the
Financial Statements and Notes thereto, which are incorporated by reference
into the SAI.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a Fund common share
outstanding throughout each period:
Year Ended December 31,
--------------------------------------------------------------
Operating performance: 2002 2001 2000 1999 1998 1997
----------- ---------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.....
----------- ---------- ----------- ----------- ----------- -----------
Net investment income....................
Net realized and unrealized gain
(loss) on investments.................
----------- ---------- ----------- ----------- ----------- -----------
Total from investment operations.........
----------- ---------- ----------- ----------- ----------- -----------
Distributions to preferred stock shareholders:
Net investment income....................
Net realized gain on investments.........
----------- ---------- ----------- ----------- ----------- -----------
Total distributions to preferred
stock shareholders....................
----------- ---------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
attributable to common stock
shareholders resulting from operations...
----------- ---------- ----------- ----------- ----------- -----------
Distributions to common stock shareholders:
Net investment income....................
Net realized gain on investments
Paid in capital
----------- ---------- ----------- ----------- ----------- -----------
Total distributions to common stock
shareholders..........................
----------- ---------- ----------- ----------- ----------- -----------
Capital share transactions:
Increase in net asset value from
common share transactions.............
Preferred share offering costs
charged to paid-in capital............
----------- ---------- ----------- ----------- ----------- -----------
Total capital share transactions.........
----------- ---------- ----------- ----------- ----------- -----------
Net asset value attributable to common
stock shareholders, end of period.......
=========== ========== =========== =========== =========== ===========
Net asset value total return+............
=========== ========== =========== =========== =========== ===========
Market value, end of period..............
=========== ========== =========== =========== =========== ===========
Total investment return++
=========== ========== =========== =========== =========== ===========
Ratios and supplemental data:
Net assets including liquidation
value of preferred shares, end of
period (in 000's)...................
Net assets attributable to common
shares, end of period (in 000's)....
Ratio of net investment income to
average net assets attributable to
common shares.......................
Ratio of operating expenses to
average net assets attributable to
common shares (a)...................
Ratio of operating expenses to
average total net assets including
liquidation value of preferred
shares (d)..........................
Portfolio turnover rate
Cumulative Preferred Stock:
8.00% Cumulative Preferred Stock
Liquidation value, end of period
(in 000's).............................
Total shares outstanding (in 000's).......
Liquidation preference per share
Average market value (b)
Asset coverage............................
Asset coverage per share..................
_______________________
+ Based on net asset value per share, adjusted for reinvestment of
distributions. Total return for the period of less than one year is not
annualized.
++ Based on market value per share, adjusted for reinvestment of
distributions. Total return for the period of less than one year is not
annualized
(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) Annualized.
(d) Amounts are attributable to both common and preferred stock assets.
Year Ended December 31,
---------------------------------------------------------------
1996+ 1995+ 1994+ 1993+ 1992+
---------- ----------- ----------- ----------- -----------
Operating Performance:
Net asset value, beginning of period...............
---------- ----------- ----------- ----------- -----------
Net investment income..............................
Net realized and unrealized gain (loss) ...........
on securities......................................
---------- ----------- ----------- ----------- -----------
Total from investment operations...................
---------- ----------- ----------- ----------- -----------
Distributions to common stock shareholders:
Net investment income..............................
Net realized gain on investments...................
Distributions in excess of net investment income...
Distributions in excess of net realized gains......
Paid-in capital....................................
---------- ----------- ----------- ----------- -----------
Net asset value, end of period.....................
========== =========== =========== =========== ===========
Market value, end of period........................
========== =========== =========== =========== ===========
Total Net Asset Value Return ++ (a)................
Total Investment Return ++(b)......................
Ratios to average net assets/supplemental data:
Net assets, end of period (in thousands)...........
Ratio of operating expenses to average
net assets(c)....................................
Ratio of net investment income (loss)
to average net assets...........................
Portfolio turnover rate............................
Average commission rate (d)........................
______________________
+ 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.
(a) Based on net asset value per share, adjusted for reinvestment of all
distributions.
(b) 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.
(c) 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. Includes, for 1997,
the advisory fee reduction on incremental assets raised through the
issuance of preferred shares of $36,986. Without this advisory fee
reduction, this ratio would have been 1.42%.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate paid per share for
purchases and sales of investment securities.
The following table provides information about the Fund's Series A 8%
Cumulative Preferred stock since its issuance in May 1997. The information has
been audited by [__], independent accountants.
Involuntary
Liquidation Average
Year ended Shares Asset Coverage Preference Market
December 31, Outstanding Per Share Per Share Value Per Share
------------ ----------- --------- ------------ ---------------
2002 $25.00
2001 $25.00
2000 $25.00
1999 $25.00
1998 $25.00
1997 $25.00
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 8% Cumulative Preferred
Stock outstanding on that date. Involuntary Liquidation Preference Per Share
refers to the amount holders of Series A 8% Cumulative Preferred Stock 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 8% Cumulative Preferred Stock 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 be able to invest the
proceeds of the Offering according to the Fund's investment objectives and
policies within six months after the completion of the Offering. Pending such
investment, the Fund will hold the proceeds in high quality short-term debt
securities and instruments.
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 is expected to be redeemed by
the Fund on February 11, 2003, currently trades on the New York Stock Exchange
under the symbol "GCV Pr."
INVESTMENT OBJECTIVES 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, corporate notes, preferred stocks and other similar securities) that
are convertible into common stock or other equity securities, and "income
securities," i.e., nonconvertible 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 investing in 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,
corporate note, preferred 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 Standard & Poor's Rating Group
("S&P") and Moody's Investor Services Inc. ("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."
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.
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 has no 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, corporate notes, preferred 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, because, among other reasons, it wishes to defer recognition
of gain or loss for U.S. Federal income tax purposes. 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 objectives, 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 has
authorized the issuance of 2,000,000 shares of preferred stock. The Fund
currently has 600,000 shares of preferred stock outstanding, all of which it
expects to redeem on February 11, 2003. The Fund's outstanding preferred stock
has a stated dividend rate of 8% per annum.
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.
Interest Rate Transactions. In order to reduce the impact of changes
in the dividend rate of the Series C AMPS or obtain the equivalent of a fixed
rate for the Series C AMPS 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 AMPS. 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 AMPS. 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 AMPS. 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 AMPS. 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 AMPS) 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 AMPS 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 AMPS in a notional amount in excess of the
outstanding amount of the Series C AMPS.
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
There are a number of risks associated with an investment in the
Series B Preferred or Series C AMPS. The value for the Series B Preferred and
Series C AMPS will be influenced by changes in interest rates, the perceived
credit quality of the Series B Preferred or Series C AMPS and other factors.
The Series B Preferred and Series C AMPS 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 AMPS. Subject to such
circumstances, the Series B Preferred and Series C AMPS are perpetual. The
credit rating on the Series B Preferred or Series C AMPS 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 AMPS. 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 AMPS. The Series B Preferred and the Series C AMPS are not obligations of
the Fund. The Series B Preferred and Series C AMPS 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 Series C AMPS for the full redemption price.
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 Series C AMPS being offered in this prospectus, the
amount of leverage will represent approximately [__]% 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
objectives and policies. These include the possibility of greater loss and the
likelihood of higher volatility of the net asset value of the Fund and the
Series B Preferred and Series C AMPS's asset coverage.
Because the fee paid to the Investment Manager will be calculated on
the basis of the Fund's managed assets (which equal the aggregate net asset
value of the common shares plus the liquidation preference of the 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 Manager an incentive to utilize leverage.
Restrictions on Dividends and 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 Preferred Series B and Series C
AMPS) 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.
General Ratings and
Asset Coverage Risk
While it is a condition to the closing of the offering that [__]
assigns a rating of [__] to the Series B Preferred and Series C AMPS and that
[__] assigns a rating of [__] to the Series C AMPS, the ratings do not do not
eliminate or necessarily mitigate the risks of investing in Series B Preferred
or Series C AMPS . For additional risks related to ratings and asset coverage
risk with respect to the Series C AMPS, see "Special Risks of the Series C
AMPS--Ratings and Asset Coverage Risk" below. --
[__] or another rating agency then rating the Series C AMPS could
downgrade the Series C AMPS, which may make your shares less liquid at an
auction or in the secondary market. If a rating agency rating the Series C
AMPS at the Fund's request downgrades the Series C AMPS, the maximum dividend
rate on the Series C AMPS will increase. See "Description of the Series B
Preferred and Series C AMPS -- Rating Agency Guidelines" for a description of
the asset maintenance tests the Fund must meet.
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 two years following the acquisition of the unregistered
convertible securities and without any restrictions beginning three years
after the acquisition of the unregistered convertible securities. 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.
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 Objectives 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, a "AAA"
rating on the Fund's outstanding preferred stock does not eliminate or
mitigate the risks associated with investing in the Fund's common stock. In
addition, should the rating on the Fund's preferred stock be lowered or
withdrawn by the relevant rating agency, there may be an adverse effect on the
market value of the Fund's preferred stock and 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.
Long-term Objective
The Fund is intended for investors seeking long-term capital growth.
The Fund is not meant to provide a vehicle for those who wish to play
short-term swings in the stock market. An investment in shares of the Fund
should not be considered a complete investment program. Each shareholder
should take into account the Fund's investment objectives 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.
Closed-end funds are bought and sold in the securities markets and may trade
at either a premium or discount from net asset value. 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 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 Objectives and Policies --
Investment Practices" in the SAI.
Forward Currency Exchange Contracts
The use of forward currency contracts may involve certain risks,
including the failure of the counter party to perform its obligations under
the contract and that the use of forward contracts may not serve as a complete
hedge because of an imperfect correlation between movements in the prices of
the contracts and the prices of the currencies hedged or used for cover. For a
further description of such investments, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
Dependence on Key Personnel
The Investment Adviser is dependent upon the expertise of Mr. Mario
J. Gabelli in providing advisory services with respect to the Fund's
investments. If the Investment Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund could be adversely affected. There
can be no assurance that a suitable replacement could be found for Mr. Gabelli
in the event of his death, resignation, retirement or inability to act on
behalf of the Investment Adviser.
Recent Developments
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 Series C AMPS.
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. 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, 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 AMPS
Auction Risk. You may not be able to sell your Series C AMPS at an
auction if the auction fails, i.e. if there is more Series C AMPS 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 AMPS only at a specified rate
that exceeds the rate set at the auction, you will not retain your Series C
AMPS. 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 AMPS, which
could also affect the liquidity of your investment. See ""Description of the
Series B Preferred and Series C AMPS" and "The Auction."
Secondary Market Risk. If you try to sell your Series C AMPS 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 AMPS are not required to maintain this market, and the Fund is not required
to redeem Series C AMPS if either an auction or an attempted secondary market
sale fails because of a lack of buyers. The Series C AMPS is not registered on
a stock exchange or the NASDAQ stock market. If you sell your Series C AMPS 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.
MANAGEMENT OF THE FUND
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 and the 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, together with other affiliated investment
advisers, has assets under management totaling over $[__] billion as of December
31, 2002. The Investment Adviser was organized in 1999 and is the successor to
the investment advisory division of Gabelli Funds, Inc., which was organized in
1980. As of December 31, 2002, the Investment Adviser and its affiliate, Gabelli
Advisers, Inc., act as primary investment adviser to 20 management investment
companies with aggregate net assets of $[__] billion. GAMCO Investors, Inc., an
affiliate of the Investment Adviser, acts as investment adviser for individuals,
pension trusts, profit sharing trusts and endowments, and as investment
sub-adviser to management investment companies having aggregate assets of $[__]
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 $[__] 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.
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, 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, costs of printing proxies, stock
certificates and stockholder reports, charges of State Street Bank and Trust
Company ("State Street," the "Custodian," "Transfer Agent" or "Dividend
Disbursing Agent") charges of EquiServe, 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.
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.; Chairman of the Board and Chief Executive Officer of
Lynch Corporation, a diversified manufacturing company, and Lynch Interactive
Corporation, a multimedia and communications services company; and Director of
Spinnaker Industries, Inc., a manufacturing 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.
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 3200 Horizon Drive, 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 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. In the event the Fund's common
stock is trading at a discount to its net asset value, the Board of Directors
would consider quarterly distributions and/or adopting a policy of distributing
at least 8% per share of its average net asset value per year. 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 gains,
the excess will be treated as a return of capital. If the Fund's net investment
income, 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 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 AMPS
The following is a brief description of each of the terms of the Series
B Preferred and the Series C AMPS. 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 AMPS. For complete terms of the Series B Preferred or
the Series C AMPS, including definitions of terms used in this prospectus,
please refer to the actual terms of such series, which are set forth in the
Articles Supplementary.
General
Under the Articles Supplementary, the Fund is authorized to issue up to
[__] shares of Series B Preferred and up to [__] shares of Series C AMPS. No
fractional shares of either shares will be issued. The Board of Directors
reserves the right to issue additional shares of preferred stock, including
Series B Preferred or Series C AMPS, from time to time, subject to the
restrictions in the Articles Supplementary and the 1940 Act.
The Series B Preferred will have a liquidation value of $25 per share
and the Series C AMPS will have a liquidation preference of $25,000 per share.
Upon a liquidation, each holder of Series B Preferred or Series C AMPS will be
entitled to receive 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
AMPS 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 AMPS 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 AMPS will, upon issuance, be fully paid and
nonassessable and will have no preemptive, exchange or conversion rights. Any
Series B Preferred or Series C AMPS 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 Series C AMPS.
Rating Agency Guidelines
Upon issuance, both the Series B Preferred and the Series C AMPS will
be rated [__] by [__]. In addition, the Series C AMPS will also be rated [__] by
[__]. The Fund is required under [__] and [__] guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Basic
Maintenance Amount (as defined below) for the Series B Preferred and the Series
C AMPS with respect to the separate guidelines [__] and [__] 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 the rating agency). The [__] and [__]
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" includes the sum of (i) 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, (ii) the
total principal of any debt (plus accrued and projected interest), (iii) certain
Fund expenses and (iv) certain other current liabilities (excluding any unpaid
dividends on the Fund's common stock).
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 AMPS 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 AMPS, as
described below under " -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by [__] or [__]. Failure to adopt
any such modifications, however, may result in a change in the ratings or a
withdrawal of the ratings altogether. In addition, any rating agency providing a
rating for the Series B Preferred or the Series C AMPS at the request of the
Fund may, at any time, change or withdraw any such rating. The Board of
Directors, without further action by the stockholders, may amend, alter, add to
or repeal certain of the definitions and related provisions that have been
adopted by the Fund pursuant to the rating agency guidelines if the Board
determines that such modification is necessary to prevent a reduction in rating
of the shares of preferred stock by [__] and/or [__], as the case may be, is in
the best interests of the holders of shares of common stock and is not adverse
to the holders of preferred stock in view of advice to the Fund by [__] and [__]
(or such other rating agency then rating the Series B Preferred or Series C AMPS
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 AMPS, as the case
may be.
With respect to the Series C AMPS, the Board of Directors may amend the
Articles Supplementary definition of "Maximum Rate" (the "maximum applicable
rate" as defined below under "-- Dividends on the Series C AMPS -- Maximum
Applicable Rate") to increase the percentage amount by which the "Reference
Rate" (as defined in the Articles Supplementary) is multiplied to determine the
maximum applicable rate without the vote or consent of the holders of Series C
AMPS or any other stockholder of the Fund, but only after consultation with the
broker-dealers and with confirmation from each applicable rating agency that the
Fund could meet the Basic Maintenance Amount Test applicable to the Series C
AMPS immediately following any such increase.
As described by [__] and [__], the ratings assigned to the Series B
Preferred and the Series C AMPS 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 AMPS. The ratings on the Series B Preferred and the Series C AMPS 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 AMPS will be able to sell such shares
on an exchange, in an auction or otherwise. The ratings are based on current
information furnished to [__] and [__] 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 AMPS, 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 [__] and [__]
for rating the Series B and the Series C AMPS.
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 Series C AMPS to maintain 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 the
Series B Preferred and the Series C AMPS. 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 AMPS, (including the Series B Preferred or Series C AMPS)
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 Series C AMPS offered hereby
had been issued and sold as of December 31, 2001, 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 $[ ] as well as giving effect to the proposed
redemption of the Series A Preferred), would have been computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($[__]) / senior securities representing
indebtedness plus liquidation preference of each class of
preferred stock ($[__]), expressed as a percentage = [__]%.
Dividends on the Series B Preferred
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 [__
]% 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 next succeeding Business Day (the "Dividend Payment
Date"). Such dividends will commence on [__], 2002, 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.
No full dividends will be declared or paid or set apart for payment on
the Series B Preferred for any dividend period or part thereof, unless full
cumulative dividends due through the most recent dividend payment dates thereof
for all series of preferred stock of the Fund ranking on a parity with the
Series B Preferred as to the payment of dividends have been or contemporaneously
are declared and paid on all such outstanding shares of preferred stock. If full
cumulative dividends due have not been paid on all shares of preferred stock of
the Fund raking on a parity with the Series B Preferred as to the payment of
dividends, any dividends being paid on the shares of such preferred stock
(including the Series B Preferred) will be paid as nearly pro rata as possible
on all outstanding shares of such preferred stock on the dividend payment dates
therefor in proportion to the respective amounts of dividends accumulated but
unpaid on each such series of preferred stock. Holders of Series B Preferred
will not be entitled to any dividends, whether payable in cash, property or
stock, in excess of full cumulative dividends. No interest, or sum of money in
lieu of interest, will be payable in respect of any dividend payment that may be
in arrears.
For so long as any shares of preferred stock are outstanding, the Fund
may not pay any dividend or distribution (other than a dividend or distribution
paid in shares, options, warrants or rights to subscribe for or purchase common
shares) in respect of the common shares or call for redemption, redeem, purchase
or otherwise acquire for consideration any common shares (except by conversion
into or exchange for shares of the Fund ranking junior to the Series B Preferred
as to the payment of dividends and the distribution of assets upon liquidation),
unless (i) it has paid all cumulative dividends on the Series B Preferred; (ii)
the Fund has redeemed any shares of Series B Preferred that it has called for
mandatory redemption; and (iii) after paying the dividend, the Fund meets
applicable asset coverage requirements described under "-- Rating Agency
Guidelines" and "-- Asset Maintenance Requirements."
Dividends on the Series C AMPS
General. The following is a general description of dividends and
dividend rate periods for the Series C AMPS. See the SAI for a more detailed
discussion of this topic. The holders of Series C AMPS are entitled to receive
cash dividends at annual rates that will vary from dividend period to dividend
period. The dividend rate for the initial dividend period for the Series C AMPS
offered in this prospectus will be the rate set out on the cover of this
prospectus. For subsequent dividend periods, the Series C AMPS 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 applicable 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 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 AMPS 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
such date, not more than 15 days before the payment date, as the Fund's Board of
Directors may fix.
The Depository Trust Company, 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 AMPS. 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 AMPS
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 AMPS pays dividends based on
a rate set at auction and Series C AMPS may be bought and sold at the auction.
The auction usually is held weekly, but may be held 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 AMPS. The auction agent then determines the lowest dividend rate that
will result in all of the Series C AMPS continuing to be held. See "The
Auction."
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
next succeeding the end of such period.
Determination of Dividend Rates. The Fund computes the dividends per
share by multiplying the dividend rate determined at the auction by a fraction,
the numerator of which normally is seven and the denominator of which normally
is 360. This rate is then multiplied by $25,000 to arrive at the dividend per
share. The numerator may be different if the dividend period includes a holiday.
If an auction for any subsequent dividend rate period of the Series C
AMPS is not held for any reason other than as described below, the dividend rate
on those shares will be the maximum applicable rate on the auction date for that
subsequent dividend period.
Maximum Applicable Rate. The dividend rate that results from an auction
for the Series C AMPS will not be greater than the "maximum applicable rate."
The maximum applicable 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 AMPS by [__] and [__] or (ii) in the case of a dividend period of longer than
184 days, the applicable percentage of the Treasury Index Rate.
Applicable
[ ] Credit Rating [ ] Credit Rating Percentage
----------------- ----------------- ----------
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__] 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, 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 applicable 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 Series C AMPS
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 auction will be held for the Series C AMPS for the
first subsequent dividend period thereafter, and the dividend rate for the
Series C AMPS for that subsequent dividend period will be the maximum applicable
rate.
However, if the Fund does not effect a timely cure, no auction will be
held for the Series C AMPS for the first subsequent dividend period thereafter
-- and for any subsequent dividend period to and including the dividend period
during which the failure is cured and the late charge is paid -- and the
dividend rate for the Series C AMPS for each such subsequent dividend period
will be the default rate.
The default rate means 300% of the applicable "AA" Financial Composite
Commercial Paper Rate for a dividend period of fewer than 184 days and 300% of
the applicable Treasury Index Rate for a dividend period of 184 days or more.
Late charges are also calculated at the applicable default rate.
Restrictions on Dividends and Other Distributions. When the Fund has
any Series C AMPS outstanding, the Fund may not pay any dividend or distribution
(other than a dividend or distribution paid in shares, or options, warrants or
rights to subscribe for or purchase, common shares) in respect of the common
shares or call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares (except by conversion into or exchange for
shares of the Fund ranking junior to the Series C AMPS as to the payment of
dividends and the distribution of assets upon liquidation), unless (i) it has
paid all cumulative dividends on the Series C AMPS; (ii) the Fund has redeemed
any shares of Series C AMPS that it has called for mandatory redemption; and
(iii) 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 or set apart for payment on
the Series C AMPS for any dividend period or part thereof, unless full
cumulative dividends due through the most recent dividend payment dates therefor
for all series of preferred stock of the Fund ranking on a parity with the
Series C AMPS as to the payment of dividends have been or contemporaneously are
declared and paid on all such outstanding shares of preferred stock. If full
cumulative dividends due have not been paid on all shares of preferred stock of
the Fund ranking on a parity with the Series C AMPS as to the payment of
dividends, any dividends being paid on the shares of such preferred stock
(including the Series C AMPS) will be paid as nearly pro rata as possible on all
outstanding shares of such preferred stock on the dividend payment dates
therefor in proportion to the respective amounts of dividends accumulated but
unpaid on each such series of preferred stock.
Designation of Special Dividend Periods for the Series C AMPS. The Fund
may instruct the auction agent to hold auctions and pay dividends 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 AMPS 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 AMPS 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) the Fund will have
deposited with the paying agent all funds necessary for redemption if the Fund
will have mailed a notice of redemption with respect to Series C AMPS, 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 Series C AMPS Basic Maintenance Amount (as defined
below), and the Fund has consulted with the broker-dealers and has provided
notice of such designation and a Series C AMPS Basic Maintenance Report to each
rating agency.
The dividend payment date for any special dividend period will be the
first business day after the end of the special dividend period. In addition,
for special dividend periods of (x) at least 91 days but not more than one year,
dividend payment dates will occur on the 91st, 181st and 271st days within such
dividend period, if applicable, and on the business day following the last day
of such dividend period and (y) of more than one year, dividend payment dates
will occur on each March 26, June 26, September 26 and December 26 during the
special dividend period.
Before the Fund designates a special dividend period: (x) 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 (y) 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.
Redemption
Mandatory Redemption Relating to Asset Coverage Requirements. The Fund
may, and in certain circumstances will be required to, mandatorily redeem
preferred stock (including, at its discretion, the Series B Preferred or Series
C AMPS) 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 AMPS 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 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
the Series C AMPS 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 the Series C AMPS 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%. In addition, as discussed under "--
Optional Redemption" below, the Fund generally may exercise its optional
redemption rights with respect to the Series C AMPS 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 each holder whose shares are to be redeemed ratably in
proportion to the sum of the respective liquidation preferences and amounts of
accrued but unpaid dividends of such shares, and the remainder of the shares
required 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 preferred stock are to be redeemed, the
Fund, at its discretion will select the series of preferred stock from which
shares will be redeemed. 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. 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 [__], [__], the
shares of Series B Preferred are not subject to any 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 [__] and thereafter, the Fund may at any time redeem shares of Series
B Preferred in whole or in part for cash at a price per share equal to $25 per
share plus accumulated and unpaid dividends (whether or not earned or declared)
to the redemption date on not less than 15 calendar days and not more than 40
calendar days written notice. Such redemptions are subject to the limitations of
the 1940 Act and Maryland law.
Optional Redemption of the Series C AMPS. The Fund may redeem the
Series C AMPS, 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.
The redemption price per Series C AMPS 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 AMPS 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 limitations of the 1940 Act and Maryland law.
Redemption Procedures. A notice of redemption will be given to the
holders of record of preferred stock selected for redemption not less than 15
or more than 40 days prior to the date fixed for redemption. Each notice of
redemption will state (i) the redemption date, (ii) the number 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 and (vii) the provision of the Articles Supplementary under
which the redemption is being made. 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 AMPS 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 AMPS 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 AMPS 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 AMPS, 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 Series C AMPS as to payment upon liquidation
will be insufficient to permit the payment in full to such holders of the Series
B Preferred and Series C AMPS 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
AMPS 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 Series C AMPS
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 Series C AMPS 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 Series C AMPS along with holders of other series of preferred
stock, 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 of any other preferred stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders of
the Series B Preferred, Series C AMPS 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 AMPS 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 AMPS 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
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 AMPS 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 AMPS 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 AMPS 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 AMPS, 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 of holders of shares of the 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 affect the
contract rights expressly set forth in the charter of a holder of shares of a
series of preferred stock (such as the Series B Preferred or Series C AMPS)
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 General Corporation 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 Series C AMPS), voting together as a
single class, will be required to approve any plan of reorganization adversely
affecting such shares 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 Objectives and Policies" and
"Investment Restrictions" in the Prospectus and the SAI. For purposes of this
paragraph, except as otherwise required under the 1940 Act, the phrase "vote of
the holders of a majority of the outstanding shares of preferred stock" 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
AMPS 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 determines that such
modification is necessary to prevent a reduction in rating of the shares of
preferred stock by [__] and/or [__] (or any other rating agency then rating the
Series B Preferred or Series C AMPS at the request of the Fund), as the case may
be, is in the best interests of the holders of shares of common stock and is not
adverse to the holders of preferred stock in view of advice to the Fund by 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 AMPS 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 paying agent to effect such redemption. The holders
of Series B Preferred and Series C AMPS 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 AMPS is outstanding and
subject to compliance with the Fund's investment objectives, 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, 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 AMPS is outstanding,
subject to receipt of approval from [__] and, in the case of the Series C AMPS,
[__], and subject to compliance with the Fund's investment objectives, 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, 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, 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.
Book Entry
Shares of Series B Preferred will initially be held in the name of Cede
& Co ("Cede"), as nominee for The Depository Trust Company ("DTC"). The Fund
will treat Cede 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
(as defined below).
Shares of Series C AMPS will initially be held by the auction agent.
The Fund will treat the auction agent as the holder of record of the Series C
AMPS for all purposes.
THE AUCTION OF SERIES C AMPS
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the
Series C AMPS, 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. Any terms in this section
not defined have the meaning assigned to them in the SAI and the SAI Glossary.
The auctions determine the dividend rate for the Series C AMPS, but each
dividend rate will not be higher than the maximum applicable rate. See
"Description of the Series B Preferred and Series C AMPS -- Dividends." You may
buy, sell or hold shares of Series C AMPS in the auction.
The auctions determine the dividend rate for the Series C
AMPS, but each dividend rate will not be higher than the
maximum applicable rate. See "Description of the Series B
Preferred and Series C AMPS -- Dividends on the Series C
AMPS."
If you own shares of Series C AMPS, 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 AMPS 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 dividends rate, you indicate that you want to
sell Series C AMPS 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 AMPS, 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 AMPS. You may also enter an
order to buy additional Series C AMPS. All orders must be
for whole shares. All orders you submit are irrevocable.
There is a fixed number of Series C AMPS 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 AMPS
and general economic conditions including current interest
rates. If you own Series C AMPS and submit a bid for them
higher than the maximum applicable 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 AMPS, 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 AMPS, 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
maximum applicable rate, your bid will not be considered.
Broker-dealers will submit orders from existing and
potential holders of Series C AMPS 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 AMPS. A
broker-dealer's failure to submit orders for Series C AMPS
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 AMPS
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 AMPS 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 AMPS placed by the broker-dealers at the auction
agreed to by the Fund and the broker-dealers.
If the number of Series C AMPS shares subject to bid
orders by potential holders with a dividend rate equal to
or lower than the maximum applicable rate is at least
equal to the number of Series C AMPS 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
AMPS available for purchase in the auction.
If the number of Series C AMPS shares subject to bid
orders by potential holders with a dividend rate equal to
or lower than the maximum applicable rate is less than the
number of Series C AMPS shares subject to sell orders,
then the auction is considered to be a failed auction, and
the dividend rate will be the maximum applicable 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 AMPS
for which they submitted sell orders.
The auction agent will not consider a bid above the
maximum applicable rate. The purpose of the maximum
applicable rate is to place an upper limit on dividends
with respect to the Series C AMPS 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 AMPS 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 AMPS, the auction is
considered an "all hold" auction and the dividend rate for
the next dividend period will be the "all hold rate,"
which is 80% of the "AA" Financial Composite Commercial
Paper Rate.
The auction procedures include a pro rata allocation of
Series C AMPS 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 AMPS
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 AMPS 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 AMPS 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
AMPS 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 AMPS
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 next 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 AMPS 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 500 Bid order at 2.1% rate for all
shares if auction rate is less than 2.1% 500 shares
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 200 Bid order at 1.9% rate for all
shares if auction rate is less than 1.9% 200 shares
Potential Holder D Wants to buy 200 shares Places order to buy at or above
2.0%
Potential Holder E Wants to buy 300 shares Places order to buy at or above
1.9%
Potential Holder F Wants to buy 200 shares Places order to buy at or above
2.1%
The lowest dividend rate that will result in all 1,000 Series C AMPS
shares continuing to be held is 2.0% (the offer by D). Therefore, the dividend
rate will be 2.0%. 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 AMPS
The underwriters are not required to make a market in the Series C
AMPS. 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
AMPS will develop or, if it does develop, that it will provide owners with
liquidity of investment. The Series C AMPS will not be registered on any stock
exchange or on the NASDAQ market. Investors who purchase Series C AMPS 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 AMPS
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 AMPS in the name of a broker-dealer, a sale or transfer of your
Series C AMPS 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. The Board
has authorized issuance of one hundred million (100,000,000) shares of the
common stock class and two million (2,000,000) shares of the preferred stock
class. The common stock of the Fund is listed on the New York Stock Exchange
under the symbol GCV and began trading March 31, 1995. 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 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 June 30, 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, 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. 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, 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 capital stock
are authorized as preferred stock, par value $.001 per share. 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 expects to redeem on February 11, 2003. The
Series A Preferred is rated AAA by S&P and is listed and traded on the New York
Stock Exchange under the symbol "GCV Pr."
All shares of Series A Preferred are fully paid and nonassessable.
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund as
of [__] 2003.
AMOUNT AMOUNT AMOUNT
CLASS OF STOCK AUTHORIZED CLASSIFIED OUTSTANDING
--------------- ---------- ---------- -----------
Common Stock............. 1,000,000,000(1) shares 998,000,000 [__] shares
Preferred Stock.......... 1,000,000,000(1) shares 2,000,000 [__] shares(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 AMPS shares 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 qualified and elected to be taxed 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 fiscal quarter (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 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 equal to the sum of (i) at least 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least 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 by a fund with a November or December year-end 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
gains) 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, 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 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 [__]% 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.**
--------------
** The Economic Growth and Tax Relief Reconciliation Act of 2001, effective
for taxable years beginning after December 31, 2000, 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.
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 withholding
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 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 (i) the ability of other entities or persons to acquire
control of the Fund's Board of Directors, (ii) the Fund's freedom to engage in
certain transactions or (iii) 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 is 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 PO Box 43025, Providence,
RI 02940-3025, serves as the Fund's dividend disbursing agent, as agent under
the Fund's Plan and as transfer agent and registrar for stock of the Fund.
Series B Preferred. State Street Bank and Trust Company serves as the
Fund's custodian with respect to the Series B Preferred. The Bank of New York,
located at 5 Penn Plaza, 13th Floor, New York, NY 10001, will serve as the
Fund's transfer agent, registrar, dividend and paying agent and redemption
agent with respect to the Series B Preferred.
Series C AMPS. 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 AMPS.
UNDERWRITING
[________ ] and Gabelli & Company, Inc are acting as
representatives of the underwriters named below. 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 AMPS set forth opposite the underwriter's name.
Number
Underwriter of Shares
----------- ---------
________ .................................................
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 AMPS, as
applicable, if they purchase any of the 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.
The Fund has been advised by the underwriters that they propose
initially to offer some of the 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 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.
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 "Investment Practices -- 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" 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 ________ is __________. The
principal business 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 AMPS 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 Series C
AMPS, and by [__], counsel to the underwriters. Skadden, Arps, Slate, Meagher
& Flom LLP and [__] will each rely as to matters of Maryland law on the
opinion of Miles & Stockbridge P.C.
EXPERTS
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
Securities and Exchange Commission.
[The Fund's common stock and Series A 8% Cumulative Preferred 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 AMPS 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
Securities and Exchange Commission 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 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 [__], 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 OBJECTIVES AND POLICIES ..........................................B-
INVESTMENT RESTRICTIONS......................................................B-
MANAGEMENT OF THE FUND.......................................................B-
PORTFOLIO TRANSACTIONS ......................................................B-
REPURCHASE OF COMMON STOCK...................................................B-
PORTFOLIO TURNOVER ..........................................................B-
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN...............................................B-
TAXATION ....................................................................B-
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR SERIES C AMPS ...............................................B-
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND C AMPS ........................................B-
[__] GUIDELINES .............................................................B-
NET ASSET VALUE..............................................................B-
BENEFICIAL OWNERS............................................................B-
GENERAL INFORMATION..........................................................B-
FINANCIAL STATEMENTS.........................................................B-
GLOSSARY.....................................................................B-
APPENDIX A...................................................................A-1
=====================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser or the
underwriters. Neither the delivery of this prospectus nor any sale made
hereunder will, under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates.
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy such securities in any circumstance in which such an offer or
solicitation is unlawful.
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 which
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 which 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 which 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.
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.
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
Prospectus Summary..............................................................
Tax Attributes of Preferred Stock Dividends.....................................
Financial Highlights............................................................
Use of Proceeds.................................................................
The Fund........................................................................
Investment Objectives and Policies..............................................
Risk Factors and Special Considerations.........................................
Management of the Fund..........................................................
Portfolio Transactions..........................................................
Dividend and Distribution Policy................................................
Description of Series B Preferred and Series C AMPS.............................
The Auction of Series C AMPS....................................................
Description of Capital Stock and Other Securities...............................
Taxation........................................................................
Anti-takeover Provisions of the Charter and By-laws.............................
Custodian, Transfer Agent and Dividend-Disbursing Agent.........................
Underwriting....................................................................
Legal Matters...................................................................
Experts.........................................................................
Additional Information..........................................................
Special Note Regarding Forward-Looking Statements...............................
Table of Contents of SAI........................................................
Appendix A...................................................................A-1
==============================================================================
$ [--]
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
[__] Shares, Series B [__]% Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
[__] Shares, Series C Auction Rate Cumulative Preferred Stock
(Liquidation Preference $25,000 per Share)
[Gabelli Logo]
_______________
PROSPECTUS
[ ], 2003
_______________
[________, ]
Gabelli & Company, Inc.
==============================================================================
[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 [ ], 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.,
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 investing in
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 AMPS. 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 Objectives and Policies.....................................................B-
Investment Restrictions................................................................B-
Management of the Fund.................................................................B-
Portfolio Transactions.................................................................B-
Repurchase of Common Stock.............................................................B-
Portfolio Turnover.....................................................................B-
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan.......................B-
Taxation...............................................................................B-
Additional Information Concerning Auctions for the Series C AMPS.......................B-
Additional Information Concerning the Series B Preferred and Series C AMPS.............B-
[__] Guidelines........................................................................B-
Net Asset Value........................................................................B-
Beneficial Owners......................................................................B-
General Information....................................................................B-
Financial Statements...................................................................B-
Glossary...............................................................................B-
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 OBJECTIVES AND POLICIES
Investment Objectives
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, corporate notes, preferred 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 investing in
Convertible Securities to the extent attractive opportunities are available.
See "Investment Objectives 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.
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, corporate notes, preferred 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. In addition, it
is possible that the issuer of fixed income securities may not be able to meet
its 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 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 US 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
US 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 one-half of
1% 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 US 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 US dollar, the Fund can attempt to "lock in"
the US 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 US 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 US 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 US 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's 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, 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 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, Boston
Safe Deposit 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 AMPS. 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
Funds in Principal Other
Name (And Age), Position Term of Office Fund Complex Occupation During Directorships
with the Fund and and Length of Overseen by Past Five Years Held by
Business Address(1) Time Served(2) Director Director
INTERESTED DIRECTORS(3):
Mario J. Gabelli Since 1989*** 21 Chairman of the Board Director of Morgan Group
Director, President and and Chief Executive Holdings, Inc.
Chief Investment Officer Officer of Gabelli Asset (transportation
Age: 60 Management Inc. and services); Vice Chairman
Chief Investment Officer of Lynch Corporation
of Gabelli Funds, LLC (diversified
and GAMCO Investors, manufacturing)
Inc; Chairman and Chief
Executive Officer of
Lynch Interactive
Corporation (multimedia
and services)
Karl Otto Pohl+ Since 1992*** 30 Member of the Director of Gabelli Asset
Director Shareholder Committee of Management Inc.
Age: 72 Sal Oppenheim Jr. & Cie (investment management);
(private investment Chairman, Incentive
bank); Former President Capital and Incentive
of the Deutsche Asset Management
Bundesbank and Chairman (Zurich); Director at Sal
of its Central Bank Oppenheim Jr. & Cie,
Council (1980-1991) Zurich
NON-INTERESTED DIRECTORS:
E. Val Cerutti Since 1989** 7 Chief Executive Officer Director of Lynch
Director of Cerutti Consultants, Corporation
Age: 62 Inc.; Former President
and Chief Operating
Officer of Stella D'oro
Biscuit Company (through
1992); Adviser, Iona
College School of
Business
Anthony J. Colavita(4) Since 1989* 32 President and Attorney ___
Director at Law in the law firm
Age: 66 of Anthony J. Colavita,
P.C.
Dugald A. Fletcher Since 1989** 2 President, Fletcher & Director of Harris and
Director Company, Inc.; Former Harris Group, Inc.
Age: 72 Director and Chairman (venture capital)
and Chief Executive
Officer of Binnings
Building Products, Inc.
(1997)
Anthony R. Pustorino Since 1989** 16 Certified Public ___
Director Accountant; Professor
Age: 76 Emeritus, Pace University
Werner J. Roeder, MD4 Since 2001*** 26 Medical Director of ___
Director Lawrence Hospital and
Age: 61 practicing private
physician
Anthonie C. van Ekris+ Since 1992* 17 Managing Director of Director of Spinnaker
Director BALMAC International, Industries, Inc.
Age: 67 Inc.
Salvatore J. Zizza Since 1991* 8 Chairman, Hallmark Board Member of Hollis
Director Electrical Supplies Eden Pharmaceuticals,
Age: 56 Corp.; Former Executive Bion Environmental
Vice President of FMG Technologies Inc. and The
Group (OTC), a Credit Store Inc.
healthcare provider;
Former President and
Chief Executive Officer
of the Lehigh Group Inc.
(electrical supply
wholesaler); an interior
construction company,
through 1997
OFFICERS:
Bruce N. Alpert Since 1989 ___ Executive Vice President ___
Vice President and Treasurer and Chief Operating
Age: 50 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.
Peter W. Latartara Since 1998 ___ Vice President of the ___
Vice President Fund since 1998. Vice
Age: 35 President of Gabelli &
Company, Inc. from 1996
James E. McKee Since 1995 ___ Vice President, General ___
Secretary Counsel and Secretary of
Age: 38 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 2002 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
** Term expires at the Fund's 2003 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
*** Term expires at the Fund's 2004 Annual Meeting of Shareholders 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 Fund's 8.00% Cumulative 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 2002;
the terms of Messrs. Fletcher and Pustorino as directors of the Fund expire in
2003; and the terms of Messrs. Gabelli, Pohl, Cerutti and Dr. Roeder as
directors of the Fund expire in 2004.
------------------------------------ ---------------------------------- ----------------------------------
Name of Director Dollar Range of Equity Aggregate Dollar Range of Equity
Securities in the Fund 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 met once during the year ended December 31, 2001. 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, 2001, 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,
2001. 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
NAME OF PERSON AND AGGREGATE TOTAL COMPENSATION
POSITION* COMPENSATION FROM FROM THE FUND AND
THE FUND FUND COMPLEX PAID
TO DIRECTORS/
OFFICERS
MARIO J. GABELLI $0 $0
Chairman of the Board (21)
E. VAL CERUTTI Director (7) $ $
ANTHONY J. COLAVITA Director (32) $ $
DUGALD A. FLETCHER Director (2) $ $
KARL OTTO POHL Director (30) $ $
ANTHONY R. PUSTORINO Director (16) $ $
WERNER J. ROEDER, MD Director (26) $ $
ANTHONIE C. van EKRIS Director (17) $ $
SALVATORE J. ZIZZA Director (8) $ $
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2001 by investment companies
(including the Fund) or portfolios thereof from which such person
receives compensation that are considered part of the same fund
complex as the Fund because they have common or affiliated investment
advisers. The number in parenthesis represents the number of such
investment companies and portfolios.
For his services as Vice President of the Fund, Mr. Latartara received
compensation in 2002 of $[__].
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 Funds, Inc., which was organized in 1980.
As of December 31, 2002, the Investment Adviser and its affiliates acted as
registered investment advisers to 20 management investment companies with
aggregate net assets of [__]. The Investment Adviser, together with other
affiliated investment advisers, has assets under management totaling [__]
billion. 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 [__] 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 [__] 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
$[__] 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 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 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 $143,305, $42,738, and $[__]
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and
its affiliates received $116,959, $34,251, and $[__] 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 [__]% of the aggregate dollar amount of brokerage
commissions paid by the Fund for such period and approximately [__]% 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 [__] %, 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 REINVESTMENTAND 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 PO 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.
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, as in the case of the Fund, an election is made by a fund with a
November or December year-end 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-US dollar denominated bonds and
other similar debt instruments and on any non-US 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 35% 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. For non-corporate taxpayers, however, net investment
income will currently be taxed at a maximum rate of 38.6% while net capital
gains 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 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 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.
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 credited
against such stockholder's federal income tax liability.
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 AMPS should consult their own tax
advisers regarding the purchase, ownership and disposition of Series B
Preferred or Series C AMPS.
ADDITIONAL INFORMATION
CONCERNING AUCTIONS FOR SERIES C AMPS
General
The Articles Supplementary provide that the Applicable Rate for each
Dividend Period of the Series C AMPS 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 AMPS 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 AMPS. 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 AMPS. One certificate for all of the Series C AMPS 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 AMPS contained in the Articles Supplementary. The Fund will also
issue stop-transfer instructions to the transfer agent for the Series C AMPS.
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 AMPS -- Voting Rights" in the Prospectus,
Cede & Co. will be the Holder of all the Series C AMPS 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 AMPS, 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 AMPS:
(i) each Beneficial Owner of Series C AMPS may submit to its
Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding
Series C AMPS 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
AMPS shares, if any, that such Beneficial Owner offers
to sell if the Applicable Rate for such Series C AMPS
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 AMPS shares, if any, that such Beneficial Owner
offers to sell without regard to the Applicable Rate for
such Series C AMPS 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 AMPS shares that they
offer to purchase if the Applicable Rate for Series C AMPS 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 AMPS 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 AMPS an Order or Orders covering all
the Outstanding Series C AMPS 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 AMPS 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 AMPS an Order or Orders covering all of the
Outstanding Series C AMPS 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 AMPS
shares held by such Beneficial Owner and not subject to Orders submitted to
its Broker-Dealer.
A Potential Beneficial Owner of Series C AMPS may submit to its
Broker-Dealer Bids in which it offers to purchase Series C AMPS 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 AMPS 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 AMPS that offers to become the
Beneficial Owner of additional Series C AMPS 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 AMPS subject
to Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of Series C AMPS 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 AMPS 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 AMPS 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 AMPS shares
that is fewer than the number of Series C AMPS 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 bad faith or 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 negligent in
ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Series C AMPS, 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 -- Secondary Market Trading and Transfer of Series C AMPS" 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., Eastern time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 60 days after 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-Delears
The Auction Agent after each Auction for Series C AMPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of [__] of the purchase price of Series C AMPS placed by such
Broker-Dealer at such Auction, in the case of any Auction immediately
preceding a Dividend Period of less than one year or, in the case of any
Auction immediately preceding a Dividend Period of one year or longer, a
percentage agreed to by the Fund and the Broker-Dealers. For the purposes of
the preceding sentence, Series C AMPS will be placed by a Broker-Dealer if
such shares were (i) the subject of Hold Orders deemed to have been submitted
to the Auction Agent by the Broker-Dealer and were acquired by such
Broker-Dealer for its customers who are Beneficial Owners or (ii) the subject
of an Order submitted by such Broker-Dealer that is (a) a Submitted Bid of an
Existing Holder that resulted in such Existing Holder continuing to hold such
shares as a result of the Auction, (b) a Submitted Bid of a Potential Holder
that resulted in such Potential Holder purchasing such shares as a result of
the Auction or (c) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (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 AMPS 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 AMPS 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 AMPS will be considered valid, but
only up to and including in the aggregate the number of
Outstanding Series C AMPS shares held by such Existing Holder,
and, if the number of Series C AMPS shares subject to such Hold
Orders exceeds the number of Outstanding Series C AMPS shares
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 AMPS will be considered valid up to
and including the excess of the number of shares of
Outstanding Series C AMPS shares held by such Existing
Holder over the number of Series C AMPS 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 AMPS is submitted to the
Auction Agent with the same rate and the number of
Outstanding shares 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 Series C AMPS shares subject to each Bid with the
same rate will be reduced pro rata to cover the number
of Series C AMPS shares equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid
of an Existing Holder for Series C AMPS 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 Series C AMPS shares 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 AMPS by or on behalf of a Potential Holder
at the rate specified therein; and
(iii) all Sell Orders for Series C AMPS will be considered valid up
to and including the excess of the number of Outstanding Series
C AMPS shares 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 AMPS 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 AMPS
shares therein specified.
Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date for
Series C AMPS, 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 Series C AMPS shares over the number of Outstanding
Series C AMPS shares subject to Submitted Hold Orders (such excess being
herein referred to as the "Available Series C AMPS") and whether Sufficient
Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will
have been made if the number of Outstanding Series C AMPS shares 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 Series C
AMPS shares that are the subject of Submitted Sell Orders (including the
number of Series C AMPS shares subject to Bids of Existing Holders specifying
rates higher than the Maximum Rate).
If Sufficient Clearing Bids for Series C AMPS 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 AMPS
shares which, when added to the number of Outstanding Series C AMPS shares to
be purchased by Potential Holders, based on the rates in their Submitted Bids,
would equal not less than the Available Series C AMPS. 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 AMPS is subject to Submitted Hold Orders), the
Applicable Rate for the next Dividend Period for all Series C AMPS 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 AMPS subject to such Sell Orders but will
continue to own Series C AMPS 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 AMPS is subject to Submitted Hold
Orders, the Applicable Rate for all Series C AMPS 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 AMPS 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 AMPS subject to such Hold
Orders.
If Sufficient Clearing Bids for Series C AMPS 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 AMPS 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 AMPS
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 AMPS 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 AMPS subject to such
Submitted Bid, unless the number of Outstanding Series C AMPS
shares subject to all such Submitted Bids is greater than the
number of Series C AMPS shares ("remaining shares") in excess
of the Available Series C AMPS over the number of Series C
AMPS 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 AMPS subject to such Submitted
Bid determined on a pro rata basis based on the number of
Outstanding Series C AMPS 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 AMPS will purchase any Available Series
C AMPS not accounted for in clauses (ii) through (iv) above on
a pro rata basis based on the Outstanding Series C AMPS shares
subject to all such Submitted Bids.
If Sufficient Clearing Bids for Series C AMPS shares have not been
made (unless this results because all Outstanding Series C AMPS 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 AMPS 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
AMPS 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 AMPS
shares subject to such Submitted Bid or Submitted Sell Order
determined on a pro rata basis based on the number of
Outstanding Series C AMPS 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 AMPS 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 AMPS shares being sold or purchased on such Auction Date so
that the number of Series C AMPS 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 AMPS share, the Auction Agent will, in such manner as,
in its sole discretion, it will determine, allocate Series C AMPS for purchase
among Potential Holders so that only whole Series C AMPS 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 AMPS as a result of
the Auction and will be required to advise each customer purchasing or selling
Series C AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS shares that is less than the number of Series C AMPS
shares that otherwise was to be purchased by such person. In such event, the
number of Series C AMPS shares to be so delivered will be determined by the
Broker-Dealer. Delivery of such lesser number of Series C AMPS shares will
constitute good delivery.
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND SERIES C AMPS
The additional information concerning the Series B Preferred and
Series C AMPS 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 AMPS contained in the
Prospectus under "Description of the Series B Preferred and Series C AMPS."
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 AMPS.
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 AMPS
Holders of Series C AMPS 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 next 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 AMPS 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 AMPS 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 AMPS 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 determined on the basis of twelve 30-day months.
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 AMPS is set forth in the Prospectus. See "The Auction --
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 AMPS 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 AMPS Basic
Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for
Series C AMPS in which Sufficient Clearing Bids have not been made (other than
because all Series C AMPS 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 AMPS 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 AMPS; 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 AMPS has been cured as set forth under " --
Default Period," (iii) Sufficient Clearing Bids 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 AMPS Basic Maintenance Amount and has consulted with the
Broker-Dealers and has provided notice and a Series C AMPS Basic Maintenance
Report to each Rating Agency which is then rating the Series C AMPS 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 next 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 AMPS 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 next preceding the relevant Dividend Payment Date or date
fixed for such redemption (the "Redemption Date"), as the case may be, (i) the
full amount of any declared dividend on the Series C AMPS 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 AMPS being
redeemed on such Redemption Date (such default 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 AMPS, and the Applicable Rate for
each Dividend Period commencing during a Default Period will be equal to the
Default Rate.
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.
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 AMPS, 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 AMPS, 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 AMPS, 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 AMPS is prohibited, unless there is no event of default
under indebtedness senior to the Series B Preferred and Series C AMPS 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 Series C AMPS).
For so long as the Series B Preferred or Series C AMPS is
Outstanding, except as otherwise provided in the Articles Supplementary, the
Fund will not declare, pay or set apart for payment 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
Series C AMPS 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 Series C AMPS 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
Series C AMPS (except by conversion into or exchange for shares of the Fund
ranking junior to the Series B Preferred and Series C AMPS 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 AMPS and the 1940 Act Asset
Coverage with respect to the Fund's Outstanding Preferred Stock, including the
Series B Preferred and Series C AMPS, 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 Series C AMPS (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 Series C AMPS
required or determined to be redeemed pursuant to any such provision.
No full dividend will be declared or paid or set apart for payment on
the Series B Preferred or Series C AMPS 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 Series C AMPS) have been or contemporaneously are declared and
paid on all Outstanding shares of Preferred Stock. If full cumulative
dividends due have not been paid on all shares of Preferred Stock, any
dividends being paid on the shares of Preferred Stock (including the Series B
Preferred and Series C AMPS) will be paid as nearly pro rata as possible on
all Outstanding shares of Preferred Stock on the Dividend Payment Dates
therefor in proportion to the respective amounts of dividends accumulated but
unpaid on each series of Preferred Stock.
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 Series C AMPS: (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 Series C AMPS,
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 Series C AMPS, 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 [__] (if [__] is then rating the Series B Preferred or Series C AMPS at
the request of the Fund) and [__] (if [__] is then rating the Series B
Preferred or Series C AMPS 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
AMPS.
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 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 AMPS, 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 AMPS, as the case may be, and which so requires
that any such changes would not impair an applicable [__] credit rating from
[__] or [__] rating from [__].
A Rating Agency's Guidelines will apply to the Series B Preferred or
Series C AMPS only so long as such Rating Agency is rating such shares at the
request of the Fund. The Fund will pay certain fees to [__] and [__] for
rating, as the case may be, the Series B Preferred and Series C AMPS. The
ratings assigned to the Series B Preferred or Series C AMPS are not
recommendations to buy, sell or hold Series B Preferred or Series C AMPS. 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 AMPS
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 AMPS 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 AMPS Basic Maintenance Amount Test.
1940 Act Series C AMPS 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 (x) the last Business Day of each March, June, September and December
and (y) a Business Day on or before any 1940 Act Asset Coverage Cure Date
following a failure to meet 1940 Act Asset Coverage. Such 1940 Act Asset
Coverage Certificate will be delivered in the case of clause (i) on the Date
of Original Issue and in the case of clause (ii) on or before the seventh
Business Day after the last Business Day of such March, June, September and
December, as the case may be, or the relevant Cure Date.
Notices. The Fund must deliver a Basic Maintenance Report to each
applicable Rating Agency and the Auction Agent, if any, which sets forth, as
of the related Valuation Date, Eligible Assets sufficient to meet or exceed
the applicable Basic Maintenance Amount, the Market Value and Discounted Value
thereof (seriatim 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 Securities Requirements Relating to the Series C AMPS
The Fund is obligated to deposit in a segregated custodial account a
specified amount of Deposit Securities not later than 12:00 noon, New York
City time, on each Dividend Payment Date and each Redemption Date relating to
the Series C AMPS. These Deposit Securities, 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 AMPS
Series C AMPS 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 AMPS through different Broker-Dealers,
advises the Auction Agent of such transfer. The certificates representing the
Series C AMPS 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.
[__] GUIDELINES
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-US 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 Trustees 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 , 2003 Title of Class Nature of Ownership Percent of Class
Cede & Co.* Common [ ] [ ]
P.O. Box 20 (record)
Bowling Green Station
New York, NY 10274
Mario J. Gabelli and affiliates Common [ ] [ ]
One Corporate Center*** (beneficial)
Rye, NY 10580
Bear Stearns Securities Corp** Common [ ] [ ]
One Metrotech Center North, 4th Floor (record)
Brooklyn, NY 11201
Charles Schwab & Co., Inc.** Common [ ] [ ]
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 [ ] shares owned directly by Mr. Gabelli, [ ]
shares owned by a family partnership for which Mr. Gabelli serves as
general partner, [ ] shares held by custodial accounts for which
Mr. Gabelli serves as Trustee, [ ] shares owned by Gabelli
Asset Management Inc. or its affiliates, [ ] shares owned by the
Gabelli & Company, Inc. Profit-Sharing Plan, and [ ] 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 December 31, 2002, the Directors and Officers of the Fund as a
group beneficially owned approximately [ ]% 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 Series C AMPS 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 Series C AMPS.
[__], independent accountants, [__], serve as auditors of the Fund
and will annually render an opinion on the financial statements of the Fund.
FINANCIAL STATEMENTS
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.
"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 AMPS shares 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, the Maximum Rate, and (iii) if
all Series C AMPS shares are the subject of Submitted Hold Orders for the
Auction in respect thereof, the All Hold Rate.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another commercial
bank, trust company, or other financial institution appointed by a resolution
of the Board of Directors enters into an agreement with the Fund to follow the
Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" means the last day of the initial Dividend Period and each
seventh day after the immediately preceding Auction Date; provided, however,
that if any such seventh day is not a Business Day, such Auction Date will be
the first preceding day that is a Business Day and the next Auction Date, if
for a Standard Dividend Period, will (subject to the same advancement
procedure) be the seventh day after the date such preceding Auction Date would
have been if it had been a Business Day; provided further, however, that the
Auction Date for the Auction at the conclusion of any Special Dividend Period
will be the last Business Day in such Special Dividend Period and that no more
than one Auction will 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 AMPS."
"Available Series C AMPS" has the meaning set forth in "Additional Information
Concerning the Auction for Series C AMPS - Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate."
"Basic Maintenance Amount" has the meaning set forth under "Additional
Information Concerning the Series B Preferred and Series C AMPS - Asset
Maintenance."
"Basic Maintenance Report" has the meaning set forth in "Additional
Information Concerning the Series B Preferred and Series C AMPS - Asset
Maintenance."
"Beneficial Owner" with respect to Series C AMPS, 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 AMPS - Submission of Orders by Broker-Dealers to
Auction Agent."
"Bidder" has the meaning set forth in "Additional Information Concerning the
Auction for Series C AMPS - 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.
"Charter" means the Fund's Articles of Incorporation, as amended, restated and
supplemented, including the Articles Supplementary.
"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" means [__].
"Date of Original Issue" means the date on which the Series B Preferred or
Series C AMPS, as the case may be, is originally issued by the Fund.
"Default Period" has the meaning set forth in "Additional Information
Concerning the Series B Preferred and Series C AMPS - Dividends and Dividend
Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities, including
Short Term Money Market Instruments that are Eligible Assets, rated at least
AAA or A-1+ by S&P, except that, for purposes of optional redemption, such
obligations or securities will be considered "Deposit Securities" only if they
also are rated at least P-1 by Moody's.
"Discount Factor" means (i) so long as [__] is rating the Series B Preferred
or Series C AMPS shares at the Fund's request, the [__] Discount Factor or
(ii) any applicable discount factor established by any Other Rating Agency,
whichever is applicable.
"Discounted Value" means, as applicable, (i) the quotient of the Market Value
of an Eligible Asset divided by the applicable Discount Factor or (ii) [__],
provided, in either case 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 AMPS - Dividends and Dividend
Period."
"Dividend Payment Date" means (i) with respect to the Series B Preferred, [__]
and (ii) with respect to the Series C AMPS, (a) for any Dividend Period of one
year or less, the Business Day next succeeding the last day thereof and, if
any, the 91st, 181st and 271st days thereof and (ii) for any Dividend Period
of more than one year, on a quarterly basis on each March 26th, June 26th,
September 26th, and December 26th and on the Business Day following the last
day of such Dividend Period.
"Dividend Period" means (i) with respect to the Series B Preferred, the
quarterly dividend periods specified in the Prospectus and (ii) with respect
to Series C AMPS, the initial period as specified in the Prospectus, 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 calendar day prior to
the next succeeding Business Day.
"Eligible Assets" means [__] Eligible Assets (if [__] is then rating the
Series B Preferred or Series C AMPS at the request of the Fund), [__] Eligible
Assets (if [__] is then rating the Series C AMPS 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 AMPS, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those Series C AMPS
shares listed in that person's name in the records of the Fund or the Auction
Agent or (ii) the beneficial owner of those Series C AMPS shares 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.
"Hedging Transactions" means transactions in which the Fund will purchase or
sell futures contracts; write, purchase or sell options on futures contracts;
or write put options (except covered put options) or call options (except
covered call options) on securities owned by the Fund.
"Hold Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series C AMPS - Orders By Existing Holders and Potential
Holders."
"Holder" means, with respect to the Series C AMPS, the registered holder of
Series C AMPS shares as the same appears on the stock ledger or stock records
of the Fund or records of the Auction Agent, as the case may be.
"Industry Classification" means a six-digit industry classification in the
Standard Industry Classification system published by the United States.
"Liquidation Preference" means $25 per Series B Preferred share, $25,000 per
Series C AMPS share 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 by two recognized securities dealers
with a minimum capitalization of $25,000,000 (or otherwise approved for such
purpose by [__] and [__]) or by one such securities dealer and any other
source (provided that the utilization of such source would not adversely
affect [__] and [__] then-current rating of the Series C AMPS) 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, 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's repurchase agreements) and commercial
paper, with maturities 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
instruments having, as nearly as practicable, comparable interest rates and
maturities provided by two recognized dealers having minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by [__] and [__]) or by
one such dealer and any other source (provided that the utilization of such
source would not adversely affect [__] and [__] then-current rating of the
Series B Preferred or Series C AMPS, as the case may be,) to the
administrator, at least one of which will be provided in writing or by
telecopy, telex, other electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn provided to the Fund
by any such means by such administrator, or, if two bid prices cannot be
obtained, such Eligible Asset will have a Market Value of zero;
(iii) as to cash, demand deposits, federal funds, bankers'
acceptances and next Business Day's 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 securities 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 [__] and [__]) or by one such dealer and any other source
(provided that the utilization of such source would not adversely affect [__]
and [__] then-current rating of the Series B Preferred or Series C AMPS , 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 AMPS by [__] and [__] 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 AMPS Basic
Maintenance Amount or (ii) in the case of a dividend period of longer than 184
days, the Treasury Index Rate.
[__] Credit Rating [__] Credit Rating APPLICABLE PERCENTAGE
---------------------- -------------------------
[__] or higher [__] or higher 150%
[__] to [__] [__] to [__] 175%
[__] to [__] [__] to [__] 250%
Below [__] Below [__] 275%
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"[__] Discount Factor" has the meaning set forth in "[__] Guidelines - [__]
Guidelines."
"[__]Eligible Assets" has the meaning set forth in "[__] Guidelines - [__]
Guidelines."
"[__] Industry and Sub-Industry Categories" means:
Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products,
Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum,
Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Broadcasting: Radio, T.V.
Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
Cable: Distribution, Equipment, Programming
Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
Communications (excluding companies primarily engaged in offering
Telephone services): Satellite, Wireless, Equipment
Containers, Packaging and Glass: Glass, Fiberglass, Containers made
of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste
Disposal
Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communication Systems, Radios, TVs, Tape Machines, Speakers,
Printers, Drivers, Technology
Entertainment: Recording Industry, Motion Exhibition Theaters, Motion
Picture Production and Distribution
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals,
Hospital Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Entertainment: Boating, Bowling, Billiards,
Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing
Machinery (Non-Agriculture, Non-Construction,
Non-Electronic): Industrial, Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
Personal, Food and Miscellaneous Services
Printing and Publishing: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks
Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Equipment, Research
Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
Personal Transportation: Air, Bus, Rail, Car, Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra- national
agencies
"1940 Act" means the Investment Company Act of 1940, as amended.
"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 Series B Preferred and Series C AMPS shares (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.
"Non-Call Period" means a period determined by the Board of Directors after
consultation with the Broker-Dealers, during which the Series C AMPS subject
to such Special Dividend Period are not subject to redemption at the option of
the Fund but only to mandatory redemption.
"Order" has the meaning set forth in "Additional Information Concerning the
Auction for Series C AMPS - Orders By Existing Holders and Potential Holders."
"Other Rating Agency" means any rating agency other than [__] or [__] then
providing a rating for the Series C AMPS 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 AMPS.
"Outstanding" means, as of any date, Preferred Stock theretofore issued by the
Fund except:
(i) any such share of Preferred Stock theretofore cancelled by
the Fund or delivered to the Fund for cancellation;
(ii) any such share of Preferred Stock other than the Series C
AMPS (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 AMPS or other
auction market preferred stock, any such shares theretofore
delivered to the Auction Agent for cancellation or with
respect to which the Fund has given notice of redemption and
irrevocably deposited with the 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, (a) 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 Affiliate is the Existing
Holder will be disregarded and deemed not Outstanding; (b) in connection with
any Auction, any Series C AMPS (or other auction market preferred) shares as
to which the Fund or any Person known to the Auction Agent to be an Affiliate
is the Existing Holder will be disregarded and not deemed Outstanding; and (c)
for purposes of determining the Basic Maintenance Amount, shares of Preferred
Stock held by the Fund will be disregarded and deemed not Outstanding, but
shares held by any Affiliate (other than any controlled Affiliates) will be
deemed Outstanding.
"Paying Agent" means 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.
"Potential Beneficial Owner or Holder" means (i) any Existing Holder who may
be interested in acquiring additional Series C AMPS shares or (ii) any other
person who may be interested in acquiring Series C AMPS shares 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 AMPS.
"Premium Call Period" means a period consisting of a number of whole years as
determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Fund's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage
or percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Directors after consultation
with the Broker-Dealers.
"Pricing Service" means any of the following: Bloomberg, 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.
"Public Equity Large-Cap" means any equity issuer with a market capitalization
in excess of $[ ] billion.
"Public Equity Mid-Cap" means any equity issuer with a market capitalization
in excess of $ billion but less than or equal to $[ ] billion.
"Public Equity Small-Cap" means any equity issuer with a market capitalization
of less than or equal to $[ ] billion.
"Rating Agency" means [__] and [__] as long as such rating agency is then
rating the Series B Preferred or Series C AMPS at the request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "[__]
Guidelines."
"Redemption Date" means [__].
"Redemption Default" has the meaning set forth in "Additional Information
Concerning the Series B Preferred and Series C AMPS - Dividends and Dividend
Period."
"Redemption Price" has the meaning set forth in "Additional Information
Concerning the Series B Preferred and Series C AMPS - Dividends and Dividend
Period."
"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 fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more) and, with respect to the determination of
the Maximum Rate, the "AA" Financial Composite Commercial Paper Rate or the
Treasury Index Rate, as appropriate.
"S&P" means Standard & Poors Rating Services or its successors at law.
"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
AMPS.
"Sell Order" has the meaning set forth in "Additional Information Concerning
the Auction for Series C AMPS - 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 B Preferred Basic Maintenance Amount Test" means a test which is met
if the aggregate Discounted Values of the [__] Eligible Assets, if [__] is
then rating the Series B Preferred at the request of the Fund, meets or
exceeds the Basic Maintenance Amount with respect to the Series B Preferred.
"Series C AMPS" 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 AMPS Basic Maintenance Amount Test" means a test which is met if the
lower of the aggregate Discounted Values of the [__] Eligible Assets or the
[__] Eligible Assets if both [__] and [__] are then rating the Series C AMPS
at the request of the Fund, or the Eligible Assets of whichever of [__] or
[__] is then doing so if only one of [__] or [__] is then rating the Series C
AMPS at the request of the Fund, meets or exceeds the Basic Maintenance Amount
with respect to the Series C AMPS.
"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 AMPS - 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 AMPS - 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 AMPS - 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 AMPS - 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 AMPS - 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 AMPS - Determination of
Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Treasury Index Rate" means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities having the same number
of 30-day periods to maturity as the length of the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most
recent such statistical release will not have been published during the 15
days preceding the date of computation, the foregoing computations will be
based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government Obligations selected by the Fund.
"U.S. Government Obligations" means direct obligations of the United States or
by its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Series C AMPS Basic Maintenance Amount or Series B Preferred Basic
Maintenance Amount, as the case may be.
"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 AMPS shares
which, when added to the number of Outstanding Series C AMPS shares to be
purchased by such Potential Holders described in subclause (ii) above, would
equal not less than the Available Series C AMPS shares.
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.
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.
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.
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
non-credit 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.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements (audited) for the fiscal year 2002(1)
(i)Portfolio of Investments as of December 31, 2002
(ii) Statement of Assets and Liabilities as of December 31, 2002
(iii) Statement of Operations for the year ended December 31, 2002
(iv) Statement of Changes in Net Assets for the year ended
December 31, 2002
(v) Financial highlights for a share outstanding throughout the
periods 1992 through 2002
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) Articles of Amendment and Restatement(2)
(b) Amended and Restated By-Laws of Registrant(2)
(c) Not applicable
(d) (i) Specimen Stock Certificate:
(A) __% Tax Advantaged Series B Cumulative Preferred Stock (5)
(B) Tax Advantaged Series C Auction Rate Cumulative Preferred
Stock (5)
(ii) Articles Supplementary:
(A) __% Tax Advantaged Series B Cumulative Preferred Stock(5)
(B) Tax Advantaged 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)
(k) Registrar, Transfer Agency and Service Agreement between Registrant
and EquiServe Trust Company(2)
(l) (i) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP(5)
(ii) Opinion and Consent of Miles & Stockbridge(5)
(iii) Opinion and Consent of underwriter's counsel(5)
(m) Not applicable
(n) (i) Consent of independent accountants(5)
(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 [__].
(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) Filed herewith.
(5) To be filed by amendment.
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.............................................. $
New York Stock Exchange listing fee................................
Printing and engraving expenses ...................................
Auditing fees and expenses ........................................
Legal fees and expenses............................................
Blue Sky fees and expenses.........................................
Miscellaneous......................................................
Total..................................................... $
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of December 31, 2002
Title of Class Number of Record Holders
Capital Stock, par value $.001 per share
8.00% Cumulative Preferred Stock,
par value $.001 per 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, Boston Safe Deposit and
Trust Company, One Boston Place, Boston, Massachusetts 02108, at the offices
of the Fund's Administrator, PFPC, Inc, 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406, and in part at the offices of EquiServe Trust Company,
N.A., PO Box 43025, Providence, RI 02940-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this
registration statement, its net asset value declines more than ten
percent from its net asset value, as of the effective date of the
registration statement or its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
2. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
3. The undersigned registrant hereby undertakes to supplement the
prospectus, after expiration of the subscription period, to set
forth the results of the subscription offer, and the terms of
any subsequent reoffering thereof.
5. 1. Registrant undertakes that, for the purpose of determining any
liability under the Securities Act the information omitted from
the form of prospectus filed as part of the Registration
Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 497(h)
will be deemed to be a part of the Registration Statement as of
the time it was declared effective.
2. Registrant undertakes that, for the purpose of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed to
be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering
thereof.
6. Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information constituting Part B of this Registration Statement.
SIGNATURES
As required by the Securities Act of 1933, this Registrant's
Registration Statement has been signed on behalf of the Registrant, in the
City of Rye, State of New York, on the 13th day of January, 2002.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
By:
-----------------------------
Bruce N. Alpert
Vice President and Treasurer
As required by the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
* Director, President and Chief January 13, 2003
------------------------ Investment Officer
Mario J. Gabelli
* Director January 13, 2003
-----------------------
Karl Otto Pohl
* Director January 13, 2003
-----------------------
E. Val Cerutti
* Director January 13, 2003
-----------------------
Anthony J. Colavita
* Director January 13, 2003
------------------------
Dugald A. Fletcher
* Director January 13, 2003
------------------------
Anthony R. Pustorino
* Director January 13, 2003
-----------------------
Werner J. Roeder, MD
* Director January 13, 2003
-----------------------
Anthonie C. van Ekris
* Director January 13, 2003
------------------------
Salvatore J. Zizza
Vice President and Treasurer January 13, 2003
------------------------
Bruce N. Alpert
Attorney-in-Fact
* Pursuant to Power of Attorney, filed herewith
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION