UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
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[ ] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment Company Act of 1940 Amendment
No. 38
(Check Appropriate Box or Boxes)
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THE GABELLI EQUITY TRUST INC.
(Exact Name of Registrant as Specified in Charter)
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One Corporate Center
Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100
(Name and Address of Agent for Service)
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Copies to:
James E. McKee, Esq. Rose F. DiMartino, Esq. Sarah E. Cogan, Esq.
The Gabelli Equity Trust Inc. Willkie Farr & Gallagher LLP Simpson Thacher & Bartlett LLP
One Corporate Center 787 Seventh Ave. 425 Lexington Ave.
Rye, New York 10580-1422 New York, New York 10019 New York, NY 10017
(914) 921-5100 (212) 728-8000 (212) 455-2000
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Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date for a
previously filed [post-effective amendment] [registration statement].
[ ] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration
statement for the same offering is .
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Being Offering Offering Registration
Title of Securities Registered Price Price (1) Fee (2)
--------------------------------------------- ---------- -------- --------- ------------
[_____] % Series F Cumulative Preferred Stock 20,000 $25 $500,000 $53.50
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $107.00 was previously wired to the Securities and Exchange Commission
account at Mellon Bank, Pittsburgh, Pennsylvania in connection with the
initial filing of this registration statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
--------------- ----------------------------
PART A
1. Outside Front Cover Outside Front Cover Page
2. Cover Pages, Other Offering Information Outside Front Cover Page; Inside Front Cover Page
3. Fee Table and Synopsis Summary
4. Financial Highlights Financial Highlights
5. Plan of Distribution Outside Front Cover Page; Summary; Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds; Investment Objectives and Policies
8. General Description of the Registrant Outside Front Cover Page; Summary; The Fund; Investment
Objectives and Policies; Risk Factors & Special
Considerations; How the Fund Manages Risk; Description
of the Series F Preferred; Anti- Takeover Provisions
of the Fund's Charter and By-Laws
9. Management Outside Front Cover Page; Summary; Management of the
Fund; Custodian, Transfer Agent, Auction Agent and
Dividend-Disbursing Agent
10. Capital Shares, Long-Term Debt, and Other Securities Outside Front Cover Page; Summary; Investment
Objectives and Policies; Description of the Series F
Preferred; Description of Capital Stock and Other
Securities; Taxation Policies; Authorized and
Outstanding Shares; Taxation
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Management of Fund
13. Table of Contents of the Statement of Additional Table of Contents of the Statement of Additional
Information Information
N-2 Item Number Location in Statement of Additional Information
--------------- -----------------------------------------------
PART B
14. Cover Page Outside Front Cover Page
15. Table of Contents Outside Front Cover Page
16. General Information and History Not Applicable
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 Not Applicable
20. Investment Advisory and Other Services Management of the Fund
21. Portfolio Managers Management of the Fund
22. Brokerage Allocation and Other Practices Portfolio Transactions
23. Tax Status Taxation
24. 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.
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 IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
_____, 2006
PROSPECTUS
$_______
THE GABELLI EQUITY TRUST INC.
SHARES, _____% SERIES F CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
The Gabelli Equity Trust Inc. (the "Fund") is a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund's primary investment
objective is to achieve long-term growth of capital by investing primarily in a
portfolio of equity securities consisting of common stock, preferred stock,
convertible or exchangeable securities and warrants and rights to purchase such
securities. Income is a secondary investment objective. Gabelli Funds, LLC (the
"Investment Adviser") serves as investment adviser to the Fund. Under normal
market conditions, the Fund will invest at least 80% of the value of its total
assets in equity securities. The Fund was organized as a Maryland corporation on
May 20, 1986 and commenced its investment operations on August 21, 1986. An
investment in the Fund is not appropriate for all investors. We cannot assure
you that the Fund's investment objectives will be achieved.
This prospectus describes the Fund's _____% Series F Cumulative Preferred
Stock (the "Series F Preferred"), liquidation preference $25 per share.
Distributions on the Series F Preferred are cumulative from their original issue
date at the annual rate of _____% of the liquidation preference of $25 per share
and are payable quarterly on March 26, June 26, September 26, and December 26 of
each year, commencing on December 26, 2006.
INVESTING IN THE SERIES F PREFERRED INVOLVES RISKS THAT ARE DESCRIBED IN
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 19 OF
THIS PROSPECTUS.
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.
SERIES F
PREFERRED PER
SHARE TOTAL
------------- -----
Public Offering Price (1)
Underwriting Discount (2)
Proceeds to the Fund (before expenses) (3)
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(1) Plus accumulated distributions, if any, from _____, 2006.
(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 (excluding underwriting discount) are
estimated at $_____.
MERRILL LYNCH & CO. CITIGROUP
A.G. EDWARDS & SONS GABELLI & COMPANY, INC.
_____, 2006
The Series F Preferred being offered by this prospectus is being offered by
the underwriters listed in this prospectus, subject to prior sale, when, as and
if accepted by them and subject to certain conditions. The Fund expects that
delivery of any Series F Preferred will be made in book-entry form through The
Depository Trust Company on or about _____, 2006.
A preliminary application has been made to list the Series F Preferred on
the New York Stock Exchange (the "NYSE"). Subject to notice of issuance and,
trading of the Series F Preferred on the NYSE is expected to commence within 30
days from the date of this prospectus. Prior to this offering, there has been no
public market for the Series F Preferred. See "Underwriting."
The net proceeds of the offering are estimated at approximately $_____,
after deduction of the estimated underwriting discounts and estimated offering
expenses payable by the Fund. Absent a material change in market conditions as
determined by the Investment Adviser, the Fund will use the net proceeds to
redeem shares of 7.20% Series B Cumulative Preferred Stock (the "Series B
Preferred"), of which there are currently 4,950,000 shares outstanding with a
liquidation preference of $25 per share. To the extent the amount raised in the
offering exceeds the amount of Series B Preferred outstanding, the excess amount
will be invested in accordance with the investment objectives and policies of
the Fund. The Fund intends to redeem shares of Series B Preferred (and, if there
are excess proceeds, invest those proceeds in accordance with the Fund's
investment objectives and policies) within six months of the completion of the
offering. The timing of the redemption (or investment of excess proceeds) within
this six month period will depend on the Investment Adviser's judgment as to
current market conditions, including, in particular, factors affecting interest
rates and the securities in which the Fund invests. See "Use of Proceeds."
The Fund expects that distributions made on the Series F Preferred will
consist of (i) long-term capital gain (gain from the sale of a capital asset
held longer than 12 months), (ii) qualified dividend income (dividend income
from certain domestic and foreign corporations, provided certain holding period
and other requirements are met by both the Fund and the shareholder), and (iii)
investment company taxable income (other than qualified dividend income,
including interest income, short-term capital gain and income from certain
hedging and interest rate transactions). For individuals, the maximum federal
income tax rate on long-term capital gain is currently 15%, on qualified
dividend income is 15%, and on ordinary income (such as distributions from
investment company taxable income that are not eligible for treatment as
qualified dividend income) it is currently 35%. These tax rates are scheduled to
apply through 2010. We cannot assure you, however, as to what percentage of
future distributions made on the Series F Preferred will consist of long-term
capital gain, which is currently taxed at lower rates for individuals than
ordinary income, and qualified dividend income, which is currently eligible to
be taxed at the lower long-term capital gain rates. For a more detailed
discussion, see "Taxation."
In order to be issued, the Series F Preferred must receive a rating of
"Aaa" by Moody's Investors Service, Inc. ("Moody's"). In order to keep this
rating, the Fund will be required to maintain a minimum discounted asset
coverage with respect to its outstanding Series F Preferred under guidelines
established by Moody's. See "Description of the Series F Preferred -- Rating
Agency Guidelines." The Fund is also required to maintain a minimum asset
coverage by the 1940 Act. If the Fund fails to maintain any of these minimum
asset coverage requirements, the Fund may at its option (and in certain
circumstances must) require, in accordance with its charter (together with any
amendments or supplements thereto, including any articles supplementary, the
"Charter") and the requirements of the 1940 Act, that some or all of its
outstanding preferred stock, including the Series F Preferred, be redeemed.
Otherwise, prior to _____, 2011 the Series F Preferred will be redeemable at the
option of the Fund only to the extent necessary for the Fund to continue to
qualify for tax treatment as a regulated investment company. Subject to certain
notice and other requirements (including those set forth in Section 23(c) of the
1940 Act), the Fund, at its option, may redeem the Series F Preferred beginning
on _____, 2011. In the event the Fund redeems the Series F Preferred, such
redemption will be for cash at a redemption price equal to $25 per share plus
accumulated but unmade distributions (whether or not earned or declared).
This prospectus concisely sets forth important information about the Fund
that you should know before deciding whether to invest in Series F Preferred.
You should read this prospectus and retain it for future reference.
The Fund has also filed with the Securities and Exchange Commission a
Statement of Additional Information (the "SAI"), dated _____, 2006, 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 that is filed with 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
can also call the toll-free number to request copies of the Fund's annual and
semi-annual reports, to request other information about
the Fund, or to make stockholder inquiries. The SAI and the Fund's reports are
also available at the website http://www.gabelli.com. You may also obtain the
SAI and reports, proxy and information statements and other information
regarding registrants, including the Fund, that file electronically with the
Securities and Exchange Commission on the Securities and Exchange Commission's
web site (http://www.sec.gov).
The Fund's Series F Preferred does not represent a deposit or obligation
of, and is not guaranteed or endorsed by, any bank or other insured depository
institution, and is not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
TABLE OF CONTENTS
Summary................................................................... 1
Financial Highlights...................................................... 12
Use of Proceeds........................................................... 15
The Fund.................................................................. 15
Capitalization............................................................ 17
Investment Objectives and Policies........................................ 17
Risk Factors and Special Considerations................................... 21
How the Fund Manages Risk................................................. 27
Management of the Fund.................................................... 28
Portfolio Transactions.................................................... 32
Dividends and Distributions............................................... 32
Description of the Series F Preferred..................................... 32
Description of Capital Stock and Other Securities......................... 39
Taxation.................................................................. 40
Anti-Takeover Provisions of the Fund's Charter and By-Laws................ 43
Custodian, Transfer Agent, Auction Agent and Dividend-Disbursing Agent.... 44
Underwriting.............................................................. 44
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 46
Privacy Principles of the Fund............................................ 47
Special Note Regarding Forward-Looking Statements......................... 47
Table of Contents of the Statement of Additional Information.............. 46
Appendix A - Corporate Bond Ratings....................................... A-1
SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's Series F
Preferred, in particular the risks associated with such an investment. For a
more detailed discussion of these risks, see "Risk Factors and Special
Considerations." You should review the more detailed information contained in
this prospectus, the Statement of Additional Information (the "SAI"), and the
Fund's Articles Supplementary for the _____% Series F Cumulative Preferred Stock
(the "Series F Articles Supplementary") on file with the Securities and Exchange
Commission (the "Commission").
THE FUND The Gabelli Equity Trust Inc. (the "Fund") is a
non-diversified, closed-end management investment
company organized as a Maryland corporation on May
20, 1986.
The Fund's outstanding shares of common stock, par
value $0.001 per share, are listed and traded on
the New York Stock Exchange (the "NYSE") under
the symbol "GAB." As of September 30, 2006, the
net assets of the Fund attributable to its common
stock were $1,458,720,807. As of September 30,
2006, the Fund had outstanding 167,642,009 shares
of common stock; 4,950,000 shares of 7.20% Tax
Advantaged Series B Cumulative Preferred Stock,
liquidation preference $25 per share (the "Series
B Preferred"); 5,200 shares of Series C Auction
Rate Cumulative Preferred Stock, liquidation
preference $25,000 per share (the "Series C
Auction Rate Preferred"); 2,949,700 shares of
5.875% Series D Cumulative Preferred Stock,
liquidation preference $25 per share (the "Series
D Preferred"); and 2,000 shares of Series E
Auction Rate Cumulative Preferred Stock,
liquidation preference $25,000 per share (the
"Series E Auction Rate Preferred"). The Fund
completed its redemption of 100% of its
outstanding 7.25% Tax Advantaged Cumulative
Preferred Stock (the "Series A Preferred") on June
17, 2003. The Fund's outstanding Series B
Preferred became redeemable at the option of the
Fund beginning June 20, 2006 and the Fund redeemed
25% of its then outstanding Series B Preferred on
June 26, 2006. The Series B Preferred, the Series
C Auction Rate Preferred, the Series D Preferred
and the Series E Auction Rate Preferred
(collectively, the "Existing Preferred") have the
same seniority with respect to distributions and
liquidation preference.
THE OFFERING The Fund offers by this prospectus $_____ of
______% Series F Cumulative Preferred Stock (the
"Series F Preferred"). The Series F Preferred is
being offered by a group of underwriters led by
Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Citigroup Global Markets Inc., as joint book
running managers, and together with A.G. Edwards &
Sons, Inc. and Gabelli & Company, Inc., as
representatives of the other underwriters named
herein. Upon issuance, the Series F Preferred will
have equal seniority with respect to distributions
and liquidation preference to the Fund's Existing
Preferred. See "Description of the Series F
Preferred."
The Fund is offering _____ shares of _____% Series
F Cumulative Preferred Stock, par value $0.001 per
share, liquidation preference $25 per share, at a
purchase price of $25 per share. Distributions on
the shares of Series F Preferred will accumulate
from the date on which such stock is issued. A
preliminary application has been made to list the
Series F Preferred on the NYSE. Subject to notice
of issuance, trading of the Series F Preferred on
the NYSE will commence within 30 days from the
date of this prospectus.
Generally, investors in Series F Preferred will
not receive certificates representing ownership of
their stock. The Depository Trust Company ("DTC"),
any successor or its nominee for the account of
the investor's broker-dealer will maintain record
ownership of the preferred stock in book-entry
form. An investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of preferred stock.
INVESTMENT OBJECTIVES The Fund's primary investment objective is to
achieve long-term growth of capital by investing
primarily in a portfolio of equity securities
consisting of common stock, preferred stock,
convertible or exchangeable securities and
warrants and rights to purchase such securities
selected by the Investment Adviser. Income is a
secondary investment objective.
Under normal market conditions, the Fund will
invest at least 80% of the value of its total
assets in equity securities (the "80% Policy").
The 80% Policy may be changed without stockholder
approval. The Fund will provide stockholders with
notice at least 60 days prior to the
1
implementation of any change in the 80% Policy.
The Investment Adviser selects investments on the
basis of fundamental value and, accordingly, the
Fund typically invests in the securities of
companies that are believed by the Investment
Adviser to be priced lower than justified in
relation to their underlying assets. Other
important factors in the selection of investments
include favorable price/earnings and debt/equity
ratios and strong management.
The Fund seeks to achieve its secondary investment
objective of income, in part, by investing up to
10% of its total assets in a portfolio consisting
primarily of high-yielding, fixed-income
securities, such as corporate bonds, debentures,
notes, convertible securities, preferred stocks
and domestic and foreign government obligations.
Fixed-income securities purchased by the Fund may
be rated as low as C by Moody's or D by Standard &
Poor's Ratings Services ("S&P") or may be unrated
securities considered to be of equivalent quality.
Securities that are rated C by Moody's are the
lowest rated class and can be regarded as having
extremely poor prospects of ever obtaining
investment-grade standing. Debt rated D by S&P is
in default or is expected to default upon maturity
of payment date. These debt securities, which are
often referred to in the financial press as "junk
bonds," are predominantly speculative and involve
major risk exposure to adverse conditions.
No assurance can be given that the Fund's
investment objectives will be achieved. See
"Investment Objectives and Policies."
DIVIDENDS AND DISTRIBUTIONS Distributions on the Series F Preferred, at the
annual rate of _____% of its $25 per share
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
(the "Board"), out of funds legally available
therefor, quarterly on March 26, June 26,
September 26, and December 26 of each year,
commencing on December 26, 2006.
PREFERRED STOCK DISTRIBUTIONS. In accordance with
the Charter (together with any amendments or
supplements thereto, including any articles
supplementary, the "Charter"), all preferred stock
of the Fund must have the same seniority with
respect to distributions. Accordingly, no full
distribution will be declared or paid on any
series of preferred stock of the Fund for any
dividend period, or part thereof, unless full
cumulative dividends and distributions due through
the most recent dividend payment dates for all
series of outstanding preferred stock of the Fund
are declared and paid. If full cumulative
distributions due have not been declared and made
on all outstanding preferred stock of the Fund
ranking on a parity with the Series F Preferred as
to distributions, any distributions on such
preferred stock (including any outstanding Series
F Preferred) will be made as nearly pro rata as
possible in proportion to the respective amounts
of distributions accumulated but unmade on each
such series of preferred stock on the relevant
dividend payment date.
In the event that for any calendar year the total
distributions on shares of the Fund's preferred
stock exceed the Fund's ordinary income and net
capital gain allocable to such 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 the shares). The amount
treated as a tax-free return of capital will
reduce a stockholder's adjusted tax basis in the
preferred stock, thereby increasing the
stockholder's potential gain or reducing the
potential loss on the sale of the shares.
COMMON STOCK DISTRIBUTIONS. In order to allow its
common stockholders to realize a predictable, but
not assured, level of cash flow and some liquidity
periodically on their investment without having to
sell shares, the Fund has adopted a managed
distribution policy, which may be changed at any
time by the Board, of paying a minimum annual
distribution of 10% of the average net asset value
of the Fund to common stockholders. In the event
the Fund does not generate a total return from
dividends and interest received and net realized
capital gains in an amount equal to or in excess
of its stated distribution in a given year, the
Fund may return capital as part of such
distribution, which may have the effect of
decreasing the asset coverage per share with
respect to the Fund's Series F Preferred (as well
as the Existing Preferred). Any return of capital
should not be considered by investors as yield or
total return on their investment in the Fund. For
the fiscal year ended December 31, 2005, the Fund
made distributions of $0.85 per share of common
stock, none of which constituted a return of
capital. The Fund has made distributions of $0.58
per share of
2
common stock for the current year through
September 30, 2006. The Fund has made quarterly
distributions with respect to its common stock
since 1987. A portion of the distributions to
common stockholders during nine of the twenty
fiscal years since the Fund's inception has
constituted a return of capital. The composition
of each distribution is estimated based on the
earnings of the Fund as of the record date for
each distribution. The actual composition of each
of the current year's distributions will be based
on the Fund's investment activity through December
31, 2006.
TAX TREATMENT OF PREFERRED The Fund expects that distributions made on the
SHARE DISTRIBUTIONS Series F Preferred will consist of (i) long-term
capital gain (gain from the sale of a capital
asset held longer than 12 months), (ii) qualified
dividend income (dividend income from certain
domestic and foreign corporations, provided
certain holding period and other requirements are
met by both the Fund and the shareholder), and
(iii) investment company taxable income (other
than qualified dividend income, including interest
income, short-term capital gain and income from
certain hedging and interest rate transactions).
For individuals, the maximum federal income tax
rate on long-term capital gain is currently 15%,
on qualified dividend income is 15%, and on
ordinary income (such as distributions from
investment company taxable income that are not
eligible for treatment as qualified dividend
income) it is currently 35%. These tax rates are
scheduled to apply through 2010. During the three
year period from 2003-2005, approximately 91% of
the Fund's distributions to common and preferred
stockholders consisted of long-term capital gain
and the remaining 9% distributed to stockholders
constituted qualified dividend income taxable at
the 15% rate for individuals. During 2005,
approximately 89% of the Fund's distributions to
common and preferred stockholders consisted of
long-term capital gain and the remaining 11%
distributed to stockholders constituted qualified
dividend income taxable at the 15% rate for
individuals. We cannot assure you, however, as to
what percentage of future distributions made on
the Series F Preferred will consist of long-term
capital gain, which is currently taxed at lower
rates for individuals than ordinary income; and
qualified dividend income, which is currently
eligible to be taxed at the lower long-term
capital gain rates. For a more detailed
discussion, see "Taxation."
RATING AND ASSET COVERAGE In order to be issued, the Series F Preferred must
REQUIREMENTS receive a rating of "Aaa" from Moody's. The Series
F Articles Supplementary setting forth the rights
and preferences of the Series F Preferred contain
certain tests that the Fund must satisfy to obtain
and maintain a rating of "Aaa" from Moody's on the
Series F Preferred. See "Description of the Series
F Preferred -- Rating Agency Guidelines."
Asset Coverage Requirements. Under the asset
coverage tests to which the Series F Preferred is
subject, the Fund is required to maintain (i)
assets having in the aggregate a discounted value
greater than or equal to a Basic Maintenance
Amount (as described under "Description of the
Series F Preferred -- Rating Agency Guidelines")
for each such series calculated pursuant to the
applicable rating agency guidelines and (ii) an
asset coverage of at least 200% (or such higher or
lower percentage as may be required at the time
under the Investment Company Act of 1940 (the
"1940 Act")) with respect to all outstanding
preferred stock of the Fund, including the Series
F Preferred. See "Description of the Series F
Preferred -- Asset Maintenance Requirements."
The Fund estimates that if the shares offered
hereby had been issued and sold as of September
30, 2006, the asset coverage under the 1940 Act
would have been approximately _____% immediately
following such issuance (and after giving effect
to the deduction of the estimated underwriting
discounts of $_____ and estimated offering
expenses for such shares of $_____). 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
The Series F Articles Supplementary, which contain
the technical provisions of the various components
of the asset coverage tests, will be filed as an
exhibit to this registration statement and may be
obtained through the web site of the Commission
(http://www.sec.gov).
REDEMPTION Mandatory Redemption. The Series F Preferred may
be subject to mandatory redemption by the Fund to
the extent the Fund fails to maintain the asset
coverage requirements described above in
accordance with the rating agency guidelines or
the 1940 Act 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 such
shares so that after the redemption the Fund
exceeds the asset
3
coverage required by the guidelines of each of the
applicable rating agencies and the 1940 Act by
10%.
With respect to the Series F Preferred, any such
redemption will be made for cash at a redemption
price equal to $25 per share, plus an amount equal
to accumulated and unmade distributions (whether
or not earned or declared) to the redemption date.
See "Description of the Series F Preferred --
Redemption."
In the event of a mandatory redemption, such
redemption will be made from the Series F
Preferred or other preferred stock of the Fund in
such proportions as the Fund may determine,
subject to the limitations of the Charter, the
1940 Act and Maryland law.
Optional Redemption. Subject to the limitations of
the Charter, the 1940 Act and Maryland law, the
Fund may, at its option, redeem the Series F
Preferred as follows:
Commencing _____,2011 and at any time thereafter,
the Fund at its option may redeem the Series F
Preferred, in whole or in part, for cash at a
redemption price per share equal to $25, plus an
amount equal to accumulated and unmade
distributions (whether or not earned or declared)
to the redemption date. If fewer than all of the
shares of the Series F Preferred are to be
redeemed, such redemption will be made pro rata in
accordance with the number of such shares held.
Prior to _____, 2011, the Series F Preferred will
be subject to optional redemption by the Fund at
the redemption price only to the extent necessary
for the Fund to continue to qualify for tax
treatment as a regulated investment company. See
"Description of the Series F Preferred --
Redemption -- Optional Redemption of the Series F
Preferred."
Series A Preferred, Series B Preferred, Series C
Auction Rate Preferred, Series D Preferred, and
Series E Auction Rate Preferred. The Fund redeemed
100% of its outstanding Series A Preferred on June
17, 2003. The Fund's outstanding Series B
Preferred became redeemable at the option of the
Fund beginning June 20, 2006 and the Fund redeemed
25% of its then outstanding Series B Preferred on
June 26, 2006. The Fund generally may redeem the
outstanding Series C Auction Rate Preferred, in
whole or in part, at any time other than during a
non-call period. The Fund's outstanding Series D
Preferred will be redeemable at the option of the
Fund beginning October 7, 2008. The Fund generally
may redeem the outstanding Series E Auction Rate
Preferred, in whole or in part, at any time other
than during a non-call period. Such redemptions
are subject to the limitations of the Charter, the
1940 Act and Maryland law. See "Description of the
Series F Preferred -- Redemption."
VOTING RIGHTS At all times, holders of the Fund's outstanding
preferred stock (including the Series F
Preferred), voting together as a single class,
will be entitled to elect two members of the
Board, and holders of the preferred stock and
common stock, voting together as a single class,
will elect the remaining directors. However, upon
a failure by the Fund to make distributions on any
of its shares of preferred stock in an amount
equal to two full years of distributions, holders
of the preferred stock, voting together as a
single class, will have the right to elect
additional directors that would then constitute a
simple majority of the Board until all cumulative
distributions on all shares of preferred stock
have been made or provided for. Holders of
outstanding shares of Series F Preferred and any
other preferred stock will vote separately as a
class on certain other matters as required under
the Charter, the 1940 Act and Maryland law. Except
as otherwise indicated in this prospectus and as
otherwise required by applicable law, holders of
Series F Preferred will be entitled to one vote
per share on each matter submitted to a vote of
stockholders and will vote together with holders
of common stock and any other preferred stock as a
single class. See "Description of the Series F
Preferred -- Voting Rights."
LIQUIDATION PREFERENCE The liquidation preference of the Series F
Preferred is $25. Upon liquidation, holders of the
Series F Preferred will be entitled to receive the
liquidation preference with respect to their
shares of preferred stock plus an amount equal to
accumulated but unmade distributions with respect
to such shares (whether or not earned or declared)
to the date of liquidation. See "Description of
the Series F Preferred -- Liquidation Rights."
4
USE OF PROCEEDS The net proceeds of the offering are estimated at
approximately $_____, after deduction of the
estimated underwriting discounts and estimated
offering expenses payable by the Fund. Absent a
material change in market conditions as determined
by Gabelli Funds, LLC (the "Investment Adviser"),
the Fund will use the net proceeds to redeem
shares of the Series B Preferred, of which there
are currently 4,950,000 shares outstanding with a
liquidation preference of $25 per share. To the
extent the amount raised in the offering exceeds
the amount of Series B Preferred outstanding, the
excess amount will be invested in accordance with
the investment objectives and policies of the
Fund. The Fund intends to redeem shares of Series
B Preferred (and, if there are excess proceeds,
invest those proceeds in accordance with the
Fund's investment objectives and policies) within
six months of the completion of the offering. The
timing of the redemption (or investment of excess
proceeds) within this six month period will depend
on the Investment Adviser's judgment as to current
market conditions, including, in particular,
factors affecting interest rates and the
securities in which the Fund invests. See "Use of
Proceeds."
LISTING OF THE SERIES F Following its issuance, the Series F Preferred is
PREFERRED expected to be listed on the NYSE. However, during
an initial period which is not expected to exceed
30 days after the date of its initial issuance,
the Series F Preferred will not be listed on any
securities exchange and consequently may be
illiquid during that period. Prior to this
offering, there has been no public market for the
Series F Preferred. There can be no assurance that
a secondary market will provide owners with
liquidity.
SPECIAL CHARACTERISTICS AND Risk is inherent in all investing. Therefore,
RISKS before investing in the Series F Preferred you
should consider the risks carefully. See "Risk
Factors and Special Considerations." Primary risks
specially associated with an investment in the
Series F Preferred include:
The market price for the Series F Preferred will
be influenced by changes in interest rates, the
perceived credit quality of the Series F Preferred
and other factors. See "Risk Factors and Special
Considerations -- Risks Associated with the Series
F Preferred -- Fluctuations in Market Price."
Prior to this offering, there has been no public
market for the Series F Preferred. A preliminary
application has been made to list the Series F
Preferred on the NYSE. However, during an initial
period which is not expected to exceed 30 days
after the date of its issuance, the Series F
Preferred will not be listed on any securities
exchange. During such 30-day period, the
underwriters may make a market in the Series F
Preferred; however, they have no obligation to do
so. Consequently, the Series F Preferred may be
illiquid during such period. No assurances can be
provided that listing on any securities exchange
or market making by the underwriters will result
in the market for Series F Preferred being liquid
at any time. See "Risk Factors and Special
Considerations -- Risks Associated with the Series
F Preferred -- Illiquidity Risk."
You will have no right to require the Fund to
repurchase or redeem your shares of Series F
Preferred at any time.
The credit rating on the Series F Preferred could
be reduced or withdrawn while an investor holds
shares, and the credit rating does not eliminate
or mitigate the risks of investing in the Series F
Preferred. A reduction or withdrawal of the credit
rating would likely have an adverse effect on the
market value of the Series F Preferred.
The Fund may not meet the asset coverage
requirements or earn sufficient income from its
investments to make distributions on the Series F
Preferred.
The value of the Fund's investment portfolio may
decline, reducing the asset coverage for the
Series F Preferred. Further, if an issuer of a
common stock in which the Fund invests experiences
financial difficulties or if an issuer's preferred
stock or debt security is downgraded or defaults
or if an issuer in which the Fund invests is
affected by other adverse market factors, there
may be a negative impact on the income and asset
value of the Fund's investment portfolio. In such
circumstances, the Fund may be forced to
mandatorily redeem shares of the Series F
Preferred.
The Fund generally may redeem the Series F
Preferred at any time after _____, 2011 and may at
any time redeem shares of Series F Preferred to
meet regulatory or rating agency requirements. The
Series F Preferred is subject to redemption under
specified circumstances and investors may not be
5
able to reinvest the proceeds of any such
redemption in an investment providing the same or
a better rate than that of the Series F Preferred.
Subject to such circumstances, the Series F
Preferred is perpetual.
The Series F Preferred is not an obligation of the
Fund. The Series F Preferred is junior in respect
of distributions 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 F
Preferred for the full redemption price.
The Fund currently uses, and intends to continue
to use, financial leverage for investment purposes
by issuing preferred stock. It is currently
anticipated that, taking into account the Series F
Preferred, the amount of leverage will represent
approximately _____% of the Fund's "managed
assets" (as defined below). If the proposed
spin-off of a portion of the Fund's assets (see
"Additional Information") were to occur, subject
to receipt of regulatory and shareholder approval,
the amount of leverage as a percentage of Fund
total assets would increase because the Fund's
managed assets would decrease by the amount
contributed to the spin-off fund. The Fund's
leveraged capital structure creates special risks
not associated with unleveraged funds having
similar investment objectives and policies. These
include the possibility of greater loss and the
likelihood of higher volatility of the net asset
value of the Fund and the asset coverage for the
Series F Preferred. Such volatility may increase
the likelihood of the Fund having to sell
investments in order to meet its obligations to
make distributions on the preferred stock, or to
redeem preferred stock when it may be
disadvantageous to do so. Also, if the Fund is
utilizing leverage, a decline in net asset value
could affect the ability of the Fund to make
common stock distributions and such a failure to
make distributions could result in the Fund
ceasing to qualify as a regulated investment
company under the Internal Revenue Code of 1986,
as amended (the "Code"). See "Taxation." As used
in this prospectus, the Fund's "managed assets"
include the aggregate net asset value of the
Fund's common stock plus assets attributable to
its outstanding preferred stock, with no deduction
for the liquidation preference of such preferred
stock.
Because the fee paid to the Investment Adviser
will be calculated on the basis of the Fund's
assets, which include for this purpose assets
attributable to the aggregate net asset value of
the common stock plus assets attributable to any
outstanding senior securities, with no deduction
for the liquidation preference of any preferred
stock, the fee may be higher when leverage in the
form of preferred stock is utilized, giving the
Investment Adviser an incentive to utilize such
leverage. However, the Investment Adviser has
agreed to reduce the management fee on the
incremental assets attributable to the Existing
Preferred and the Series F Preferred during the
fiscal year if the total return of the net asset
value of the common stock, including distributions
and advisory fees subject to reduction for that
year, does not exceed the stated dividend rate or
corresponding swap rate of each particular series
of preferred stock for the period. In other words,
if the effective cost of the leverage for any
series of preferred stock exceeds the total return
(based on net asset value) on the Fund's common
stock, the Investment Adviser will waive that
portion of its management fee on the incremental
assets attributable to the leverage for that
series of preferred stock to mitigate the negative
impact of the leverage on the common stockholder's
total return. This fee waiver is voluntary and may
be discontinued at any time. The Fund's total
return on the net asset value of the common stock
is monitored on a monthly basis to assess whether
the total return on the net asset value of the
common stock exceeds the stated dividend rate or
corresponding swap rate of each particular series
of preferred stock for the period. The test to
confirm the accrual of the management fee on the
assets attributable to each particular series of
preferred stock is annual. The Fund will accrue
for the management fee on these assets during the
fiscal year if it appears probable that the Fund
will incur the management fee on those additional
assets. See "Risk Factors and Special
Considerations -- Risks Associated with the Series
F Preferred -- Leverage Risk."
Restrictions imposed on the declaration and
payment of dividends or other distributions to the
holders of the 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
shares of its preferred stock (including the
Series F Preferred) to the extent necessary to
enable the Fund to distribute its income as
required to maintain its qualification as a
regulated investment
6
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.
The Fund has adopted a policy, which may be
changed at any time by the Board, of paying a
minimum annual distribution of 10% of the average
net asset value of the Fund to common
stockholders. In the event the Fund does not
generate a total return from dividends and
interest received and net realized capital gains
in an amount equal to or in excess of its stated
distribution in a given year, the Fund may return
capital as part of such distribution, which may
have the effect of decreasing the asset coverage
per share with respect to the Series F Preferred
(as well as the Existing Preferred). Any return of
capital should not be considered by investors as
yield or total return on their investment in the
Fund. For the fiscal year ended December 31, 2005,
the Fund made distributions of $0.85 per share of
common stock, none of which constituted a return
of capital. The Fund has made distributions of
$0.58 per share of common stock for the current
year through September 30, 2006. The Fund has made
quarterly distributions with respect to its common
stock since 1987. A portion of the distributions
to holders of common stock during nine of the
twenty fiscal years since the Fund's inception has
constituted a return of capital. The composition
of each distribution is estimated based on the
earnings of the Fund as of the record date for
each distribution. The actual composition of each
of the current year's distributions will be based
on the Fund's investment activity through December
31, 2006.
As a non-diversified, closed-end management
investment company under the 1940 Act, the Fund
may invest a greater portion of its assets in a
more limited number of issuers than may a
diversified fund, and accordingly, an investment
in the Fund may, under certain circumstances,
present greater risk to an investor than an
investment in a diversified company. See "Risk
Factors and Special Considerations -- Risks of
Investing in the Fund -- Non-Diversified Status."
The Fund may invest up to 25% of its assets in the
securities of companies principally engaged in a
single industry. In the event the Fund makes
substantial investments in a single industry, the
Fund would become more susceptible to adverse
economic or regulatory occurrences affecting that
industry. See "Risk Factors and Special
Considerations -- Risks of Investing in the Fund
-- Industry Concentration Risk."
The Fund has entered into an interest rate swap
transaction with respect to its outstanding Series
C Auction Rate Preferred and may enter into an
interest rate swap or cap transaction with respect
to all or a portion of its outstanding Series E
Auction Rate Preferred. The use of interest rate
swaps and caps is a highly specialized activity
that involves certain risks to the Fund including,
among others, counterparty risk and early
termination risk. See "How the Fund Manages Risk
-- Interest Rate Transactions."
The Fund may invest up to 35% of its total assets
in securities of foreign issuers. Investing in
securities of foreign companies (or foreign
governments), which are generally denominated in
foreign currencies, may involve certain risks and
opportunities not typically associated with
investing in domestic companies and could cause
the Fund to be affected favorably or unfavorably
by changes in currency exchange rates and
revaluation of currencies. See "Risk Factors and
Special Considerations -- Risks of Investing in
the Fund -- Foreign Securities."
The Fund may invest up to 10% of its total assets
in fixed-income securities rated in the lower
rating categories of recognized statistical rating
agencies, also sometimes referred to as "junk
bonds." Such securities are subject to greater
risks than investment grade securities, which
reflect their speculative character, including (i)
greater volatility; (ii) greater credit risk;
(iii) potentially greater sensitivity to general
economic or industry conditions; (iv) potential
lack of attractive resale opportunities
(illiquidity); and (v) additional expenses to seek
recovery from issuers who default. Fixed-income
securities purchased by the Fund may be rated as
low as C by Moody's or D by S&P or may be unrated
securities considered to be of equivalent quality.
Securities that are rated C by Moody's are the
lowest rated class and can be regarded as having
extremely poor prospects of ever obtaining
investment-grade standing. Debt rated D by S&P is
in default or is expected to default upon
7
maturity of payment date. See "Risk Factors and
Special Considerations -- Risks of Investing in
the Fund -- Lower Rated Securities."
The Fund may participate in certain derivative
transactions. Such transactions entail certain
execution, market, liquidity, hedging and tax
risks. 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 or interest rate
markets is inaccurate, the consequences to the
Fund may leave it in a worse position than if such
strategies were not used. See "Risk Factors and
Special Considerations -- Risks of Investing in
the Fund -- Special Risks of Derivative
Transactions."
The Fund is subject to management risk because it
is an actively managed portfolio. The Investment
Adviser will apply investment techniques and risk
analyses in making investment decisions for the
Fund, but there can be no guarantee that these
will produce the desired results. See "Risk
Factors and Special Considerations -- Risks of
Investing in the Fund -- Management Risk."
The Investment Adviser is dependent upon the
expertise of Mr. Mario J. Gabelli in providing
advisory services with respect to the Fund's
investments. If the Investment Adviser were to
lose the services of Mr. Gabelli, its ability to
service the Fund could be adversely affected.
There can be no assurance that a suitable
replacement could be found for Mr. Gabelli in the
event of his death, resignation, retirement or
inability to act on behalf of the Investment
Adviser. See "Risk Factors and Special
Considerations -- Risks of Investing in the Fund
-- Dependence on Key Personnel." The Fund's
Charter and By- Laws include provisions that could
limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund to
an open-end fund. See "Anti-Takeover Provisions of
the Fund's Charter and By- Laws."
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 such
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. The Investment Adviser's fee is computed
weekly and paid monthly at the annual rate of
1.00% of the Fund's average weekly net assets plus
assets attributable to any outstanding senior
securities, with no deduction for the liquidation
preference of any outstanding preferred stock. The
fee paid by the Fund may be higher when leverage
in the form of preferred stock is utilized, giving
the Investment Adviser an incentive to utilize
such leverage. However, the Investment Adviser has
agreed to reduce the management fee on the
incremental assets attributable to the Existing
Preferred and the Series F Preferred during the
fiscal year if the total return of the net asset
value of the common stock, including distributions
and advisory fees subject to reduction for that
year, does not exceed the stated dividend rate or
corresponding swap rate of each particular series
of preferred stock for the period. In other words,
if the effective cost of the leverage for any
series of preferred stock exceeds the total return
(based on net asset value) on the Fund's common
stock, the Investment Adviser will waive that
portion of its management fee on the incremental
assets attributable to the leverage for that
series of preferred stock to mitigate the negative
impact of the leverage on the common stockholder's
total return. This fee waiver is voluntary and may
be discontinued at any time. The Fund's total
return on the net asset value of the common stock
is monitored on a monthly basis to assess whether
the total return on the net asset value of the
common stock exceeds the stated dividend rate or
corresponding swap rate of each particular series
of preferred stock for the period. The test to
confirm the accrual of the management fee on the
assets attributable to each particular series of
preferred stock is annual. The Fund will accrue
for the management fee on these assets during the
fiscal year if it appears probable
8
that the Fund will incur the management fee on
those additional assets.
For the year ended December 31, 2005, the Fund's
total return on the net asset value of the common
stock exceeded the stated dividend rate or net
swap expense of the Series C Auction Rate
Preferred and Series E Auction Rate Preferred.
Thus, management fees were accrued on these
assets. The Fund's total return on the net asset
value of the common stock did not exceed the
stated dividend rate or net swap expense of the
Series B Preferred and Series D Preferred. Thus,
management fees with respect to the liquidation
value of those preferred stock assets were reduced
by $2,387,425. See "Risk Factors and Special
Considerations -- Risks Associated with the Series
F Preferred -- Leverage Risk."
A discussion regarding the basis for the Board's
approval of the investment advisory contract of
the Fund is available in the Fund's semi-annual
report to shareholders dated June 30, 2006.
Over the past several years, the staff of the
Commission (the "Staff"), the staff of the New
York Attorney General's office (the "NYAG") and
officials of other states have been conducting
industry-wide inquiries into, and bringing
enforcement and other proceedings regarding,
trading abuses involving open-end investment
companies. The Investment Adviser and its
affiliates have received information requests and
subpoenas from the Staff and the NYAG in
connection with these inquiries and have been
complying with these requests for documents and
testimony. The Investment Adviser has implemented
additional compliance policies and procedures in
response to recent industry initiatives and its
internal reviews of its mutual fund practices in a
variety of areas. For further details regarding
the Investment Adviser's review in connection with
these requests, see "Management of the Fund --
Regulatory Matters."
REPURCHASE OF COMMON STOCK The Fund's Board has authorized the Fund to
repurchase shares of its common stock in the open
market when the shares are trading at a discount
of 10% or more from net asset value. Such
repurchases are subject to certain notice and
other requirements under the 1940 Act. Through
September 30, 2006, the Fund has not repurchased
shares of its common stock under this
authorization.
ANTI-TAKEOVER PROVISIONS Certain provisions of the Fund's Charter and
OF THE FUND'S CHARTER AND By-Laws may be regarded as "anti-takeover"
BY-LAWS provisions. Pursuant to these provisions, only one
of the three classes of directors is elected each
year, and the affirmative vote of the holders of
66 2/3% of the Fund's outstanding shares of each
class (voting separately) is required to authorize
the conversion of the Fund from a closed-end to an
open-end investment company or generally to
authorize any of the following transactions:
(1) the merger or consolidation of the Fund
with any entity;
(2) the issuance of any securities of the
Fund for cash to any entity or person;
(3) the sale, lease or exchange of all or any
substantial part of the assets of the Fund to
any entity or person (except assets having an
aggregate fair market value of less than
$1,000,000); or
(4) the sale, lease or exchange to the Fund,
in exchange for its securities, of any assets
of any entity or person (except assets having
an aggregate fair market value of less than
$1,000,000);
if such person or entity is directly, or
indirectly through affiliates, the beneficial
owner of more than 5% of the outstanding shares of
any class of capital stock of the Fund. However,
such vote would not be required when, under
certain conditions, the Board approves the
transaction. 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, or the
conversion of the Fund to open-end status. These
provisions may have the effect of depriving Fund
stockholders of an opportunity to sell their stock
at a premium above the prevailing market price.
See "Anti-Takeover Provisions of the Fund's
Charter and By-Laws."
CUSTODIAN, TRANSFER Mellon Trust of New England, N.A. (the
"Custodian"), located at 135 Santilli Highway,
Everett, Massachusetts 02149, serves as the
custodian of the Fund's assets pursuant to a
custody agreement.
9
AGENT, AUCTION AGENT AND Under the custody agreement, the Custodian holds
DIVIDEND DISBURSING AGENT the Fund's assets in compliance with the 1940 Act.
For its services, the Custodian receives a monthly
fee based upon the month end value of the total
assets of the Fund, plus certain charges for
securities transactions.
Computershare Trust Company, N.A.
("Computershare"), located at 250 Royall Street,
Canton, Massachusetts 02021, serves as the Fund's
dividend disbursing agent, as agent under the
Fund's automatic dividend reinvestment and
voluntary cash purchase plan (the "Plan") and as
transfer agent and registrar with respect to the
common stock of the Fund.
Computershare will serve as the transfer agent,
registrar, dividend disbursing agent and
redemption agent with respect to the Series F
Preferred. Computershare currently serves in such
capacities with respect to the Series B Preferred
and the Series D Preferred.
The Bank of New York, located at 100 Church
Street, New York, New York 10286, serves as the
auction agent, transfer agent, registrar, dividend
disbursing agent and redemption agent with respect
to the Series C Auction Rate Preferred and the
Series E Auction Rate Preferred.
INTEREST RATE TRANSACTIONS The Fund has entered into an interest rate swap
transaction with respect to its outstanding Series
C Auction Rate Preferred, and may enter into an
interest rate swap or cap transaction with respect
to all or a portion of its outstanding Series E
Auction Rate Preferred. Through these transactions
the Fund may, for example, obtain the equivalent
of a fixed rate for the Series C Auction Rate
Preferred or the Series E Auction Rate Preferred
(collectively, the "Auction Rate Preferred") that
is lower than the Fund would have to pay if it
issued fixed rate preferred stock. The use of
interest rate swaps and caps is a highly
specialized activity that involves investment
techniques and risks different from those
associated with ordinary portfolio security
transactions. Swap agreements may involve, to
varying degrees, elements of marketing and
counterparty risk, and exposure to loss in excess
of the related amounts reflected in the Fund's
Statement of Assets and Liabilities.
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 a series of the Auction Rate
Preferred. In an interest rate cap, the Fund would
pay a premium to the counterparty to the interest
rate cap and, to the extent that a specified
variable rate index exceeds a predetermined fixed
rate, the Fund would receive from the counterparty
payments of the difference based on the notional
amount of such cap. Interest rate swap and cap
transactions introduce additional risk because the
Fund would remain obligated to pay preferred stock
distributions when due in accordance with the
Articles Supplementary of each of the series of
Auction Rate Preferred even if the counterparty
defaulted. If there is a default by the
counterparty to a swap contract, the Fund will be
limited to contractual remedies pursuant to the
agreements related to the transaction. There is no
assurance that the swap contract counterparties
will be able to meet their obligations pursuant to
a swap contract or that, in the event of a
default, the Fund will succeed in pursuing
contractual remedies. The Fund assumes the risk
that it may be delayed in or prevented from
obtaining payments owed to it pursuant to a swap
contract. The creditworthiness of the swap
contract counterparties is closely monitored in
order to minimize this risk. 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 distributions on
its auction rate preferred stock. 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 distributions on its auction rate preferred
stock.
A sudden and dramatic decline in interest rates
may result in a significant decline in the asset
coverage. If the Fund fails to maintain the
required asset coverage on its outstanding
preferred stock or fails to comply with other
covenants, the Fund may, at its option (and in
certain circumstances must) require, consistent
with its Charter and the requirements of the 1940
Act, that some or all of its outstanding shares of
preferred stock (including the Series F Preferred)
be redeemed. 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
10
to the counterparty.
The Fund intends to segregate cash or liquid
securities having a value at least equal to the
value of the Fund's net payment obligations under
any swap transaction, marked to market daily. See
"How the Fund Manages Risk -- Interest Rate
Transactions."
11
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for the periods
presented. The per share operating performance and ratios for the fiscal periods
ended December 31, 2005, 2004, 2003, 2002 and 2001, have been audited by
[AUDITOR], the Fund's Independent Registered Public Accounting Firm, as stated
in its report which is incorporated by reference into the SAI. The per share
operating performance and ratios for the six months ended June 30, 2006 are
unaudited and are as stated in the Fund's semi-annual 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.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2006 ------------------------------------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
---------------- ---------- ---------- ---------- ---------- ----------
Selected data for a share of common stock
outstanding throughout each period:
OPERATING PERFORMANCE:
Net Asset value, beginning of period
Net investment income
Net realized and unrealized gain
(loss) on investments
Total from investment operations
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
Net investment income
Net realized gain on investments
Total distributions to preferred
shareholders
NET INCREASE (DECREASE) IN NET ASSETS
ATTRIBUTABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income
Net realized gain on investments
Return of capital
Total distributions to common
shareholders
CAPITAL SHARE TRANSACTIONS:
Increase (decrease) in net asset
value from common share transactions
Decrease in net asset value from
shares issued in rights offering
Increase in net asset value from
repurchase of preferred shares
Offering costs for preferred shares
charged to paid-in capital
Offering costs for issuance of rights
charged to paid-in capital
Total capital share transactions
NET ASSET VALUE ATTRIBUTABLE TO COMMON
SHAREHOLDERS, END OF PERIOD
Net Asset Value Total Return
Market Value, End of Period
12
USE OF PROCEEDS
The net proceeds of the offering are estimated at approximately $_____,
after deduction of the estimated underwriting discounts and estimated offering
expenses payable by the Fund. Absent a material change in market conditions as
determined by the investment adviser, the Fund will use the net proceeds to
redeem shares of the Series B Preferred, of which there are currently 4,950,000
shares outstanding with a liquidation preference of $25 per share. To the extent
the amount raised in the offering exceeds the amount of Series B Preferred
outstanding, the excess amount will be invested in accordance with the
investment objectives and policies of the Fund. The Fund intends to redeem
shares of Series B Preferred (and, if there are excess proceeds, invest those
proceeds in accordance with the Fund's investment objectives and policies)
within six months of the completion of the offering. The timing of the
redemption (or investment of excess proceeds) within this six month period will
depend on the Investment Adviser's judgment as to current market conditions,
including, in particular, factors affecting interest rates and the securities in
which the Fund invests.
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Maryland corporation
on May 20, 1986. The Fund commenced its investment operations on August 21,
1986. The Fund's principal office is located at One Corporate Center, Rye, New
York 10580-1422.
As of September 30, 2006, the Fund had 167,642,009 shares of common stock
outstanding. Pursuant to an amendment to the Fund's Articles of Incorporation
that was approved by stockholders in 2004, the Board may increase or decrease
the aggregate number of shares of stock of the Fund or the number of shares of
stock of any class or series that the Fund has authority to issue without
stockholder approval. The Fund is currently authorized to issue 252,000,000
shares of common stock, par value $0.001 per share. The common stock currently
trades on the
13
NYSE under the symbol "GAB." Prior to its redemption on June 17, 2003, the
Series A Preferred was listed and traded on the NYSE under the symbol "GAB Pr."
The Series B Preferred is listed and traded on the NYSE under the symbol "GAB
PrB" and Series D Preferred is listed and traded on the NYSE under the symbol
"GAB PrD". The Series C and Series E Auction Rate Preferred are not traded on
any exchange.
The following table provides information about the Fund's outstanding stock
as of September 30, 2006.
AMOUNT AMOUNT
TITLE OF CLASS AUTHORIZED* OUTSTANDING*
-------------- ----------- ------------
Common Stock 252,000,000 167,642,009
Series A Preferred 5,367,900 0
Series B Preferred 6,600,000 4,950,000
Series C Auction Rate Preferred 5,200 5,200
Series D Preferred 3,000,000 2,949,700
Series E Auction Rate Preferred 2,000 2,000
Preferred Stock 3,024,900 0
* Does not include the Series F Preferred being offered pursuant to this
prospectus.
14
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of September 30, 2006, and its adjusted capitalization assuming the
Series F Preferred offered in this prospectus had been issued.
As of September 30, 2006
(unaudited)
----------------------------
Actual As adjusted
-------------- -----------
Preferred stock, $0.001 par value per share, 18,000,000 shares authorized as of
September 30, 2006 and 25,000,000 shares as adjusted (the "Actual" column
reflects the Fund's outstanding capitalization as of September 30, 2006; the
"As adjusted" column assumes the issuance of _____ shares of Series F
Preferred, $25 liquidation preference) $ 377,492,500 $_____
Shareholders' equity applicable to common stock: _____
Common stock, $0.001 par value per share; 252,000,000 shares
authorized; 167,642,009 shares outstanding 167,642 _____
Paid-in surplus* 1,069,995,506 _____
Distribution in excess of net investment income and net realized gains on
investments (7,800,361) _____
Net unrealized appreciation 396,358,020 _____
-------------- ------
Net assets attributable to common stock 1,458,720,807 _____
Liquidation preference of preferred stock 377,492,500 _____
-------------- ------
Net assets, plus the liquidation preference of preferred stock $1,836,213,307 _____
----------
* Paid-in surplus, as adjusted, reflects a deduction for the estimated
underwriting discounts of $ _____ and estimated offering expenses of the
Series F Preferred issuance of $ _____.
For financial reporting purposes, the Fund is required to deduct the
liquidation preference of its outstanding preferred stock from "net assets," so
long as the senior securities have redemption features that are not solely
within the control of the Fund. For all regulatory purposes, the Fund's
preferred stock will be treated as equity (rather than debt).
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to achieve long-term growth
of capital by investing primarily in a portfolio of equity securities consisting
of common stock, preferred stock, convertible or exchangeable securities and
warrants and rights to purchase such securities selected by the Investment
Adviser. Income is a secondary investment objective. The investment objectives
of long-term growth of capital and income are fundamental policies of the Fund.
These fundamental policies and the investment limitations described in the SAI
under the caption "Investment Restrictions" cannot be changed without the
approval of the holders of a majority of the Fund's outstanding shares of
preferred stock voting as a separate class and the approval of the holders of a
majority of the Fund's outstanding voting securities. Such majority votes
require, in each case, the lesser of (i) 67% of the Fund's applicable shares
represented at a meeting at which more than 50% of the Fund's applicable shares
outstanding are represented, whether in person or by proxy, or (ii) more than
50% of the outstanding shares of the applicable class.
Under normal market conditions, the Fund will invest at least 80% of
the value of its total assets in equity securities. The 80% Policy may be
changed without stockholder approval. The Fund will provide stockholders with
notice at least 60 days prior to the implementation of any change in the 80%
Policy.
The Investment Adviser selects investments on the basis of fundamental
value and, accordingly, the Fund typically invests in the securities of
companies that are believed by the Investment Adviser to be priced lower than
justified in relation to their underlying assets. Other important factors in the
selection of investments include favorable price/earnings and debt/equity ratios
and strong management.
The Fund seeks to achieve its secondary investment objective of
income, in part, by investing up to 10% of its total assets in fixed-income
securities rated as low as C by Moody's or D by S&P or may be unrated securities
15
considered to be of equivalent quality. Securities that are rated C by Moody's
are the lowest rated class and can be regarded as having extremely poor
prospects of ever obtaining investment-grade standing. Debt rated D by S&P is in
default or is expected to default upon maturity of payment date. These debt
securities, which are often referred to in the financial press as "junk bonds,"
are predominantly speculative and involve major risk exposure to adverse
conditions.
No assurance can be given that the Fund's investment objectives will
be achieved.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Investment Adviser normally
will consider the following factors, among others:
- the Investment Advisers' 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;
- the potential for capital appreciation of the securities;
- the interest or dividend income generated by the securities;
- the prices of the securities relative to other comparable securities;
- whether the securities are entitled to the benefits of call protection
or other protective covenants;
- the existence of any anti-dilution protections or guarantees of the
security; and
- the diversification of the portfolio of the Fund as to issuers.
The Investment Adviser's investment philosophy with respect to equity
securities is 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 an issuer's free cash flow and long-term earnings trends. Finally, the
Investment Adviser looks for a catalyst, something indigenous to the company,
its industry or country, that will surface additional value.
CERTAIN INVESTMENT PRACTICES
FOREIGN SECURITIES. The Fund may invest up to 35% of its total assets
in foreign securities. Among the foreign securities in which the Fund may invest
are those issued by companies located in developing countries, which are
countries in the initial stages of their industrialization cycles. Investing in
the equity and debt markets of developing countries involves exposure to
economic structures that are generally less diverse and less mature, and to
political systems that may have less stability, than those of developed
countries. The markets of developing countries historically have been more
volatile than the markets of the more mature economies of developed countries,
but often have provided higher rates of return to investors.
The Fund may also invest in the debt securities of foreign
governments. Although such investments are not a principal strategy of the Fund,
there is no independent limit on its ability to invest in the debt securities of
foreign governments.
TEMPORARY DEFENSIVE INVESTMENTS. Subject to the Fund's investment
restrictions, when a temporary defensive period is believed by the Investment
Adviser to be warranted ("temporary defensive periods"), the Fund may, without
limitation, hold cash or invest its assets in securities of United States
government sponsored instrumentalities, in repurchase agreements in respect of
those instruments, and in certain high-grade commercial paper instruments.
During temporary defensive periods the Fund may also invest in money market
mutual funds that invest primarily in securities of United States government
sponsored instrumentalities and repurchase agreements in respect of those
instruments. Under current law, in the absence of an exemptive order, such money
market mutual funds will not be affiliated with the Investment Adviser.
Obligations of certain agencies and instrumentalities of the United States
government, such as the Government National Mortgage Association, are supported
by the "full faith and credit" of the United States government; others, such as
those of the Export-Import Bank of the United States, are supported by the right
of the issuer to borrow from the United States Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the discretionary
authority of the United States 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
16
United States government would provide financial support to United States
government sponsored instrumentalities if it is not obligated to do so by law.
During temporary defensive periods, the Fund may be less likely to achieve its
secondary investment objective of income.
LOWER RATED SECURITIES. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, including securities rated as low as C
by Moody's or D by S&P or may be unrated securities considered to be of
equivalent quality. Securities that are rated C by Moody's are the lowest rated
class and can be regarded as having extremely poor prospects of ever obtaining
investment-grade standing. Debt rated D by S&P is in default or is expected to
default upon maturity of payment date.
Generally, lower rated securities and unrated securities of comparable
quality offer a higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the ratings organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than higher
quality bonds. In addition, such lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, the Investment Adviser, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
operating history, financial resources, its sensitivity to economic conditions
and trends, the market support for the facility financed by the issue, the
perceived ability and integrity of the issuer's management and regulatory
matters.
In addition, the market value of securities in lower rated categories
is more volatile than that of higher quality securities, and the markets in
which such lower rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell securities at their fair value to
respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a feature
of fixed income securities), the Fund may have to replace the security with a
lower yielding security, resulting in a decreased return for investors. Also, in
the event of rising interest rates, as the principal values of bonds move
inversely with movements in interest rates, the value of the securities held by
the Fund may decline proportionately more than a portfolio consisting of higher
rated securities. Investments in zero coupon bonds may be more speculative and
subject to greater fluctuations in value due to changes in interest rates than
bonds that pay interest currently.
As part of its investments in lower grade fixed-income securities, the
Fund may invest in securities of issuers in default. The Fund will only make an
investment in securities of issuers in default when the Investment Adviser
believes that such issuers will honor their obligations or emerge from
bankruptcy protection and that the value of these securities will appreciate. By
investing in the securities of issuers in default, the Fund bears the risk that
these issuers will not continue to honor their obligations or emerge from
bankruptcy protection or that the value of the securities will not appreciate.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. On behalf of the Fund, the
Investment Adviser may, subject to the Fund's investment restrictions and
guidelines of the Board, purchase and sell financial futures contracts and
options thereon which are traded on a commodities exchange or board of trade for
certain hedging, yield enhancement and risk management purposes. These futures
contracts and related options may be on debt securities, financial indices,
securities indices, United States government securities and foreign currencies.
A financial futures contract is an agreement to purchase or sell an agreed
amount of securities or currencies at a set price for delivery in the future.
The Investment Adviser has claimed an exclusion from the definition of
the term "commodity pool operator" under the Commodity Exchange Act and
therefore is not subject to the registration requirements under the
17
Commodity Exchange Act. Accordingly, the Fund's investments in derivative
instruments are not limited by or subject to regulation under the Commodity
Exchange Act or otherwise regulated by the Commodity Futures Trading Commission.
Nevertheless, the Fund's investment restrictions place certain limitations and
prohibitions on its ability to purchase or sell commodities or commodity
contracts. In addition, investment in futures contracts and related options
generally will be limited by the rating agency guidelines applicable to any of
the Fund's outstanding preferred stock.
FORWARD CURRENCY EXCHANGE CONTRACTS. Subject to guidelines of the
Board, the Fund may enter into forward foreign currency exchange contracts to
protect the value of its portfolio against future changes in the level of
currency exchange rates. The Fund may enter into such contracts on a "spot,"
i.e., cash, basis at the rate then prevailing in the currency exchange market or
on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract. The Fund's dealings in forward contracts generally will be
limited to hedging involving either specific transactions or portfolio
positions. The Fund does not have an independent limitation on its investments
in foreign currency futures contracts and options on foreign currency futures
contracts.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with banks and non-bank dealers of United States government securities which are
listed as reporting dealers of the Federal Reserve Bank and which 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 who undertakes to repurchase the security at a specified
resale price on an agreed future date. Repurchase agreements are generally for
one business day and generally will not have a duration of longer than one week.
The Commission has taken the position that, in economic reality, a repurchase
agreement is a loan by a fund to the other party to the transaction secured by
securities transferred to the fund. The resale price generally exceeds the
purchase price by an amount which reflects an agreed -upon market interest rate
for the term of the repurchase agreement. The 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 may be 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 the collateral upon a default
in the obligation to repurchase is less than the repurchase price, the Fund will
experience a loss. 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 could suffer a loss.
LOANS OF PORTFOLIO SECURITIES. To increase income, the Fund may lend
its portfolio securities to securities broker-dealers or financial institutions
if (i) the loan is collateralized in accordance with applicable regulatory
requirements and (ii) no loan will cause the value of all loaned securities to
exceed 20% of the value of its 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 Fund's Board, there can be no assurance that
borrowers will not fail financially. On termination of the loan, the borrower is
required to return the securities to the Fund, and any gain or loss in the
market price during the loan would inure to the Fund. If the counterparty to the
loan petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the Fund's rights is unsettled. As a result, under these
circumstances, there may be a restriction on the Fund's ability to sell the
collateral and it would suffer a loss.
BORROWING. The Fund may borrow money in accordance with its investment
restrictions, including as a temporary measure for extraordinary or emergency
purposes. It may not borrow for investment purposes.
LEVERAGING. As provided in the 1940 Act, and subject to compliance
with the Fund's investment limitations, the Fund may issue senior securities
representing stock, such as preferred stock, so long as immediately following
such issuance of stock, its total assets exceed 200% of the amount of such
stock. The use of leverage magnifies the impact of changes in net asset value.
For example, a fund that uses 33% leverage will show a 1.5% increase or decline
in net asset value for each 1% increase or decline in the value of its total
assets. In addition, if the cost of leverage exceeds the return on the
securities acquired with the proceeds of leverage, the use of leverage
18
will diminish, rather than enhance, the return to the Fund. The use of leverage
generally increases the volatility of returns to the Fund.
Further information on the investment objectives and policies of the
Fund is set forth in the SAI.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment
restrictions as fundamental policies of the Fund. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority, as defined
in the 1940 Act, of the outstanding voting securities of the Fund (voting
together as a single class). In addition, pursuant to the Fund's respective
Articles Supplementary of the Series B, C, D, E, and F Preferred, a majority, as
defined in the 1940 Act, of the outstanding preferred stock of the Fund (voting
separately as a single class) is also required to change a fundamental policy,
as defined in the 1940 Act. The Fund's investment restrictions are more fully
discussed under "Investment Restrictions" in the SAI.
PORTFOLIO TURNOVER. The Fund does not engage in the trading of
securities for the purpose of realizing short-term profits, but adjusts its
portfolio as it deems advisable in view of prevailing or anticipated market
conditions to accomplish its investment objectives. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses than a
lower rate, and such expenses must be borne by the Fund and its stockholders.
High portfolio turnover may also result in the realization of substantial net
short-term capital gains and any distributions resulting from such gains will be
taxable at ordinary income rates for United States federal income tax purposes.
The Fund's portfolio turnover rates for the fiscal years ended December 31, 2004
and 2005 were 28.6% and 22.4%, respectively. The portfolio turnover rate is
calculated by dividing the lesser of sales or purchases of portfolio securities
by the average monthly value of a fund's portfolio securities. For purposes of
this calculation, portfolio securities exclude purchases and sales of debt
securities having a maturity at the date of purchase of 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:
RISKS ASSOCIATED WITH THE SERIES F PREFERRED
There are a number of risks associated with an investment in the
Series F Preferred:
The market price for the Series F Preferred will be influenced by
changes in interest rates, the perceived credit quality of the Series F
Preferred and other factors.
A preliminary application has been made to list the Series F Preferred
on the NYSE. Prior to the offering, there has been no public market for the
Series F Preferred. However, during an initial period which is not expected to
exceed 30 days after the date of its issuance, the Series F Preferred will not
be listed on any securities exchange. During such 30-day period, the
underwriters may make a market in the Series F Preferred; however, they have no
obligation to do so. Consequently, the Series F Preferred may be illiquid during
such period. No assurances can be provided that listing on any securities
exchange or market making by the underwriters will result in the market for
Series F Preferred being liquid at any time.
The credit rating on the Series F Preferred could be reduced or
withdrawn while an investor holds shares, and the credit rating does not
eliminate or mitigate the risks of investing in the Series F Preferred. A
reduction or withdrawal of the credit rating would likely have an adverse effect
on the market value of the Series F Preferred.
The Fund may not meet the asset coverage requirements or earn
sufficient income from its investments to make distributions on the Series F
Preferred.
The value of the Fund's investment portfolio may decline, reducing the
asset coverage for the Series F Preferred. Further, if an issuer of a common
stock in which the Fund invests experiences financial difficulties or if an
issuer's preferred stock or debt security is downgraded or defaults or if an
issuer in which the Fund invests is affected by other adverse market factors,
there may be a negative impact on the income received from and/or asset value of
the Fund's investment portfolio. In such circumstances, the Fund may be forced
to mandatorily redeem shares of the Series F Preferred.
The Fund generally may redeem the Series F Preferred at any time after
_____, 2011 and may at any time redeem shares of Series F Preferred to meet
regulatory or rating agency requirements. The Series F Preferred is subject to
redemption under specified circumstances and investors may not be able to
reinvest the proceeds of any
19
such redemption in an investment providing the same or a better rate than that
of the Series F Preferred. Subject to such circumstances, the Series F
Preferred is perpetual.
The Series F Preferred is not an obligation of the Fund. The Series F
Preferred would be junior in respect of distributions 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 F Preferred 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 F Preferred being offered in this prospectus, the amount
of leverage will represent approximately _____% of the Fund's total assets. If
the proposed spin-off of a portion of the Fund's assets (see "Additional
Information") were to occur, subject to regulatory and shareholder approval, the
amount of leverage as a percentage of Fund total assets would increase because
the Fund's managed assets would decrease by the amount contributed to the
spin-off fund. The Fund's leveraged capital structure creates special risks not
associated with unleveraged funds having similar investment objectives and
policies. These include the possibility of greater loss and the likelihood of
higher volatility of the net asset value of the Fund and the asset coverage for
the Series F Preferred. Such volatility may increase the likelihood of the Fund
having to sell investments in order to meet its obligations to make
distributions on the preferred stock, or to redeem preferred stock, when it may
be disadvantageous to do so. Also, if the Fund is utilizing leverage, a decline
in net asset value could affect the ability of the Fund to make common stock
distributions and such a failure to pay dividends or make distributions could
result in the Fund ceasing to qualify as a regulated investment company under
the Code. See "Taxation."
Because the fee paid to the Investment Adviser will be calculated on
the basis of the Fund's net assets, which include for this purpose assets
attributable to the aggregate net asset value of the common stock plus assets
attributable to any outstanding preferred stock with no deduction for the
liquidation preference of any preferred stock, the fee may be higher when
leverage in the form of preferred stock is utilized, giving the Investment
Adviser an incentive to utilize such leverage. However, the Investment Adviser
has agreed to reduce the management fee on the incremental assets attributable
to the Existing Preferred and the Series F Preferred during the fiscal year if
the total return of the net asset value of the common stock, including
distributions and advisory fees subject to reduction for that year, does not
exceed the stated dividend rate or corresponding swap rate of each particular
series of preferred stock for the period. In other words, if the effective cost
of the leverage for any series of preferred stock exceeds the total return
(based on net asset value) on the Fund's common stock, the Investment Adviser
will waive that portion of its management fee on the incremental assets
attributable to the leverage for that series of preferred stock to mitigate the
negative impact of the leverage on the common stockholder's total return. This
fee waiver is voluntary and may be discontinued at any time. The Fund's total
return on the net asset value of common stock is monitored on a monthly basis to
assess whether the total return on the net asset value of the common stock
exceeds the stated dividend rate or corresponding swap rate of each particular
series of preferred stock for the period. The test to confirm the accrual of the
management fee on the assets attributable to each particular series of preferred
stock is annual. The Fund will accrue for the management fee on these assets
during the fiscal year if it appears probable that the Fund will incur the
management fee on those additional assets.
For the year ended December 31, 2005, the Fund's total return on the
net asset value of the common stock exceeded the stated dividend rate or net
swap expense of the Series C Auction Rate Preferred and Series E Auction Rate
Preferred. Thus, management fees were accrued on these assets. The Fund's total
return on the net asset value of the common stock did not exceed the stated
dividend rate or net swap expense of the Series B Preferred and Series D
Preferred. Thus, management fees with respect to the liquidation value of those
preferred assets were reduced by $2,387,425.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. Restrictions
imposed on the declaration and payment of dividends or other distributions to
the holders of the common stock and preferred stock (including the Series F
Preferred), both by the 1940 Act and by requirements imposed by rating agencies,
might impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes. While the Fund intends to
redeem its preferred stock (including the Series F Preferred) to the extent
necessary to enable the Fund to distribute its income as required to maintain
its qualification as a regulated investment company under the Code, there can be
no assurance that such actions can be effected in time to meet the Code
requirements. See "Taxation" in the SAI.
20
RISKS OF INVESTING IN THE FUND
COMMON STOCK DISTRIBUTION POLICY RISK. The Fund has adopted a policy,
which may be changed at any time by the Board, of paying a minimum annual
distribution of 10% of the average net asset value of the Fund to common
stockholders. In the event the Fund does not generate a total return from
dividends and interest received and net realized capital gains in an amount
equal to or in excess of its stated distribution in a given year, the Fund may
return capital as part of such distribution, which may have the effect of
decreasing the asset coverage per share with respect to the Series F Preferred
(as well as the Existing Preferred). Any return of capital should not be
considered by investors as yield or total return on their investment in the
Fund. For the fiscal year ended December 31, 2005, the Fund made distributions
of $0.85 per share of common stock, none of which constituted a return of
capital. The Fund has made distributions of $0.58 per share of common stock for
the current year through September 30, 2006. The Fund has made quarterly
distributions with respect to its common stock since 1987. A portion of the
distributions to holders of common stock during nine of the twenty fiscal years
since the Fund's inception has constituted a return of capital. The composition
of each distribution is estimated based on the earnings of the Fund as of the
record date for each distribution. The actual composition of each of the current
year's common stock distributions will be based on the Fund's investment
activity through December 31, 2006.
VALUE INVESTING RISK. The Fund invests in dividend-paying common and
preferred stocks that the Investment Adviser believes are undervalued or
inexpensive relative to other investments. These types of securities may present
risks in addition to the general risks associated with investing in common and
preferred stocks. These securities generally are selected on the basis of an
issuer's fundamentals relative to current market price. Such securities are
subject to the risk of mis-estimation of certain fundamental factors. In
addition, during certain time periods market dynamics may strongly favor
"growth" stocks of issuers that do not display strong fundamentals relative to
market price based upon positive price momentum and other factors. Disciplined
adherence to a "value" investment mandate during such periods can result in
significant underperformance relative to overall market indices and other
managed investment vehicles that pursue growth style investments and/or flexible
equity style mandates.
NON-DIVERSIFIED STATUS. The Fund is classified as a "non-diversified"
investment company under the 1940 Act, which means it is not limited by the 1940
Act as to the proportion of its assets that may be invested in the securities of
a single issuer. However, the Fund has in the past conducted and intends to
conduct its operations so as to qualify as a "regulated investment company," or
"RIC," for purposes of the Code, which will relieve it of any liability for
federal income tax to the extent its earnings are distributed to stockholders.
To qualify as a "regulated investment company," among other requirements, the
Fund will limit its investments so that, with certain exceptions, at the close
of each quarter of the taxable year:
- not more than 25% of the value of its total assets will be invested in
the securities (other than United States government securities or the
securities of other RICs) of a single issuer, or of any two or more
issuers that the Fund controls and which are determined to be engaged
in the same, similar or related trades or businesses or in the
securities of one or more qualified publicly traded partnerships (as
defined in the Code); and
- at least 50% of the value of the Fund's assets will be represented by
cash, securities of other regulated investment companies, United
States government securities and other securities, with such other
securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's assets and not more than
10% of the outstanding voting securities of such issuer.
As a non-diversified investment company, the Fund may invest in the
securities of individual issuers to a greater degree than a diversified
investment company. As a result, the Fund may be more vulnerable to events
affecting a single issuer and therefore subject to greater volatility than a
fund that is more broadly diversified. Accordingly, an investment in the Fund
may present greater risk to an investor than an investment in a diversified
company.
MARKET VALUE AND NET ASSET VALUE. The Fund is a non-diversified,
closed-end management investment company. Shares of closed-end funds are bought
and sold in the securities markets and may trade at either a premium to or
discount from net asset value. Listed shares of closed-end investment companies
often trade at discounts from net asset value. This characteristic of stock of a
closed-end fund is a risk separate and distinct from the risk that its net asset
value will decrease. The Fund cannot predict whether its listed stock will trade
at, below or above net asset value. Since inception, the Fund's shares of common
stock have traded at both premiums to and discounts from net asset value. As of
September 30, 2006, the shares traded at a premium of 0.69%. Stockholders
21
desiring liquidity may, subject to applicable securities laws, trade their Fund
stock on the NYSE or other markets on which such stock may trade at the
then-current market value, which may differ from the then-current net asset
value. Stockholders will incur brokerage or other transaction costs to sell
stock.
INDUSTRY CONCENTRATION RISK. The Fund may invest up to 25% of its
total assets in securities of a single industry. Should the Fund choose to do
so, the net asset value of the Fund will be more susceptible to factors
affecting those particular types of companies, which, depending on the
particular industry, may include, among others: governmental regulation;
inflation; cost increases in raw materials, fuel and other operating expenses;
technological innovations that may render existing products and equipment
obsolete; and increasing interest rates resulting in high interest costs on
borrowings needed for capital investment, including costs associated with
compliance with environmental and other regulations. In such circumstances the
Fund's investments may be subject to greater risk and market fluctuation than a
fund that had securities representing a broader range of industries.
SPECIAL RISKS RELATED TO PREFERRED SECURITIES. There are special risks
associated with the Fund's investing in preferred securities, including:
- Deferral. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer dividends or
distributions for a stated period without any adverse
consequences to the issuer. If the Fund owns a preferred
security that is deferring its dividends or distributions,
the Fund may be required to report income for tax purposes
although it has not yet received such income.
- Non-Cumulative Dividends. Some preferred securities are
non-cumulative, meaning that the dividends do not accumulate
and need not ever be paid. A portion of the portfolio may
include investments in non-cumulative preferred securities,
whereby the issuer does not have an obligation to make up
any arrearages to its shareholders. Should an issuer of a
non-cumulative preferred security held by the Fund determine
not to pay dividends or distributions on such stock, the
Fund's return from that security may be adversely affected.
There is no assurance that dividends or distributions on
non-cumulative preferred securities in which the Fund
invests will be declared or otherwise made payable.
- Subordination. Preferred securities are subordinated to
bonds and other debt instruments in an issuer's capital
structure in terms of priority to corporate income and
liquidation payments, and therefore will be subject to
greater credit risk than more senior debt security
instruments.
- Liquidity. Preferred securities may be substantially less
liquid than many other securities, such as common stocks or
U.S. Government securities.
- Limited Voting Rights. Generally, preferred security holders
(such as the Fund) have no voting rights with respect to the
issuing company unless preferred dividends have been in
arrears for a specified number of periods, at which time the
preferred security holders may be entitled to elect a number
of trustees to the issuer's board. Generally, once all the
arrearages have been paid, the preferred security holders no
longer have voting rights.
- Special Redemption Rights. In certain varying circumstances,
an issuer of preferred securities may redeem the securities
prior to a specified date. For instance, for certain types
of preferred securities, a redemption may be triggered by a
change in federal income tax or securities laws. A
redemption by the issuer may negatively impact the return of
the security held by the Fund.
MARKET DISRUPTION RISK. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks, war and other geopolitical
events. The Fund cannot predict the effects of similar events in the future on
the U.S. economy. Lower rated securities and securities of issuers with smaller
market capitalizations tend to be more volatile than higher rated securities and
securities of issuers with larger market capitalizations so that these events
and any actions resulting from them may have a greater impact on the prices and
volatility of lower rated securities and securities of issuers with smaller
market capitalizations than on higher rated securities and securities of issuers
with larger market capitalization.
INTEREST RATE TRANSACTIONS. The Fund has entered into an interest rate
swap transaction with respect to its outstanding Series C Auction Rate Preferred
and may enter into an interest rate swap or cap transaction with respect
22
to its outstanding Series E Auction Rate Preferred. The use of interest rate
swaps and caps is a highly specialized activity that involves certain risks to
the Fund including, among others, counterparty risk and early termination risk.
See "How the Fund Manages Risk -- Interest Rate Transactions."
FOREIGN SECURITIES. The Fund may invest up to 35% of its total assets
in securities of foreign issuers. 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 United States 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 and it may be difficult to
effect repatriation of capital invested in certain countries. With respect to
certain countries, there are also risks of expropriation, confiscatory taxation,
political or social instability or diplomatic developments that could affect
assets of the Fund held in foreign countries. Dividend income the Fund receives
from foreign securities may not be eligible for the special tax treatment
applicable to qualified dividend income.
There may be less publicly available information about a foreign
company than a United States company. Foreign securities markets may have
substantially less volume than United States securities markets and some foreign
company securities are less liquid than securities of otherwise comparable
United States 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-United States securities markets and the increased costs of maintaining
the custody of foreign securities.
The Fund also may purchase sponsored American Depositary Receipts
("ADRs") or United States dollar denominated securities of foreign issuers. ADRs
are receipts issued by United States banks or trust companies in respect of
securities of foreign issuers held on deposit for use in the United States
securities markets. While ADRs may not necessarily be denominated in the same
currency as the securities into which they may be converted, many of the risks
associated with foreign securities may also apply to ADRs. In addition, the
underlying issuers of certain depositary receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
SMALLER COMPANIES. The Fund may invest in smaller companies which may
benefit from the development of new products and services. These smaller
companies may present greater opportunities for capital appreciation, and may
also involve greater investment risk than larger, more established companies.
For example, smaller companies may have more limited product lines, market or
financial resources and their securities may trade less frequently and in lower
volume than the securities of larger, more established companies. As a result,
the prices of the securities of such smaller companies may fluctuate to a
greater degree than the prices of securities of other issuers.
INVESTMENT COMPANIES. The Fund may invest in the securities of other
investment companies to the extent permitted by law. To the extent the Fund
invests in the common equity of investment companies, the Fund will bear its
ratable share of any such investment company's expenses, including management
fees. The Fund will also remain obligated to pay management fees to the
Investment Adviser with respect to the assets invested in the securities of
other investment companies. In these circumstances holders of the Fund's common
stock will be subject to duplicative investment expenses.
LOWER RATED SECURITIES. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies. These high yield securities, also
sometimes referred to as "junk bonds," generally pay a premium above the yields
of United States government securities or debt securities of investment grade
issuers because they are subject to greater risks than these securities. These
risks, which reflect their speculative character, include the following:
- greater volatility;
23
- greater credit risk;
- potentially greater sensitivity to general economic or industry
conditions;
- potential lack of attractive resale opportunities (illiquidity); and
- additional expenses to seek recovery from issuers who default.
The market value of lower rated securities may be more volatile than
the market value of higher rated securities and generally tends to reflect the
market's perception of the creditworthiness of the issuer and short-term market
developments to a greater extent than more highly rated securities, which
primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective, and are not absolute standards of
quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition.
As a part of its investment in lower rated fixed-income securities,
the Fund may invest in the securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Investment Adviser
believes that such issuers will honor their obligations and emerge from
bankruptcy protection and that the value of such issuers' securities will
appreciate. By investing in the securities of issuers in default, the Fund bears
the risk that these issuers will not continue to honor their obligations or
emerge from bankruptcy protection or that the value of these securities will not
appreciate.
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 or interest rate markets is
inaccurate, the consequences to the Fund may leave it in a worse position than
if such strategies were not used. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities indices
and foreign currencies include:
- dependence on the Investment Adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and
currency markets;
- 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;
- the fact that skills needed to use these strategies are different from
those needed to select portfolio securities;
- the possible absence of a liquid secondary market for any particular
instrument at any time;
- the possible need to defer closing out certain hedged positions to
avoid adverse tax consequences; and
- 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.
FUTURES TRANSACTIONS. Futures and options on futures entail certain
risks, including but not limited to the following:
- no assurance that futures contracts or options on futures can be
offset at favorable prices;
- possible reduction of the returns of the Fund due to the use of
hedging;
- possible reduction in value of both the securities hedged and the
hedging instrument;
- possible lack of liquidity due to daily limits or price fluctuations;
- imperfect correlation between the contracts and the securities being
hedged; and
- losses from investing in futures transactions that are potentially
unlimited and the segregation requirements for such transactions.
24
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 counterparty
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.
COUNTERPARTY RISK. The Fund will be subject to credit risk with
respect to the counterparties to the derivative contracts purchased by the Fund.
If a counterparty becomes bankrupt or otherwise fails to perform its obligations
under a derivative contract due to financial difficulties, the Fund may
experience significant delays in obtaining any recovery under the derivative
contract in bankruptcy or other reorganization proceedings. The Fund may obtain
only a limited recovery or may obtain no recovery in such circumstances.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements and the Fund's investment restrictions, 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 in the SAI) 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 earning
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
shares are qualified for sale. The Fund's loans of portfolio securities will be
collateralized in accordance with applicable regulatory requirements.
For a further description of such loans of portfolio securities, see
"Investment Objective and Policies -- Certain Investment Practices -- Loans of
Portfolio Securities."
MANAGEMENT RISK. The Fund is subject to management risk because it is
an actively managed portfolio. The Investment Adviser will apply investment
techniques and risk analyses in making investment decisions for the Fund, but
there can be no guarantee that these will produce the desired results.
DEPENDENCE ON KEY PERSONNEL. Mario J. Gabelli serves as the Fund's
portfolio manager. The Investment Adviser is dependent upon the expertise of Mr.
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.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S CHARTER AND BY-LAWS. The Fund's
Charter and By- Laws include provisions that could limit the ability of other
entities or persons to acquire control of the Fund or convert the Fund to an
open-end fund. See "Anti-Takeover Provisions of the Fund's Charter and By-Laws."
STATUS AS A REGULATED INVESTMENT COMPANY. 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 such
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.
HOW THE FUND MANAGES RISK
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment limitations, some of which are
fundamental policies of the Fund, designed to limit investment risk and maintain
portfolio diversification. Under the 1940 Act, a fundamental policy may not be
changed without the vote of a majority, as defined in the 1940 Act, of the
outstanding voting securities of the Fund (voting together as a single class).
In addition, pursuant to the Articles Supplementary of each of the series of
preferred stock, a majority, as defined in the 1940 Act, of the outstanding
shares of preferred stock of the Fund (voting separately as a single class) is
also required to change a fundamental policy. The Fund may become
25
subject to guidelines that are more limiting than its current investment
restrictions in order to obtain and maintain ratings from Moody's and S&P on its
preferred stock.
INTEREST RATE TRANSACTIONS
The Fund has entered into an interest rate swap transaction with
respect to its outstanding Series C Auction Rate Preferred. The Fund may enter
into interest rate swap or cap transactions with respect to all or a portion of
its outstanding Series E Auction Rate Preferred. Through these transactions the
Fund may, for example, obtain the equivalent of a fixed rate for a series of the
Auction Rate Preferred that is lower than the Fund would have to pay if it
issued fixed rate preferred stock.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party to the interest rate swap
(which is known as the "counterparty") periodically a fixed rate payment in
exchange for the counterparty agreeing to pay to the Fund periodically a
variable rate payment that is intended to approximate the Fund's variable rate
payment obligation on a series of the Auction Rate Preferred. In an interest
rate cap, the Fund would pay a premium to the counterparty to the interest rate
cap and, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, would receive from the counterparty payments of the
difference based on the notional amount of such cap. Interest rate swap and cap
transactions introduce additional risk because the Fund would remain obligated
to pay preferred stock dividends or distributions when due in accordance with
the Articles Supplementary of the relevant series of the Auction Rate Preferred
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 or distribution payments on the Auction Rate Preferred. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund will not be able to obtain a
replacement transaction or that the terms of the replacement will not be as
favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make dividend or distribution payments
on the Auction Rate Preferred. To the extent there is a decline in interest
rates, the value of the interest rate swap or cap could decline, resulting in a
decline in the asset coverage for the Auction Rate Preferred. A sudden and
dramatic decline in interest rates may result in a significant decline in the
asset coverage. Under the Articles Supplementary for each series of the
preferred stock (including the Series F Preferred ), if the Fund fails to
maintain the required asset coverage on the outstanding preferred stock or fails
to comply with other covenants, the Fund may, at its option (and in certain
circumstances will be required to), mandatorily redeem some or all of these
shares. The Fund generally may redeem either or both series of the Auction Rate
Preferred, in whole or in part, at its option at any time (usually on a dividend
or distribution payment date), other than during a non-call period. Such
redemption would likely result in the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early termination of a swap could result
in a termination payment by the Fund to the counterparty, while early
termination of a cap could result in a termination payment to the Fund.
The Fund will usually enter into swaps or caps on a net basis; that
is, the two payment streams will be netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The Fund
intends to segregate cash or liquid securities having a value at least equal to
the value of the Fund's net payment obligations under any swap transaction,
marked to market daily. The Fund will monitor any such swap with a view to
ensuring that the Fund remains in compliance with all applicable regulatory
investment policy and tax requirements.
MANAGEMENT OF THE FUND
The Board (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.
INVESTMENT MANAGEMENT
Gabelli Funds, LLC, located at One Corporate Center, Rye, New York
10580-1422, serves as the investment adviser to the Fund pursuant to an
investment advisory agreement (described below in "-- Advisory Agreement").
The Investment Adviser was organized in 1999 and is the successor to Gabelli
Funds, Inc., which was organized in 1980. As of June 30, 2006, the Investment
Adviser acted as registered investment adviser to 27 management investment
companies with aggregate net assets of $13.5 billion. The Investment Adviser,
together with other affiliated investment advisers, had assets under management
totaling approximately $26.8 billion as of
26
June 30, 2006. GAMCO Asset Management 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 $12.3 billion under management as of June
30, 2006. Gabelli Securities, Inc., an affiliate of the Investment Adviser, acts
as investment adviser for investment partnerships and entities having aggregate
assets of approximately $500 million under management as of June 30, 2006.
Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for separate accounts having aggregate assets of
approximately $55 million under management as of June 30, 2006. Gabelli
Advisers, Inc., an affiliate of the Investment Adviser, acts as investment
manager to the Westwood Funds having aggregate assets of approximately $400
million under management as of June 30, 2006.
The Investment Adviser is a wholly-owned subsidiary of GAMCO
Investors, Inc., a New York corporation whose Class A Common Stock is traded on
the NYSE under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a
"controlling person" of the Investment Adviser on the basis of his ownership of
a majority of the stock of GGCP, Inc., which owns a majority of the capital
stock of GAMCO Investors, Inc.
The Investment Adviser has sole investment discretion for the Fund's
assets under the supervision of the Fund's Board and in accordance with the
Fund's stated policies. The Investment Adviser will select investments for the
Fund and will place purchase and sale orders on behalf of the Fund.
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by 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 (but excluding costs associated with the calculation
of the net asset value), and 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, offering expenses,
expenses for legal and Independent Registered Public Accounting Firm services,
rating agency fees, costs of printing proxies, stock certificates and
stockholder reports, charges of the custodian, any subcustodian, auction agent,
transfer agent(s) and dividend disbursing agent expenses in connection with its
respective automatic dividend reinvestment and voluntary cash purchase plan,
Commission fees, fees and expenses of unaffiliated directors, accounting and
pricing costs, including costs of calculating the net asset value of the Fund,
membership fees in trade associations, fidelity bond coverage for its officers
and employees, directors' and officers' errors and omission insurance coverage,
interest, brokerage costs, taxes, stock exchange listing fees and expenses,
expenses of qualifying its shares for sale in various states, litigation and
other extraordinary or non-recurring expenses, and other expenses properly
payable by the Fund.
ADVISORY AGREEMENT
Under the terms of the Fund's Investment Advisory Agreement (the
"Advisory Agreement"), the Investment Adviser manages the portfolio of the Fund
in accordance with its stated investment objectives and policies, makes
investment decisions for the Fund, places orders to purchase and sell securities
on behalf of the Fund and manages the Fund's other business and affairs, all
subject to the supervision and direction of its Board. 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 its
stockholders and supervising the calculation of the net asset value of its
stock. All expenses of computing the Fund's net asset value, including any
equipment or services obtained solely for the purpose of pricing shares of stock
or valuing the Fund's investment portfolio, will be an expense of the Fund under
the Advisory Agreement unless the Investment Adviser voluntarily assumes
responsibility for such expense. During fiscal 2005, the Fund reimbursed the
Investment Adviser $ 45,000 in connection with the cost of computing the Fund's
net asset value.
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 weekly and paid monthly at the annual rate of
1.00% of the Fund's average weekly net assets plus the liquidation value of any
outstanding preferred stock. The Investment Adviser has agreed to reduce the
management fee on the incremental assets attributable to the Existing Preferred
and the Series F Preferred during the fiscal year if the total return of the net
asset value of the common stock, including distributions and management fees
subject to reduction for that year, does not exceed the stated dividend rate or
corresponding swap rate of each particular series of preferred stock for the
period. In other words, if the effective cost of the leverage for any series of
preferred stock exceeds the total return (based on net asset value) on the
Fund's common stock, the Investment Adviser will waive that portion of its
management fee on the incremental assets
27
attributable to the leverage for that series of preferred stock to mitigate the
negative impact of the leverage on the common stockholder's total return. This
fee waiver is voluntary and may be discontinued at any time. The Fund's total
return on the net asset value of its common stock is monitored on a monthly
basis to assess whether the total return on the net asset value of its common
stock exceeds the stated dividend rate or corresponding swap rate of each
particular series of outstanding preferred stock for the period. The test to
confirm the accrual of the management fee on the assets attributable to each
particular series of preferred stock is annual. The Fund will accrue for the
management fee on these assets during the fiscal year if it appears probable
that the Fund will incur the management fee on those assets.
For the year ended December 31, 2005, the Fund's total return on the
net asset value of the common stock exceeded the stated dividend rate or net
swap expense of the Series C Auction Rate Preferred and Series E Auction Rate
Preferred. Thus, management fees were accrued on these assets. The Fund's total
return on the net asset value of the common stock did not exceed the stated
dividend rate or net swap expense of the Series B Preferred and Series D
Preferred. Thus, management fees with respect to the liquidation value of those
preferred assets were reduced by $2,387,425.
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties thereunder, the Investment Adviser is not liable for any
error of 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 from year to year if approved annually (i) by the
Fund's Board or by the holders of a majority of the Fund's outstanding voting
securities and (ii) by a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of any party to the Advisory Agreement, by
vote cast in person at a meeting called for the purpose of voting on such
approval.
A discussion regarding the basis of the Board's approval of the
Advisory Agreement is available in the Fund's semi-annual report to shareholders
for the six months ended June 30, 2006.
SELECTION OF SECURITIES BROKERS
The Advisory Agreement contains provisions relating to the selection
of securities brokers to effect the portfolio transactions of the Fund. Under
those provisions, the Investment Adviser may (i) direct Fund portfolio brokerage
to Gabelli & Company, Inc. or other broker-dealer affiliates of the Investment
Adviser and (ii) pay commissions to brokers other than Gabelli & Company, Inc.
that are higher than might be charged by another qualified broker to obtain
brokerage and/or research services considered by the Investment Adviser to be
useful or desirable for its investment management of the Fund and/or its other
advisory accounts or those of any investment adviser affiliated with it. The SAI
contains further information about the Advisory Agreement, including a more
complete description of the advisory and expense arrangements, exculpatory and
brokerage provisions, as well as information on the brokerage practices of the
Fund.
PORTFOLIO MANAGERS
Mario J. Gabelli is currently and has been responsible for the
day-to-day management of the Fund since its formation. Mr. Gabelli has served as
Chief Investment Officer -- Value Portfolios of the Investment Adviser and its
predecessor 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 of the Fund. Over the past five years, Mr. Gabelli has
served as Chairman of the Board and Chief Executive Officer of GAMCO Investors,
Inc.; Chief Investment Officer -- Value Portfolios of GAMCO Asset Management
Inc; Vice Chairman of the Board of LGL Group, Inc. (until 2004), a diversified
manufacturing company; and Chairman of the Board of Lynch Interactive
Corporation, a multimedia and communications services company.
Additionally, as of September 30, 2006, Mr. Caesar M.P. Bryan managed
approximately $ 93 million of the Fund's assets. Mr. Bryan has been a Senior
Vice President and Portfolio Manager with GAMCO Asset Management Inc. (a
wholly-owned subsidiary of GAMCO Investors, Inc.) and Portfolio Manager of the
GAMCO Gold Fund, Inc. since May 1994 and the GAMCO International Growth Fund,
Inc. since June 1995, Co-Portfolio Manager of the GAMCO Global Opportunity Fund
since May 1998, Gold Companies Portfolio Manager of the
28
Gabelli Global Gold, Natural Resources & Income Trust since March 2005, and a
member of the GAMCO Global Growth Fund portfolio management team since September
2000.
The SAI provides additional information about the Portfolio Managers'
compensation, other accounts managed by the Portfolio Managers and the Portfolio
Managers' ownership of securities in the Fund.
SUB-ADMINISTRATOR
PFPC, Inc. ("PFPC"), located at 400 Bellevue Parkway, Wilmington,
Delaware, 19809, serves as the Fund's sub-administrator. For these services and
the related expenses borne by PFPC, the Investment Adviser pays a prorated
monthly fee at the annual rate of 0.0275% of the first $ 10 billion of the
aggregate average net assets of the Fund and all other funds advised by the
Investment Adviser and administered by PFPC, 0.0125% of the aggregate average
net assets exceeding $10 billion, and 0.01% of the aggregate average net assets
in excess of $15 billion.
REGULATORY MATTERS
The Fund received the following information from the Investment
Adviser.
Over the past several years, the staff of the Commission (the
"Staff"), the staff of the New York Attorney General's office (the "NYAG") and
officials of other states have been conducting industry-wide inquiries into, and
bringing enforcement and other proceedings regarding, trading abuses involving
open-end investment companies. The Investment Adviser and its affiliates have
received information requests and subpoenas from the Staff and the NYAG in
connection with these inquiries and have been complying with these requests for
documents and testimony. The Investment Adviser has implemented additional
compliance policies and procedures in response to recent industry initiatives
and its internal reviews of its mutual fund practices in a variety of areas. The
Investment Adviser has not found any information that it believes would be
material to the ability of the Investment Adviser to fulfill its obligations
under the Advisory Agreement. More specifically, the Investment Adviser has
found no evidence of arrangements for trading in the Gabelli mutual funds after
the 4:00 p.m. pricing time and no evidence of improper short-term trading in
these funds by its investment professionals or senior executives. The Investment
Adviser did find that one investor, who had been engaged in short-term trading
in one of the Gabelli mutual funds (the prospectus of which did not at that time
impose limits on short-term trading) and who had subsequently made an investment
in a hedge fund managed by an affiliate of the Investment Adviser, was banned
from the mutual fund only after certain other investors were banned. The
Investment Adviser believes that this relationship was not material to the
Investment Adviser. The Investment Adviser also found that certain discussions
took place in 2002 and 2003 between the Investment Adviser's staff and personnel
of an investment advisor regarding possible frequent trading in certain Gabelli
domestic equity funds. In June 2006, the Investment Adviser began discussions
with the Staff regarding a possible resolution of their inquiry. Since these
discussions are ongoing, the Investment Adviser cannot determine whether they
will ultimately result in a settlement of this matter and, if so, what the terms
of the settlement might be. There can be no assurance that any resolution of
this matter will not have a material adverse impact on the Investment Adviser or
on its ability to fulfill its obligations under the Advisory Agreement.
The Investment Adviser was informed by the Staff that they may
recommend to the Commission that the Investment Adviser be held accountable for
the actions of two of the seven closed-end funds managed by the Investment
Adviser relating to Section 19(a) and Rule 19a-1 of the 1940 Act. These
provisions require registered investment companies to provide written statements
to shareholders when a distribution is made from a source other than net
investment income. While the two funds sent annual statements containing the
required information and Form 1099-DIV statements as required by the IRS, the
funds did not send written statements to shareholders with each distribution in
2002 and 2003. The closed-end funds managed by the Investment Adviser changed
their notification procedures in 2004 and the Investment Adviser believes that
all of the funds have been in compliance with Section 19(a) and Rule 19a-1 of
the 1940 Act since that time. The Staff's notice to the Investment Adviser did
not relate to the Fund. The Staff indicated that they may recommend to the
Commission that administrative remedies be sought, including a monetary penalty.
The Investment Adviser cannot predict whether an administrative proceeding will
be instituted and, if so, what the ultimate resolution might be. The Investment
Adviser currently expects that any resolution of this matter will not have a
material effect on the Investment Adviser's ability to fulfill its obligations
under the Advisory Agreement. If the Commission were to revoke the exemptive
order that the Fund relies upon to make distributions of capital gains more
frequently than annually, the Board may consider whether to modify or possibly
eliminate the Fund's current distribution policy.
29
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
therefore. For a more detailed discussion of the Fund's brokerage allocation
practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund has a policy, which may be modified at any time by the Board,
of paying a minimum annual distribution of 10% of the average net asset value
of the Fund to common stockholders. The Fund's current quarterly distribution
level is $0.19 per share. The Board paid a distribution of $0.20 per share for
the third quarter of 2006, consisting of the $0.19 per share quarterly
distribution plus an additional $0.01 per share. Each year the Fund pays an
adjusting distribution in the fourth quarter of an amount sufficient to pay 10%
of the average net asset value of the Fund, as of the last day of the four
preceding calendar quarters, or to satisfy the minimum distribution requirements
of the Code, whichever is greater. Each quarter, the Board reviews the amount of
any potential distribution and the income, capital gain or capital available.
This policy permits common stockholders to realize a predictable, but not
assured, level of cash flow and some liquidity periodically with respect to
their shares of common stock without having to sell their shares. The Fund may
retain for reinvestment, and pay the resulting federal income taxes on, its net
capital gain, if any, although the Fund reserves the authority to distribute its
net capital gain in any year. However, to avoid paying income tax at the
corporate level, the Fund intends to distribute substantially all of its
investment company taxable income and net capital gain.
If, for any calendar year, the total quarterly distributions and the
amount of distributions on any preferred stock issued by the Fund exceed
investment company taxable income and net capital gain, the excess will
generally be treated as a tax-free return of capital up to the amount of a
stockholder's tax basis in the stock. Any distributions to the holders of
preferred stock which constitute tax-free return of capital will reduce a
stockholder's tax basis in such preferred stock, thereby increasing such
stockholder's potential gain or reducing his or her potential loss on the sale
of the preferred stock. Any amounts distributed to a preferred stockholder in
excess of the basis in the preferred stock will generally be taxable to the
stockholder as capital gain.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing its
expense ratio, as the Fund's fixed expenses will become a larger percentage of
the Fund's average net assets. In addition, in order to make such distributions,
the Fund might have to sell a portion of its investment portfolio at a time when
independent investment judgment might not dictate such action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, has obtained an exemption from Section 19(b)
of the 1940 Act and Rule 19b-1 thereunder permitting it to make periodic
distributions of long-term capital gains provided that any distribution policy
of the Fund with respect to its common stock calls for periodic (e.g., quarterly
or semi-annually, but in no event more frequently than monthly) distributions in
an amount equal to a fixed percentage of the Fund's average net asset value over
a specified period of time or market price per share of common stock at or about
the time of distribution or payment of a fixed dollar amount. The exemption also
permits the Fund to make distributions with respect to its preferred stock in
accordance with such stock's terms.
DESCRIPTION OF THE SERIES F PREFERRED
The Fund offers by this prospectus $_____ of Series F Preferred. The
following is a brief description of the terms of the Series F Preferred. This
description does not purport to be complete and is qualified by reference to the
Fund's Charter, including the provisions of the Articles Supplementary
establishing the Series F Preferred. For complete terms of the Series F
Preferred, including definitions of terms used in this prospectus, please refer
to the actual terms of the Series F Preferred, which are set forth in the
Articles Supplementary.
GENERAL
Under its Charter, the Fund is authorized to issue up to 270,000,000
shares of capital stock. Currently, 18,000,000 shares of the Fund's capital
stock have been classified by the Board as preferred stock, par value $0.001 per
share. Up to 7,000,000 authorized and unissued shares of the Fund, previously
classified as common stock, par value $.001 per share, may be reclassified and
authorized for issuance as Series F Preferred prior to the completion of this
offering.
30
No fractional shares of Series F Preferred will be issued. The Board reserves
the right to issue additional shares of preferred stock, including Series F
Preferred, from time to time, subject to the restrictions in the Fund's Charter
and the 1940 Act.
If and when issued, the Series F Preferred will have a liquidation
preference of $25 per share. Upon a liquidation, each holder of Series F
Preferred will be entitled to receive out of the assets of the Fund available
for distribution to stockholders (after payment of claims of the Fund's
creditors but before any distributions with respect to common stock or any other
shares of the Fund ranking junior to the Series F Preferred as to liquidation
payments) an amount per share equal to such share's liquidation preference plus
any accumulated but unpaid distributions (whether or not earned or declared,
excluding interest thereon) to the date of distribution and such stockholders
shall be entitled to no further participation in any distribution or payment in
connection with such liquidation. The Series F Preferred will rank on a parity
with any other series of preferred stock (including the Existing Preferred) of
the Fund as to the payment of distributions and the distribution of assets upon
liquidation. The Series F Preferred carries one vote per share on all matters on
which such stock is entitled to vote. The Series F Preferred will, upon
issuance, be fully paid and nonassessable and will have no preemptive, exchange
or conversion rights. The Board may by resolution classify or reclassify any
authorized but unissued capital shares of the Fund from time to time by setting
or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions or terms or conditions of
redemption. The Fund will not issue any class of stock senior to the Series F
Preferred.
RATING AGENCY GUIDELINES
Upon issuance, the Series F Preferred will be rated "Aaa" by Moody's.
The Fund is required under Moody's guidelines to maintain assets having in the
aggregate a discounted value at least equal to the Basic Maintenance Amount (as
defined below) for its outstanding preferred stock, including any outstanding
Series F Preferred, with respect to the guidelines Moody's has established for
determining discounted value. To the extent any particular portfolio holding
does not satisfy the applicable rating agency's guidelines, all or a portion of
such holding's value will not be included in the calculation of discounted value
(as defined by such rating agency). The Moody's 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," if Moody's is then rating the Fund, is equal to (i) the sum of (a) the
aggregate liquidation preference of any 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 distributions
(whether or not earned or declared) in respect of such preferred stock, (b) the
total principal of any debt (plus accrued and projected interest), (c) certain
Fund expenses and (d) certain other current liabilities (excluding any unmade
distributions on the shares of common stock) less (ii) the Fund's (a) cash and
(b) assets consisting of indebtedness which (y) mature prior to or on the date
of redemption or repurchase of the preferred stock and are United States
government securities or evidences of indebtedness rated at least "Aaa," "P-1",
"VMIG-1" or "MIG-1" by Moody's or "AAA," "SP-1+" or "A-1+" by S&P and
(z) is held by the Fund for distributions, the redemption or repurchase of
preferred stock or the Fund's liabilities.
If the Fund does not timely cure a failure to maintain a discounted
value of its portfolio equal to the Basic Maintenance Amount in accordance with
the requirements of the applicable rating agency or agencies then rating the
Series F Preferred at the request of the Fund, the Fund may, and in certain
circumstances will be required to, mandatorily redeem preferred stock, including
the Series F Preferred, as described below under "-- Redemption."
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's (or such
other rating agency then rating the Series F Preferred at the request of the
Fund). Failure to adopt any such modifications, however, may result in a change
in the relevant rating agency's ratings or a withdrawal of such ratings
altogether. In addition, any rating agency providing a rating for the Series F
Preferred at the request of the Fund may, at any time, change or withdraw any
such rating. The Board, 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 preferred stock by Moody's, 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 Moody's (or such other rating agency then rating
the Series F Preferred at the request of the Fund), and that such modification
would not adversely affect, as the case may be, Moody's then current rating of
the Series F Preferred.
31
As described by Moody's, the rating assigned to the Series F
Preferred is an assessment of the capacity and willingness of the Fund to pay
the obligations of the Series F Preferred. The rating on the Series F Preferred
is not a recommendation to purchase, hold or sell shares of Series F Preferred,
inasmuch as the rating does 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 F Preferred will be able to sell such shares
on an exchange or otherwise. The rating is based on current information
furnished to Moody's by the Fund and the Investment Adviser and information
obtained from other sources. The rating may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information.
The Moody's guidelines will apply to the Series F Preferred only so
long as Moody's is rating such stock at the request of the Fund. The Fund will
pay fees to Moody's for rating the Series F Preferred.
ASSET MAINTENANCE REQUIREMENTS
In addition to the requirements summarized under "-- Rating Agency
Guidelines" above, the Fund must also satisfy asset maintenance requirements
under the 1940 Act with respect to its preferred stock. The 1940 Act
requirements are summarized below.
The Fund will be required under the Series F Articles Supplementary to
determine whether it has, as of the last business day of each March, June,
September and December of each year, an "asset coverage" (as defined in the
1940 Act) of at least 200% (or such higher or lower percentage as may be
required at the time under the 1940 Act) with respect to all outstanding senior
securities of the Fund that are stock, including any outstanding Series F
Preferred. If the Fund fails to maintain the asset coverage required under the
1940 Act on such dates and such failure is not cured within 60 calendar days, in
the case of the Series F Preferred, the Fund may, and in certain circumstances
will be required to, mandatorily redeem the number of shares of preferred stock
sufficient to satisfy such asset coverage. See "-- Redemption" below.
The Fund estimates that if the stock offered hereby had been issued
and sold as of September 30, 2006, the asset coverage under the 1940 Act would
have been approximately _____% immediately following such issuance (and after
giving effect to the deduction of the estimated underwriting discounts of $
_____ and estimated offering expenses for such stock of $ _____). 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
DISTRIBUTIONS ON THE SERIES F PREFERRED
Upon issuance of the Series F Preferred (if issued), holders of shares
of Series F Preferred will be entitled to receive, when, as and if declared by
the Board out of funds legally available therefor, cumulative cash
distributions, at the annual rate of _____% (computed on the basis of a 360-day
year consisting of twelve 30-day months) of the liquidation preference of $25
per share, payable quarterly on March 26, June 26, September 26 and December 26
of each year or, if any such day is not a business day, the immediately
succeeding business day. Such distributions will commence on December 26, 2006
and will be payable to the persons in whose names the shares of Series F
Preferred are registered at the close of business on the fifth preceding
business day.
Distributions on the shares of Series F Preferred will accumulate from
the date on which such shares are issued.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS FOR THE SERIES F PREFERRED
Under the 1940 Act, the Fund may not (i) declare any dividend and
distribution (except a dividend payable in stock of the issuer) or other
distributions upon any of its outstanding shares of common stock, or purchase
any such shares of 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 F Preferred, would be less than 200%.
So long as any Series F Preferred is outstanding, the Fund may not pay
any dividend or distribution (other than a dividend or distribution paid in
common stock or in options, warrants or rights to subscribe for or purchase
common stock) in respect of the common stock or call for redemption, redeem,
purchase or otherwise acquire for
32
consideration any common stock (except by conversion into or exchange for shares
of the Fund ranking junior to the Series F Preferred as to the payment of
dividends or distributions and the distribution of assets upon liquidation),
unless:
- the Fund has declared and paid (or provided to the relevant dividend
disbursing agent) all cumulative distributions on the Fund's
outstanding preferred stock, including the Series F Preferred, due on
or prior to the date of such common stock dividend or distribution;
- the Fund has redeemed the full number of shares of Series F Preferred
to be redeemed pursuant to any mandatory redemption provision in the
Fund's Charter; and
- after making the distribution, the Fund meets applicable asset
coverage requirements described above under "-- Rating Agency
Guidelines" and "-- Asset Maintenance Requirements."
No full distribution will be declared or made on the Series F
Preferred for any dividend period, or part thereof, unless full cumulative
distributions due through the most recent dividend payment dates therefor for
all outstanding series of preferred stock of the Fund ranking on a parity with
the Series F Preferred as to distributions have been or contemporaneously are
declared and made. If full cumulative distributions due have not been made on
all outstanding preferred stock of the Fund ranking on a parity with the Series
F Preferred as to the payment of distributions, any distributions being paid on
the preferred stock (including the Series F Preferred) will be paid as nearly
pro rata as possible in proportion to the respective amounts of distributions
accumulated but unmade on each such series of preferred stock on the relevant
dividend payment date. While the Fund's investment restrictions currently do not
permit the Fund to borrow money for investment purposes, the Fund's obligation
to make distributions on the Series F Preferred will be subordinate to its
obligations to pay interest and principal, when due, on any of the Fund's senior
securities representing debt.
REDEMPTION
MANDATORY REDEMPTION RELATING TO ASSET COVERAGE REQUIREMENTS. The Fund
may, at its option, consistent with its Charter and the 1940 Act, and in certain
circumstances will be required to, mandatorily redeem preferred stock
(including, at its discretion the Series F Preferred) in the event that:
- the Fund fails to maintain the asset coverage requirements for the
Series F Preferred specified under the 1940 Act on a quarterly
valuation date and such failure is not cured on or before 60 days
following such failure; or
- the Fund fails to maintain the asset coverage requirements as
calculated in accordance with the applicable rating agency guidelines
as of the last Valuation Date of any calendar month, and such failure
is not cured on or before ten business days after such Valuation Date.
The redemption price for the Series F Preferred subject to mandatory
redemption will be $25 per share plus an amount equal to any accumulated but
unmade distributions (whether or not earned or declared) to the date fixed for
redemption.
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 asset coverage
requirements of each applicable rating agency by up to 10% (that is, 110% rating
agency asset coverage).
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the shares of preferred stock to be
redeemed on any redemption date, the Fund will redeem on such redemption date
that number of shares for which it has legally available funds, or is otherwise
able to redeem, from the holders whose shares are to be redeemed ratably on the
basis of the redemption price of such shares, and the remainder of
33
those shares to be redeemed will be redeemed on the earliest practicable date on
which the Fund will have funds legally available for the redemption of, or is
otherwise able to redeem, such shares upon written notice of redemption.
If fewer than all shares of the Fund's outstanding preferred stock are
to be redeemed, the Fund, at its discretion, and subject to the limitations of
the Charter, the 1940 Act and Maryland law, will select the one or more series
of preferred stock from which shares will be redeemed and the amount of
preferred stock to be redeemed from each such series. If fewer than all of the
shares of a series of preferred stock are to be redeemed, such redemption will
be made as among the holders of that series pro rata in accordance with the
respective number of shares of such series held by each such holder on the
record date for such redemption (or by such other equitable method as the Fund
may determine). If fewer than all shares of the preferred stock held by any
holder are to be redeemed, the notice of redemption mailed to such holder will
specify the number of shares to be redeemed from such holder, which may be
expressed as a percentage of shares held on the applicable record date.
OPTIONAL REDEMPTION OF THE SERIES F PREFERRED. Prior to _____, 2011
the shares of Series F Preferred are not subject to optional redemption by the
Fund unless such redemption is necessary, in the judgment of the Fund, to
maintain the Fund's status as a regulated investment company under the Code.
Commencing on _____, 2011 and thereafter, the Fund may at any time redeem shares
of Series F Preferred in whole or in part for cash at a redemption price per
share equal to $25 per share plus accumulated and unmade distributions (whether
or not earned or declared) to the redemption date. Such redemptions are subject
to the notice requirements set forth below under "-- Redemption Procedures" and
the limitations of the Charter, the 1940 Act and Maryland Law.
REDEMPTION PROCEDURES. A notice of redemption with respect to an
optional redemption by the Fund will be given to the holders of record of
preferred stock selected for redemption not less than 15 days (subject to NYSE
requirements) nor more than 40 days prior to the date fixed for redemption.
Preferred stockholders may receive shorter notice in the event of a mandatory
redemption. Each notice of redemption will state (i) the redemption date, (ii)
the number or percentage of shares of preferred stock to be redeemed (which may
be expressed as a percentage of such shares outstanding), (iii) the CUSIP
number(s) of such shares, (iv) the redemption price (specifying the amount of
accumulated distributions to be included therein), (v) the place or places where
such shares are to be redeemed, (vi) that distributions on the shares to be
redeemed will cease to accumulate on such redemption date, (vii) the provision
of the Series F Articles Supplementary under which the redemption is being made
and (viii) any conditions precedent to such redemption. No defect in the notice
of redemption or in the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
The holders of Series F Preferred will not have the right to redeem
any of their shares 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 F Preferred then
outstanding will be entitled to receive out of the assets of the Fund available
for distribution to stockholders, after satisfying claims of creditors but
before any distribution or payment of assets is made to holders of the common
stock or any other class of stock of the Fund ranking junior to the Series F
Preferred as to liquidation payments, a liquidation distribution in the amount
of $25 per share, plus an amount equal to all unmade distributions accumulated
to and including the date fixed for such distribution or payment (whether or not
earned or declared by the Fund but excluding interest thereon), and such holders
will be entitled to no further participation in any distribution or payment in
connection with any such liquidation, dissolution or winding up. If, upon any
liquidation, dissolution or winding up of the affairs of the Fund, whether
voluntary or involuntary, the assets of the Fund available for distribution
among the holders of all outstanding shares of preferred stock of the Fund
ranking on a parity with the Series F Preferred as to payment upon liquidation
will be insufficient to permit the payment in full to such holders of the Series
F Preferred and other parity preferred stock of the amounts due upon liquidation
with respect to such shares, then such available assets will be distributed
among the holders of the Series F Preferred and such other parity preferred
stock ratably in proportion to the respective preferential amounts to which they
are entitled. Unless and until the liquidation payments due to holders of the
Series F Preferred and such other parity preferred stock have been paid in full,
no dividends or distributions will be made to holders of the common stock or any
other stock of the Fund ranking junior to the Series F Preferred and other
parity preferred stock as to liquidation and junior to any senior securities
representing debt.
34
VOTING RIGHTS
Except as otherwise stated in this prospectus, specified in the Fund's
Charter or resolved by the Board or as otherwise required by applicable law,
holders of the Series F Preferred shall be entitled to one vote per share held
on each matter submitted to a vote of the stockholders of the Fund and will vote
together with holders of shares of common stock and of any other preferred stock
then outstanding as a single class.
In connection with the election of the Fund's directors (each, a
"Director"), holders of the outstanding shares of Series F Preferred and the
other series of preferred stock, voting together as a single class, will be
entitled at all times to elect two of the Fund's Directors, and the remaining
directors will be elected by holders of shares of common stock and holders of
Series F Preferred, and other series of preferred stock, voting together as a
single class. In addition, if (i) at any time dividends and distributions on
outstanding shares of Series F Preferred and/or any other preferred stock are
unpaid in an amount equal to at least two full years' dividends and
distributions thereon and sufficient cash or specified securities have not been
deposited with the applicable paying agent for the payment of such accumulated
dividends and distributions 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 applicable Articles Supplementary creating such
shares, then the number of Directors constituting the Board automatically will
be increased by the smallest number that, when added to the two Directors
elected exclusively by the holders of the Series F Preferred and other series of
preferred stock as described above, would then constitute a simple majority of
the Board as so increased by such smallest number. Such additional Directors
will be elected by the holders of the outstanding shares of Series F Preferred
and the other series of preferred stock, voting together as a single class, at a
special meeting of stockholders which will be called as soon as practicable and
will be held not less than ten nor more than twenty 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 and distributions payable on all
outstanding shares of preferred stock for all past dividend periods or the
holders of other series of preferred stock are no longer entitled to elect such
additional directors, the additional voting rights of the holders of the
preferred stock as described above will cease, and the terms of office of all of
the additional Directors elected by the holders of the preferred stock (but not
of the Directors with respect to whose election the holders of shares of common
stock were entitled to vote or the two Directors the holders of shares of
preferred stock have the right to elect as a separate class in any event) will
terminate automatically.
So long as shares of Series F Preferred are outstanding, the Fund will
not, without the affirmative vote of the holders of a majority (as defined in
the 1940 Act) of the shares of preferred stock outstanding at the time
(including the Series F Preferred), and present and voting on such matter,
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 rights, preferences or powers expressly
set forth in the Charter with respect to such shares of preferred stock, unless
the Fund obtains written confirmation from Moody's, or any such other rating
agency then rating the Series F Preferred that such amendment, alteration or
repeal would not impair the rating then assigned by such rating agency to the
Series F Preferred, in which case the vote or consent of the holders of the
Series F Preferred is not required. 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 rights, preferences or
powers expressly set forth in the Charter with respect to such shares of a
series of preferred stock 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). For purposes of this paragraph, no matter shall be deemed
to adversely affect any right, preference or power unless such matter (i)
adversely alters or abolishes any preferential right of such series; (ii)
creates, adversely alters or abolishes any right in respect of redemption of
such series; or (iii) creates or adversely alters (other than to abolish) any
restriction on transfer applicable to such series.
Under the Charter and applicable provisions of the 1940 Act or
Maryland law, the affirmative vote of a majority of the votes entitled to be
cast by holders of outstanding shares of the preferred stock (including the
Series F Preferred), voting together as a single class, will be required to
approve any plan of reorganization adversely affecting the preferred stock. The
approval of 66-2/3% of each class, voting separately, of the Fund's outstanding
voting stock is required to authorize the conversion of the Fund from a
closed-end to an open-end investment
35
company. The approval of a majority (as that term is defined in the 1940 Act) of
the Fund's outstanding preferred stock and a majority (as that term is defined
in the 1940 Act) of the Fund's outstanding voting securities are required to
approve any action requiring a vote of security holders under Section 13(a) of
the 1940 Act (other than a conversion of the Fund from a closed-end to open-end
investment company), including, among other things, changes in the Fund's
investment objectives or changes in the investment restrictions described as
fundamental policies under "Investment Objectives and Policies" in this
prospectus and the SAI, "How the Fund Manages Risk -- Investment Restrictions"
in this prospectus and "Investment Restrictions" in the SAI. For purposes of
this paragraph, except as otherwise required under the 1940 Act, the majority of
the outstanding 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 66-2/3% 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 common
stock, 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 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 Moody's (or such other rating agency then rating the Series F
Preferred at the request of the Fund), as the case may be, or is in the best
interests of the holders of shares of common stock and is not adverse to the
holders of preferred stock in view of advice to the Fund by the relevant rating
agencies that such modification would not adversely affect its then-current
rating of the preferred stock.
The foregoing voting provisions will not apply to any Series F
Preferred if, at or prior to the time when the act with respect to which such
vote otherwise would be required will be effected, such stock will have been
redeemed or called for redemption and sufficient cash or cash equivalents
provided to the applicable paying agent to effect such redemption. The holders
of Series F Preferred will have no preemptive rights or rights to cumulative
voting.
LIMITATION ON ISSUANCE OF PREFERRED STOCK
So long as the Fund has preferred stock outstanding, subject to
receipt of approval from the rating agencies of each series of preferred stock
outstanding, and subject to compliance with the Fund's investment objectives,
policies and restrictions, the Fund may issue and sell shares of one or more
other series of additional preferred stock provided that the Fund will,
immediately after giving effect to the issuance of such additional preferred
stock and to its receipt and application of the proceeds thereof (including,
without limitation, to the redemption of preferred stock to be redeemed out of
such proceeds), have an "asset coverage" for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 200% of the sum of the
liquidation preference of the shares of preferred stock of the Fund then
outstanding and all indebtedness of the Fund constituting senior securities and
no such additional preferred stock will have any preference or priority over any
other preferred stock of the Fund upon the distribution of the assets of the
Fund or in respect of the payment of dividends or distributions.
The Fund does not currently intend to offer additional shares of
preferred stock. However, the Fund will monitor market conditions, including,
among other things, interest rates and the asset levels of the Fund, and will
consider from time to time whether to offer additional preferred stock or
securities representing indebtedness and may issue such additional securities if
the Board concludes that such an offering would be consistent with the Fund's
Charter and applicable law, and in the best interest of existing common
stockholders.
REPURCHASE OF THE SERIES F PREFERRED
The Fund is a non-diversified, closed-end management investment
company and, as such, holders of the Series F Preferred do not and will not have
the right to require the Fund to repurchase their preferred stock. The Fund,
however, may repurchase Series F Preferred when it is deemed advisable by the
Board in compliance with the requirements of the 1940 Act and regulations
thereunder and other applicable requirements. Unlike a redemption of the Series
F Preferred, where stockholders are subject to the redemption terms, in a
repurchase offer the Fund is purchasing stock on an exchange or otherwise
(through private transactions or tender offers) soliciting repurchases, and
stockholders may choose whether or not to sell.
36
This prospectus will serve as notice that the Fund may from time to
time purchase shares of Series F Preferred when such shares are trading below
the $25 per share liquidation preference.
BOOK-ENTRY
Shares of the Series F Preferred will initially be held in the name of
Cede & Co. as nominee for DTC. The Fund will treat Cede & Co. as the holder of
record of the Series F Preferred for all purposes. In accordance with the
procedures of DTC, however, purchasers of the Series F Preferred will be deemed
the beneficial owners of stock purchased for purposes of dividends and
distributions, voting and liquidation rights. Certificates for Series F
Preferred will not be issued. Purchasers of the Series F Preferred may establish
direct (registered) ownership of their shares by contacting the Transfer Agent.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
COMMON STOCK
Pursuant to an amendment to the Fund's Articles of Incorporation that
was approved by stockholders in 2004, the Board may increase or decrease the
aggregate number of shares of stock of the Fund or the number of shares of any
class or series that the Fund has authority to issue without stockholder
approval. The Fund is currently authorized to issue 252,000,000 shares of common
stock, par value $0.001 per share. Holders of the Fund's common stock are
entitled to one vote per share held. Holders of shares of common stock are
entitled to share equally in distributions authorized by the Board payable to
the holders of such shares and in the net assets of the Fund available on
liquidation for distribution to holders of such shares. The shares of common
stock have noncumulative voting rights and no conversion, preemptive or other
subscription rights, and are not redeemable. In the event of liquidation, each
share of common stock is entitled to its proportion of the Fund's assets after
payment of debts and expenses and the amounts payable to holders of the Fund
preferred stock ranking senior to the shares of common stock as described below.
The Fund's outstanding common stock is listed and traded on the NYSE
under the symbol "GAB". The average weekly trading volume of the common stock
on the NYSE during the period from January 1, 2005 through December 31, 2005 was
523,176 shares. The average weekly trading volume of the common stock on the
NYSE during the period from January 1, 2006 through September 30, 2006 was 1.02
million shares. The Fund's shares of common stock have traded in the market at
both premiums to and discounts from net asset value.
The Fund may repurchase shares of its common stock from time to time
as and when it deems such repurchase advisable, subject to maintaining required
asset coverage for each series of outstanding preferred stock. The Board has
adopted a policy to authorize such repurchases when the shares are trading at a
discount of 10% or more from net asset value. The policy does not limit the
amount of common stock that can be repurchased. The percentage of the discount
from net asset value at which share repurchases will be authorized may be
changed at any time by the Board. Through September 30, 2006, the Fund has not
repurchased shares of its common stock under this authorization.
Stockholders whose common stock is registered in their own name will
have all distributions reinvested pursuant to the Fund's Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan (the "Plan") unless they
specifically elect to opt out of the Plan. For a more detailed discussion of the
Plan, see "Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan" in
the SAI.
PREFERRED STOCK
Currently, 18,000,000 shares of the Fund's capital stock have been
classified by the Board as preferred stock, par value $0.001 per share. Up to
7,000,000 authorized and unissued shares of the Fund, previously classified as
common stock, par value $.001 per share, may be reclassified and authorized for
issuance as Series F Preferred prior to the completion of this offering. The
terms of each series of preferred stock may be fixed by the Board and may
materially limit and/or qualify the rights of the holders of the Fund's common
stock. As of September 30, 2006, the Fund had 4,950,000 outstanding shares of
Series B Preferred, 5,200 outstanding shares of Series C Auction Rate Preferred,
2,949,700 outstanding shares of Series D Preferred and 2,000 outstanding shares
of Series E Auction Rate Preferred, which, along with the Series F Preferred
being issued in connection with this prospectus, are senior securities of the
Fund.
Distributions on the Series B Preferred accumulate at an annual rate
of 7.20% of the liquidation preference of $25 per share, are cumulative from the
date of original issuance thereof, and are payable quarterly on March 26, June
26, September 26 and December 26 of each year. The Fund is required to meet
similar asset coverage requirements with respect to the Series B Preferred as
are described in this prospectus for the Series F Preferred.
37
The Series B Preferred is rated "Aaa" by Moody's. The Fund's outstanding Series
B Preferred became redeemable at the liquidation preference plus accumulated but
unpaid dividends (whether or not earned or declared) at the option of the Fund
beginning June 20, 2006. The Series B Preferred is listed and traded on the NYSE
under the symbol "GAB PrB".
Distributions on the Series C Auction Rate Preferred accumulate at a
variable rate set at a weekly auction. The Fund is required to meet certain
asset coverage requirements with respect to the Series C Auction Rate Preferred.
The Series C Auction Rate Preferred is rated "Aaa" by Moody's and "AAA" by
S&P. The liquidation preference of the Series C Auction Rate Preferred is
$25,000. The Fund generally may redeem the outstanding Series C Auction Rate
Preferred, in whole or in part, at any time other than during a non-call period.
The Series C Auction Rate Preferred is not traded on any exchange.
Distributions on the Series D Preferred accumulate at an annual rate
of 5.875% of the liquidation preference of $25 per share, are cumulative from
the date of original issuance thereof, and are payable quarterly on March 26,
June 26, September 26 and December 26 of each year. The Fund is required to meet
similar asset coverage requirements with respect to the Series D Preferred as
are described in this prospectus for the Series F Preferred. The Series D
Preferred is rated "Aaa" by Moody's. The Fund's outstanding Series D Preferred
is redeemable at the liquidation preference plus accumulated but unpaid
dividends (whether or not earned or declared) at the option of the Fund
beginning October 7, 2008. The Series D Preferred is listed and traded on the
NYSE under the symbol "GAB PrD".
Distributions on the Series E Auction Rate Preferred accumulate at a
variable rate set at a weekly auction. The Fund is required to meet certain
asset coverage requirements with respect to the Series E Auction Rate Preferred.
The Series E Auction Rate Preferred is rated "Aaa" by Moody's and "AAA" by
S&P. The liquidation preference of the Series E Auction Rate Preferred is
$25,000. The Fund generally may redeem the outstanding Series E Auction Rate
Preferred, in whole or in part, at any time other than during a non-call period.
The Series E Auction Rate Preferred is not traded on any exchange.
The following table shows (i) the classes of capital stock authorized,
(ii) the number of shares authorized in each class and (iii) the number of
shares outstanding in each class as of September 30, 2006.
TITLE OF CLASS : AMOUNT AUTHORIZED* AMOUNT OUTSTANDING*
---------------- ------------------ -------------------
Common Stock 252,000,000 167,642,009
Series A Preferred 5,367,900 0
Series B Preferred 6,600,000 4,950,000
Series C Auction Rate Preferred 5,200 5,200
Series D Preferred 3,000,000 2,949,700
Series E Auction Rate Preferred 2,000 2,000
Preferred Stock 3,024,900 0
* Does not include the Series F Preferred being offered pursuant to this
prospectus.
For a description of the terms and limitations of the Series F
Preferred with respect to liquidation rights, dividends and distributions, the
rights of holders of the Fund's preferred stock to receive distributions, and
selection of Directors to the Fund's Board, see "Description of the Series F
Preferred."
TAXATION
The following discussion is a brief summary of certain United States
federal income tax considerations affecting the Fund and its stockholders. 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
United States federal, state, local and foreign tax concerns affecting the Fund
and its stockholders (including stockholders owning large positions in the
Fund), and the discussion set forth herein does not constitute tax advice.
Investors are urged to consult their own tax advisers to determine the tax
consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has elected to be treated and has qualified, and intends to
continue to qualify, as a regulated investment company under Subchapter M of the
Code. Accordingly, the Fund must, among other things, (i) derive
38
in each taxable year at least 90% of its gross income from (a) dividends,
interest (including tax-exempt 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 (b) net income
derived from interests in certain publicly traded partnerships that are treated
as partnerships for United States federal income tax purposes and that derive
less than 90% of their gross income from the items described in (a) above (each
a "Qualified Publicly Traded Partnership"); and (ii) diversify its holdings so
that, at the end of each quarter of each taxable year (a) at least 50% of the
value of the Fund's total assets is represented by cash and cash items, United
States 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, (b) not more than 25% of the value of the Fund's total assets is
invested in the securities of (I) any one issuer (other than United States
government securities and the securities of other regulated investment
companies), (II) 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 or (III) any one or more Qualified Publicly Traded Partnerships.
The Fund's investments in partnerships, including in Qualified
Publicly Traded Partnerships, may result in the Fund being subject to state,
local or foreign income, franchise or withholding tax liabilities.
As a regulated investment company, the Fund generally is not subject
to United States federal income tax on income and gains that it distributes each
taxable year to stockholders, if it distributes at least 90% of the sum of the
Fund's (i) investment company taxable income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over net
long-term capital losses and other taxable income other than any net capital
gain (as defined below) reduced by deductible expenses) determined without
regard to the deduction for dividends and distributions paid and (ii) its net
tax-exempt interest (the excess of its gross tax-exempt interest over certain
disallowed deductions). The Fund intends to distribute at least annually
substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax at the Fund level. To avoid the tax, the Fund must distribute during each
calendar year an amount at least equal to the sum of (i) 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) 98% of its capital gains in excess of its capital losses (adjusted
for certain ordinary losses) for a one-year period generally ending on October
31 of the calendar year (unless an election is made to use the Fund's fiscal
year), and (iii) certain undistributed amounts from previous years on which the
Fund paid no United States federal income tax. While the Fund intends to
distribute any income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In that event, the Fund will be liable
for the tax only on the amount by which it does not meet the foregoing
distribution requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to stockholders.
The Fund has a policy, which may be modified at any time by its Board,
of paying a minimum annual distribution of 10% of the average net asset value of
the Fund, paid quarterly, to holders of shares of common stock. In the event
that the Fund's investment company taxable income and net capital gain exceed
the total of its quarterly distributions and the amount of distributions on any
preferred stock issued by the Fund, in order to avoid paying income tax at the
corporate level, the Fund intends to pay such excess once a year. If, for any
calendar year, the total quarterly distributions and the amount of distributions
on any preferred stock issued by the Fund exceed both current earnings and
profits and accumulated earnings and profits, the excess will generally be
treated as a tax-free return of capital up to the amount of a stockholder's tax
basis in the stock. The amount treated as a tax-free return of capital will
reduce a stockholder's tax basis in the stock, thereby increasing such
stockholder's potential gain or reducing the potential loss on the sale of the
stock. Any amounts distributed to a stockholder in excess of the basis in the
stock will be taxable to the stockholder as capital gain. The Fund's
distribution policy may cause it to make taxable distributions to stockholders
in excess of the minimum amounts of such taxable distributions it would be
required to make in order to avoid liability for federal income tax. In certain
situations, this excess distribution may cause stockholders to be liable for
taxes for which they would not otherwise be liable if the Fund paid only that
amount required to avoid liability for federal income tax.
39
TAXATION OF STOCKHOLDERS
Based in part on the Fund's inability to voluntarily redeem the Series
F Preferred until _____, 2011 the Fund intends to take the position that under
present law the Series F Preferred will constitute equity, rather than debt of
the Fund for Federal income tax purposes. It is possible, however, that the IRS
could take a contrary position asserting, for example, that the Series F
Preferred constitutes debt of the Fund. The Fund believes this position, if
asserted, would be unlikely to prevail. If that position were upheld,
distributions on the Series F Preferred would be considered interest, taxable as
ordinary income regardless of the taxable income of the Fund. The following
discussion assumes the Series F Preferred is treated as equity.
Distributions paid to you by the Fund from its investment company
taxable income which includes the excess of net short-term capital gains over
net long-term capital losses (together referred to hereinafter as "ordinary
income dividends") are generally taxable to you as ordinary income to the
extent of the Fund's earnings and profits. Such distributions (if designated by
the Fund) may, however, qualify (provided holding periods and other requirements
are met by both the Fund and the stockholder) (i) for the dividends received
deduction in the case of corporate stockholders to the extent that the Fund's
income consists of dividend income from United States corporations, and (ii) for
taxable years through December 31, 2010, as qualified dividend income eligible
for the reduced maximum Federal rate to individuals of generally 15% (currently
5% for individuals in lower tax brackets) to the extent that the Fund receives
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a qualified comprehensive tax treaty
with the United States, or whose stock with respect to which such dividend is
paid is readily tradable on an established securities market in the United
States). Distributions made to you from an excess of net long-term capital gains
over net short-term capital losses ("capital gain dividends"), including
capital gain dividends credited to you but retained by the Fund, are taxable to
you as long-term capital gains if they have been properly designated by the
Fund, regardless of the length of time you have owned Fund stock. The maximum
Federal tax rate on net long-term capital gain of individuals is reduced
generally from 20% to 15% (currently 5% for individuals in lower brackets) for
such gain realized before January 1, 2011. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of your stock and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to you (assuming the stock is held as a capital asset). Generally, not later
than 60 days after the close of its taxable year, the Fund will provide you with
a written notice designating the amount of any qualified dividend income or
capital gain dividends and other distributions.
Upon the sale, exchange, redemption or other disposition of Series F
Preferred stock, you will generally realize a taxable gain or loss equal to the
difference between (1) the amount of cash and the fair market value of other
property received and (2) your adjusted tax basis in the stock. Such gain or
loss will generally be a capital gain or loss, and will be long-term capital
gain or loss if the stock has been held for more than one year at the time of
sale. Any loss upon the sale or exchange of Fund stock held for six months or
less will be treated as long-term capital loss to the extent of any capital gain
dividends received (including amounts credited as an undistributed capital gain
dividend) by you. A loss realized on a sale or exchange of stock of the Fund
will be disallowed if other substantially identical Fund stock is acquired
(whether through the automatic reinvestment of dividends or otherwise) within a
61-day period beginning 30 days before and ending 30 days after the date that
the stock is disposed of. In such case, the basis of the stock acquired will be
adjusted to reflect the disallowed loss. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income.
If the Fund pays you a dividend or makes a distribution 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 or
distribution 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 or distribution
was declared.
The Fund is required in certain circumstances to backup withhold on
taxable dividends or distributions 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
United States federal income tax liability, if any, provided that the required
information is furnished to the IRS.
40
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 SAI THAT IS INCORPORATED BY REFERENCE
INTO THIS PROSPECTUS. STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS
REGARDING SPECIFIC QUESTIONS AS TO UNITED STATES FEDERAL, FOREIGN, STATE, LOCAL
INCOME OR OTHER TAXES.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S CHARTER AND
BY-LAWS
The Fund presently has provisions in its Charter and By-Laws which
could have the effect of limiting, in each case:
- the ability of other entities or persons to acquire control of
the Fund;
- the Fund's freedom to engage in certain transactions; or
- the ability of the Fund's Directors or stockholders to amend the
Charter and By-Laws or effectuate changes in the Fund's
management.
These provisions may be regarded as "anti-takeover" provisions. The
Board of 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 a minimum of two years to change a majority of the Board. 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. A Director of the Fund may be removed only for
cause and by a vote of a majority of the votes entitled to be cast for the
election of Directors.
In addition, the affirmative vote of the holders of 66-2/3% of the
Fund's outstanding shares of each class (voting separately) is required to
authorize the conversion of the Fund from a closed-end to an open-end investment
company or generally to authorize any of the following transactions:
- the merger or consolidation of the Fund with any entity;
- the issuance of any securities of the Fund for cash to any entity
or person;
- the sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having
an aggregate fair market value of less than $1,000,000); or
- the sale, lease or exchange to the Fund, in exchange for its
securities, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000);
if such person or entity is directly, or indirectly through affiliates, the
beneficial owner of more than 5% of the outstanding shares of any class of
capital stock of the Fund. However, such vote would not be required when, under
certain conditions, the Board approves the transaction. Further, unless a higher
percentage is provided for under the Charter, the affirmative vote of a majority
(as defined in the 1940 Act) of the votes entitled to be cast by holders of
outstanding shares of the Fund's preferred stock, voting as a separate class,
will be required to approve any plan of reorganization adversely affecting such
stock or any action requiring a vote of security holders under Section 13(a) of
the 1940 Act, including, among other things, changing the Fund's
subclassification as a closed-end investment company, changing the Fund's
investment objectives or changing its fundamental investment restrictions.
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 the Fund's Charter or By-Laws, under Maryland law the Board may
elect by resolution to, among other things:
41
- 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;
- reserve for the Board the right to fix the number of Fund
Directors;
- provide that Directors are subject to removal only by the vote of
the holders of two-thirds of the stock entitled to vote; and
- retain for the Board sole authority to fill vacancies created by
the death, removal or resignation of a Director, with any
Director so appointed to serve for the balance of the unexpired
term rather than only until the next annual meeting of
stockholders.
The Board may make any of the foregoing elections without amending the
Fund's Charter or By-Laws and without stockholder approval. Though a
corporation's charter or a resolution by its board may prohibit its directors
from making the elections set forth above, the Fund's Board currently is not
prohibited from making any such elections.
The provisions of the Charter and By-Laws and Maryland law described
above could have the effect of depriving the owners of stock in the Fund of
opportunities to sell their shares at a premium over prevailing market prices,
by discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a principal stockholder. The Board has determined that the foregoing
voting requirements, which are generally greater than the minimum requirements
under Maryland law and the 1940 Act, are in the best interests of the
stockholders generally.
The Charter and By-Laws of the Fund are on file with the Commission.
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND
DIVIDEND-DISBURSING AGENT
Mellon Trust of New England, N.A., located at 135 Santilli Highway,
Everett, Massachusetts 02149, 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 receives a monthly fee based upon the month end value of the total
assets of the Fund, plus certain charges for securities transactions.
Computershare, located at 250 Royall Street, Canton, Massachusetts
02021, serves as the Fund's dividend disbursing agent, as agent under the Fund's
Plan and as transfer agent and registrar with respect to the common stock of the
Fund.
Along with the Series B Preferred and Series D Preferred,
Computershare will also serve as the Fund's transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to the Series F Preferred.
The Bank of New York, located at 100 Church Street, New York, New York
10286, serves as the auction agent, transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to the Series C Auction Rate
Preferred and the Series E Auction Rate Preferred.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup
Global Markets Inc. are acting as joint book-running managers and, together with
A.G. Edwards & Sons, Inc. and Gabelli and 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 F Preferred set forth opposite the underwriter's
name.
NUMBER OF SERIES F
UNDERWRITER PREFERRED SHARES
----------- ------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Citigroup Global Markets Inc.
A.G. Edwards & Sons, Inc.
Gabelli & Company, Inc.
Total
42
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all of the Series F Preferred shares,
if they purchase any such shares.
The following table shows the sales load that the Fund will pay to the
underwriters in connection with this offering.
SALES LOAD PAID BY THE FUND
---------------------------
Per Share
Total
The underwriters propose to initially offer some of the Series F
Preferred directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the Series F Preferred to certain
dealers at the public offering price less a concession not in excess of $0.50
per share. The sales load that the Fund will pay of $ _____ per share is equal
to _____% of the initial offering price. The underwriters may allow, and the
dealers may reallow, a discount not in excess of $ _____ per share of Series F
Preferred on sales to other dealers. After the initial offering, the public
offering price and concession may be changed. Investors must pay for any Series
F Preferred purchased in the initial public offering on or before _____, 2006.
Prior to the offering, there has been no public market for the Series
F Preferred. A preliminary application has been made to list the Series F
Preferred on the NYSE. However, during an initial period that is not expected to
exceed 30 days after the date of this prospectus, the Series F Preferred will
not be listed on any securities exchange. During such 30-day period, the
underwriters intend to make a market in the Series F Preferred; however, they
have no obligation to do so. Consequently, an investment in the Series F
Preferred may be illiquid during such period.
In connection with the offering, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Citigroup Global Markets Inc., on behalf of the underwriters,
may purchase and sell the Series F Preferred in the open market. These
transactions may include syndicate covering and stabilizing transactions.
Syndicate covering transactions involve purchases of the Series F Preferred in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of shares made for the purpose of preventing or retarding a decline in
the market price of the shares while the offering is in progress.
The underwriters may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets
Inc. repurchase shares of Series F Preferred originally sold by that syndicate
member in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities may have the effect of preventing or retarding
a decline in the market price of Series F Preferred. They may also cause the
price of Series F Preferred to be higher than the price that would otherwise
exist in the open market in the absence of these transactions. The underwriters
may conduct these transactions on the NYSE or in the over-the-counter market, or
otherwise. If the underwriters commence any of these transactions, they may
discontinue them at any time.
We estimate that total expenses for this offering (excluding
underwriting discounts) will be $_____.
The Fund anticipates that, from time to time, certain underwriters may
act as brokers or dealers in connection with the Fund's execution of the Fund's
portfolio transactions after they have ceased to be underwriters and, subject to
certain restrictions, may act as brokers while they are underwriters.
Certain underwriters have performed investment banking and advisory
services for the Fund and the Investment Adviser from time to time, for which
they have received customary fees and expenses. The underwriters and their
affiliates may from time to time engage in transactions with, and perform
services for, the Fund and the Investment Adviser in the ordinary course of
their business. An affiliate of Citigroup Global Markets Inc. is the
counterparty to the Fund in an interest rate swap transaction with an aggregate
notional value of $130 million.
43
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 Chairman
and Chief Investment Officer, may be deemed to be a "controlling person" of
Gabelli & Company, Inc.
In the underwriting agreement, the Fund and the Investment Adviser
have agreed to indemnify the underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make for any of those
liabilities.
A prospectus in electronic format may be available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares of Series F Preferred to underwriters for sale to
their online brokerage account holders. The representatives will allocate shares
of Series F Preferred to underwriters that may make Internet distributions on
the same basis as other allocations. In addition, Series F Preferred may be sold
by the underwriters to securities dealers who resell Series F Preferred to
online brokerage account holders.
The principal business address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated is 4 World Financial Center, New York, New York 10080. The
principal business address of Citigroup Global Markets Inc. is 388 Greenwich
Street, New York, New York 10013. The principal business address of A.G. Edwards
& Sons, Inc. is One North Jefferson Avenue, St. Louis, Missouri. 63101. The
principal business address of Gabelli & Company, Inc. is One Corporate Center,
Rye, New York 10580-1422.
LEGAL MATTERS
Certain legal matters will be passed on by Willkie Farr & Gallagher
LLP, 787 Seventh Avenue, New York, New York, 10019, counsel to the Fund in
connection with the offering of the Series F Preferred, and by Simpson Thacher
& Bartlett, LLP, 425 Lexington Avenue New York, New York 10017, counsel to the
underwriters. Counsel for the Fund and for the underwriters will rely, as to
certain matters of Maryland law, on Venable LLP, 1800 Mercantile Bank and Trust
Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
EXPERTS
The audited financial statements of the Fund as of December 31, 2005,
have been incorporated by reference into the SAI in reliance on the report of
[AUDITOR], an independent registered public accounting firm, given on the
authority of that firm as experts in accounting and auditing. The report of
[AUDITOR] is incorporated by reference into the SAI. [AUDITOR] is located at
[ADDRESS].
ADDITIONAL INFORMATION
The Board has approved, subject to shareholder and other regulatory
approvals, the contribution of a portion of the Fund's assets to a newly formed
non-diversified, closed-end investment company, The Gabelli Global Healthcare &
WellnessRx Trust (the "Healthcare & WellnessRx Trust"). All of the Healthcare &
WellnessRx Trust's common stock would then be distributed to the common
stockholders of the Fund.
The Fund would contribute to the Healthcare & WellnessRx Trust
approximately $60 million to $100 million of its cash and/or securities and
would then distribute all of the shares of the Healthcare & WellnessRx Trust pro
rata to the common stockholders of the Fund. The Healthcare & WellnessRx Trust
will seek to have its shares listed on the NYSE.
The transaction is expected to be voted upon at the Fund's Annual
Meeting of Shareholders in May 2007. The Board will determine the amount of
capital to be distributed, the number of shares to be distributed, and the
record and distribution dates, which will be announced at a later time. The
distribution will be made only by means of a prospectus.
* * *
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 Commission. Reports,
proxy statements and other information filed by the Fund with the Commission
pursuant to the informational requirements of the Securities Exchange Act of
1934 and the 1940 Act can be inspected and copied at the public reference
facilities maintained by the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. The
44
Commission 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 Commission.
The Fund's common stock, Series B Preferred and Series D Preferred are
listed on the NYSE. Reports, proxy statements and other information concerning
the Fund and filed with the Commission by the Fund will be available for
inspection at the NYSE, 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a Registration Statement filed by
the Fund with the Commission under the Securities Act of 1933 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
preferred stock 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 Commission. Each such
statement is qualified in its entirety by such reference. The complete
Registration Statement may be obtained from the Commission upon payment of the
fee prescribed by its rules and regulations or free of charge through the
Commission's web site (http://www.sec.gov).
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its stockholders
and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information the
Fund collects, how the Fund protects that information and why, in certain cases,
the Fund may share information with select other parties.
Generally, the Fund does not receive any non-public personal
information relating to its stockholders, although certain non-public personal
information of its stockholders may become available to the Fund. The Fund does
not disclose any non-public personal information about its stockholders or
former stockholders to anyone, except as permitted by law or as is necessary in
order to service stockholder accounts (for example, to a transfer agent or third
party administrator).
The Fund restricts access to non-public personal information about its
stockholders to employees of the Fund's Investment Adviser and its affiliates
with a legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its stockholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors and Special Considerations" and elsewhere in this
prospectus. As a result of the foregoing and other factors, no assurance can be
given as to the Fund's future results, levels of activity or achievements.
45
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
THE FUND S-1
INVESTMENT OBJECTIVES AND POLICIES S-1
INVESTMENT RESTRICTIONS S-7
MANAGEMENT OF THE FUND S-9
PORTFOLIO TRANSACTIONS S-19
TAXATION S-20
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN S-25
ADDITIONAL INFORMATION CONCERNING THE SERIES F PREFERRED S-26
MOODY'S GUIDELINES S-26
NET ASSET VALUE S-34
BENEFICIAL OWNERS S-34
GENERAL INFORMATION S-35
FINANCIAL STATEMENTS S-37
GLOSSARY S-38
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.
46
APPENDIX A - CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risk appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Moody's
applies numerical modifiers (1, 2, and 3) with respect to the bonds rated Aa
through B. The modifier 1 indicates that the company ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the company ranks in the lower end of its generic
rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
A-1
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.
2
[COMPANY LOGO]
THE GABELLI EQUITY TRUST INC.
_____ SHARES, _____% SERIES F CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
PROSPECTUS
___, 2006
MERRILL LYNCH & CO.
CITIGROUP
A.G. EDWARDS
GABELLI & COMPANY, INC.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. THE FUND MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Equity Trust Inc. (the "Fund") is a non-diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund's primary investment
objective is to achieve long-term growth of capital by investing primarily in a
portfolio of equity securities consisting of common stock, preferred stock,
convertible or exchangeable securities and warrants and rights to purchase such
securities. Income is a secondary investment objective. The Fund commenced
investment operations on August 21, 1986. Gabelli Funds, LLC (the "Investment
Adviser") serves as investment adviser to the Fund.
This Statement of Additional Information (the "SAI") is not a
prospectus, but should be read in conjunction with the prospectus for the Fund
dated _____, 2006 (the "Prospectus"). Investors should obtain and read the
Prospectus prior to purchasing the _____% Series F Cumulative Preferred Stock
(the "Series F Preferred"). A copy of the Prospectus may be obtained, without
charge, by calling the Fund at 800-GABELLI (800-422-3554) or (914) 921-5100.
This SAI incorporates by reference the entire Prospectus.
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange Commission
(the "Commission"), 450 Fifth Street, N.W., Washington, D.C. The registration
statement may be obtained from the Commission upon payment of the fee
prescribed, or inspected at the Commission's office or via its website
(http://www.sec.gov) at no charge.
This Statement of Additional Information is dated _____, 2006.
TABLE OF CONTENTS
PAGE
----
THE FUND S-1
INVESTMENT OBJECTIVES AND POLICIES S-1
INVESTMENT RESTRICTIONS S-7
MANAGEMENT OF THE FUND S-9
PORTFOLIO TRANSACTIONS S-19
TAXATION S-20
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN S-25
ADDITIONAL INFORMATION CONCERNING THE SERIES F PREFERRED S-26
MOODY'S GUIDELINES S-26
NET ASSET VALUE S-34
BENEFICIAL OWNERS S-34
GENERAL INFORMATION S-35
FINANCIAL STATEMENTS S-37
GLOSSARY S-38
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.
The Prospectus and this SAI omit certain information contained in the
registration statement filed with the Commission, Washington D.C. The
registration statement may be obtained from the Commission upon payment of the
fee prescribed, or inspected at the Commission's office at no charge. This
Statement of Additional Information is dated _____, 2006.
THE FUND
The Fund was incorporated in Maryland on May 20, 1986 and is a
non-diversified, closed-end management investment company registered under the
1940 Act. The common stock of the Fund is listed on the New York Stock Exchange
(the "NYSE") under the symbol "GAB." The Fund's 7.20% Tax Advantaged Series B
Cumulative Preferred Stock (the "Series B Preferred") is listed and traded on
the NYSE under the symbol "GAB PrB". The Fund's 5.875% Series D Cumulative
Preferred Stock (the "Series D Preferred") is listed and traded on the NYSE
under the symbol "GAB PrD".
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to achieve long-term growth
of capital by investing primarily in a portfolio of equity securities consisting
of common stock, preferred stock, convertible or exchangeable securities and
warrants and rights to purchase such securities selected by the Investment
Adviser. Income is a secondary investment objective. Under normal market
conditions, the Fund will invest at least 80% of the value of its total assets
in equity securities. See "Investment Objectives and Policies" in the
Prospectus.
INVESTMENT PRACTICES
SPECIAL SITUATIONS. Although the Fund typically invests in the
securities of companies on the basis of fundamental value, the Fund from time to
time may, as a non-principal investment strategy, invest in companies that are
determined by the Investment Adviser to possess "special situation"
characteristics. In general, a special situation company is a company whose
securities are expected to increase in value solely by reason of a development
particularly or uniquely applicable to the company. Developments that may create
special situations include, among others, a liquidation, reorganization,
recapitalization or merger, material litigation, technological breakthrough or
new management or management policies. The principal risk associated with
investments in special situation companies is that the anticipated development
thought to create the special situation may not occur and the investment
therefore may not appreciate in value or may decline in value.
OPTIONS. The Fund may, subject to guidelines of the Board of Directors
(the "Board"), 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 United States over-the-counter ("OTC") markets as a means of
achieving additional return or of hedging the value of the Fund's portfolio.
The Fund may write covered call options on common stocks that it owns
or has an immediate right to acquire through conversion or exchange of other
securities in an amount not to exceed 25% of total assets or invest up to 10% of
its total assets in the purchase of put options on common stocks that the Fund
owns or may acquire through the conversion or exchange of other securities that
it owns.
A call option is a contract that gives the holder of the option the
right to buy from the writer (seller) of the call option, in return for a
premium paid, the security or currency underlying the option at a specified
exercise price at any time during the term of the option. The writer of the call
option has the obligation, upon exercise of the option, to deliver the
underlying security or currency upon payment of the exercise price during the
option period.
A put option is the reverse of a call option, giving the holder the
right, in return for a premium, to sell the underlying security or currency to
the writer, at a specified price, and obligating the writer to purchase the
underlying security or currency from the holder at that price. The writer of the
put, who receives the premium, has the obligation to buy the underlying security
or currency upon exercise, at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
An exchange-traded option may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option.
S-1
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration upon conversion or exchange of
another instrument held in its portfolio (or for additional cash consideration
held in a segregated account by its custodian). A call option is also covered if
the Fund holds a call on the same instrument as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written or (ii) greater than the exercise price of the call written
if the difference is maintained by the Fund in cash, U.S. Government Obligations
(as defined under "Investment Restrictions") or other high-grade short-term
obligations in a segregated account with its custodian. A put option is "covered
" if the Fund maintains cash or other high grade short-term obligations with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same instrument as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by 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 call option include supply and demand, interest rates, the current market
price and price volatility of the underlying security and the time remaining
until the expiration date. Gains and losses on investments in options depend, in
part, on the ability of the Investment Adviser to predict correctly the effect
of these factors. The use of options cannot serve as a complete hedge since the
price movement of securities underlying the options will not necessarily follow
the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event it might not be possible to effect closing
transactions in particular options, so 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 until the Fund delivers the underlying security upon exercise
or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and
sell call and put options on securities indices. A stock index reflects in a
single number the market value of many different stocks. Relative values are
assigned to the stocks included in an index and the index fluctuates with
changes in the market values of the stocks. The options give the holder the
right to receive a cash settlement during the term of the option based on the
difference between the exercise price and the value of the index. By writing a
put or call option on a securities index, the Fund is obligated, in return for
the premium received, to make delivery of this amount. The Fund may offset its
position in the stock index options prior to expiration by entering into a
closing transaction on an exchange, or it may let the option expire unexercised.
The Fund may also buy or sell put and call options on foreign
currencies. A put option on a foreign currency gives the purchaser of the option
the right to sell a foreign currency at the exercise price until the option
expires. A call option on a foreign currency gives the purchaser of the option
the right to purchase the currency at the exercise price until the option
expires. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of the Fund to reduce foreign
currency risk using such options. Over-the-counter options differ from
exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Over-the-counter options are
illiquid securities.
S-2
Use of options on securities indices entails the risk that trading in
the options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Investment Adviser is satisfied with the development, depth and liquidity of the
market and the Investment Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate
precisely with the movements in the level of an index and, therefore, the use of
options on indexes cannot serve as a complete hedge and will depend, in part, on
the ability of the Investment Adviser to predict correctly movements in the
direction of the stock market generally or of a particular industry. Because
options on securities indexes require settlement in cash, the Fund may be forced
to liquidate portfolio securities to meet settlement obligations.
Although the Investment Adviser will attempt to take appropriate
measures to minimize the risks relating to the Fund's writing of put and call
options, there can be no assurance that the Fund will succeed in any option
writing program it undertakes.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. A "sale" of a futures
contract (or a "short" futures position) means the assumption of a contractual
obligation to deliver the assets underlying the contract at a specified price at
a specified future time. A "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, including stock and bond index futures, are settled on a net
cash payment basis rather than by the sale and delivery of the assets underlying
the futures contracts. No consideration will be paid or received by the Fund
upon the purchase or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker an amount of cash or cash equivalents equal
to approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange or board of trade on which the contract is traded and
brokers or members of such board of trade may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract. Subsequent payments, known as "variation
margin," to and from the broker will be made daily as the price of the index or
security underlying the futures contracts fluctuates. At any time prior to the
expiration of a futures contract, the Fund may close the position by taking an
opposite position, which will operate to terminate its existing position in the
contract.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time prior to the expiration of the option. Upon
exercise of an option, the delivery of the futures positions by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account attributable to that
contract, which represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option purchased is fixed at the point of sale, there are no daily cash payments
by the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the 1940 Act, an amount of cash,
obligations of the U.S. government and its agencies and instrumentalities or
other liquid securities equal to the market value of the contract must be
deposited and maintained in a segregated account with the custodian of the Fund
to collateralize the positions, thereby ensuring that the use of the contract is
unleveraged. For short positions in futures contracts and sales of call options,
the Fund may establish a segregated account (not with a futures commission
merchant or broker) with cash or liquid securities that, when added to amounts
deposited with a futures commission merchant or a broker as margin, equal the
market value of the instruments or currency underlying the futures contract or
call option or the market price at which the short positions were established.
S-3
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 fluctuation in the value of appropriately selected futures
contracts should approximate those 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
concurrently liquidate its futures position. To the extent the Fund enters into
futures contracts for this purpose, it will maintain, in a segregated asset
account with the Fund's custodian, assets sufficient to cover the Fund's
obligations with respect to such futures contracts, which will consist of cash
or other liquid securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial margin deposited by the Fund with its
custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities that are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium, which provides a partial
hedge against any increase in the price of debt securities that the Fund intends
to purchase. If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
CURRENCY FUTURES AND OPTIONS THEREON. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate futures
contracts and options thereon discussed previously. By entering into currency
futures and options thereon, the Fund will seek to establish the rate at which
it will be entitled to exchange U.S. dollars for another currency at a future
time. By selling currency futures, the Fund will seek to establish the number of
dollars it will receive at delivery for a certain amount of a foreign currency.
In this way, whenever the Fund anticipates a decline in the value of a foreign
currency against the U.S. dollar, the Fund can attempt to "lock in" the U.S.
dollar value of some or all of the securities held in its portfolio that are
denominated in that currency. By purchasing currency futures, the Fund can
establish the number of dollars it will be required to pay for a specified
amount of a foreign currency in a future month. Thus, if the Fund intends to buy
securities in the future
S-4
and expects the U.S. dollar to decline against the relevant foreign currency
during the period before the purchase is effected, the Fund can attempt to lock
in the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for
the price of the premium and related transaction costs it must pay for the
option, to decide whether or not to buy (in the case of a call option) or to
sell (in the case of a put option) a futures contract at a specified price at
any time during the period before the option expires. If the Investment Adviser,
in purchasing an option, has been correct in its judgment concerning the
direction in which the price of a foreign currency would move as against the
U.S. dollar, the Fund may exercise the option and thereby take a futures
position to hedge against the risk it had correctly anticipated or close out the
option position at a gain that will offset, to some extent, currency exchange
losses otherwise suffered by the Fund. If exchange rates move in a way the Fund
did not anticipate, however, the Fund will have incurred the expense of the
option without obtaining the expected benefit; any such movement in exchange
rates may also thereby reduce, rather than enhance, the Fund's profits on its
underlying securities transactions.
SECURITIES INDEX FUTURES CONTRACTS AND OPTIONS THEREON. Purchases or
sales of securities index futures contracts are used for hedging purposes to
attempt to protect the Fund's current or intended investments from broad
fluctuations in stock or bond prices. For example, the Fund may sell securities
index futures contracts in anticipation of or during a market decline to attempt
to offset the decrease in market value of the Fund's securities portfolio that
might otherwise result. If such decline occurs, the loss in value of portfolio
securities may be offset, in whole or part, by gains on the futures position.
When the Fund is not fully invested in the securities market and anticipates a
significant market advance, it may purchase securities index futures contracts
in order to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in securities index futures
contracts will be closed out. The Fund may write put and call options on
securities index futures contracts for hedging purposes.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The Investment Adviser has claimed an exclusion from the definition
of the term "commodity pool operator" under the Commodity Exchange Act and
therefore is not subject to registration under the Commodity Exchange Act.
Accordingly, the Fund's investments in derivative instruments described in the
Prospectus and this SAI are not limited by or subject to regulation under the
Commodity Exchange Act or otherwise regulated by the Commodity Futures Trading
Commission. Nevertheless, the Fund's investment restrictions place certain
limitations and prohibitions on the Fund's ability to purchase or sell
commodities or commodity contracts. See "Investment Restrictions." Under these
restrictions, the Fund may not enter into futures contracts or options on
futures contracts unless (i) the aggregate initial margins and premiums do not
exceed 5% of the fair market value of the Fund's total assets and (ii) the
aggregate market value of the Fund's outstanding futures contracts and the
market value of the currencies and futures contracts subject to outstanding
options written by the Fund, as the case may be, do not exceed 50% of the market
value of the Fund's total assets. In addition, investment in futures contracts
and related options generally will be limited by the Rating Agency Guidelines
(as defined in the Glossary) applicable to any of the Fund's Outstanding
Preferred Stock (as defined in the Glossary).
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
S-5
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 deliver.
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
S-6
data on which to make trading decisions, (iii) delays in the Fund's ability to
act upon economic events occurring in the foreign markets during non-business
hours in the U.S., (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the U.S. and (v) lesser
trading volume.
Exchanges on which options, futures and options on futures are traded
may impose limits on the positions that the Fund may take in certain
circumstances.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are also subject
to risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental action
can result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has
entered into to be rendered useless, resulting in full currency exposure as well
as incurring transaction costs.
WHEN ISSUED, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. The
Fund may enter into forward commitments for the purchase or sale of securities,
including on a "when issued" or "delayed delivery" basis, in excess of customary
settlement periods for the type of security involved. In some cases, a forward
commitment may be conditioned upon the occurrence of a subsequent event, such as
approval and consummation of a merger, corporate reorganization or debt
restructuring, i.e., a when, as and if issued security. When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment
and delivery taking place in the future, generally a month or more after the
date of the commitment. While it will only enter into a forward commitment with
the intention of actually acquiring the security, the Fund may sell the security
before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to a total
of 10% of its net assets in securities that are subject to restrictions on
resale and securities the markets for which are illiquid, including repurchase
agreements with more than seven days to maturity. Illiquid securities include
securities the disposition of which is subject to substantial legal or
contractual restrictions. The sale of illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Unseasoned issuers are companies (including
predecessors) that have operated less than three years. The continued liquidity
of such securities may not be as well assured as that of publicly traded
securities, and accordingly the Board will monitor their liquidity. The Board
will review pertinent factors such as trading activity, reliability of price
information and trading patterns of comparable securities in determining whether
to treat any such security as liquid for purposes of the foregoing 10% test. To
the extent the Board treats such securities as liquid, temporary impairments to
trading patterns of such securities may adversely affect the Fund's liquidity.
In accordance with pronouncements of the Commission, the Fund may
invest in restricted securities that can be traded among qualified institutional
buyers under Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), without registration and may treat them as liquid for
purposes of the foregoing 10% test if such securities are found to be liquid.
The Board has adopted guidelines and delegated to the Investment Adviser,
subject to the supervision of the Board, the function of determining and
monitoring the liquidity of particular Rule 144A securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies under the 1940 Act and that, except as otherwise noted,
cannot be changed without the affirmative vote of a majority, as defined in the
1940 Act, of the outstanding voting securities of the Fund (voting together as a
single class). In addition, pursuant to the Articles Supplementary, the
affirmative vote of a majority, as defined in the 1940 Act, of the outstanding
preferred stock of the Fund (voting separately as a single class) is also
required to change a fundamental policy, as defined in the 1940 Act. For
purposes of the preferred stock voting rights described in the foregoing
sentence, except as otherwise required under the 1940 Act, the majority of the
outstanding preferred stock means, in
S-7
accordance with Section 2(a)(42) of the 1940 Act, the vote of (i) of 67% or more
of the shares of preferred stock present at the stockholders meeting called for
such vote, if the holders of more than 50% of the outstanding preferred stock
are present or represented by proxy or (ii) more than 50% of the outstanding
preferred stock, whichever is less. Except as otherwise noted, all percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting from
market fluctuations does not require any action. The Fund may not:
1. Invest 25% or more of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any
particular industry. This restriction does not apply to investments in
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 ("U.S. Government
Obligations").
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, if more than 10% of the market value of the total
assets of the Fund would be invested in securities of other investment
companies, more than 5% of the market value of the total assets of the
Fund would be invested in the securities of any one investment company
or the Fund would own more than 3% of any other investment company's
securities, provided, however, this restriction shall not apply to
securities of any investment company organized by the Fund that are to
be distributed pro rata as a dividend to its stockholders.
3. Purchase or sell commodities or commodity contracts except that the
Fund may purchase or sell futures contracts and related options
thereon if immediately thereafter (i) no more than 5% of its total
assets are invested in margins and premiums and (ii) the aggregate
market value of its outstanding futures contracts and market value of
the currencies and futures contracts subject to outstanding options
written by the Fund does not exceed 50% of the market value of its
total assets. The Fund may not purchase or sell real estate, provided
that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate
or interests therein.
4. Purchase any securities on margin or make short sales, except that the
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
5. Make loans of money, except by the purchase of a portion of publicly
distributed debt obligations in which the Fund may invest, and
repurchase agreements with respect to those obligations, consistent
with its investment objectives and policies. The Fund reserves the
authority to make loans of its portfolio securities to financial
intermediaries in an aggregate amount not exceeding 20% of its total
assets. Any such loans may only be made upon approval of, and subject
to any conditions imposed by, the Board. Because these loans would at
all times be fully collateralized, the risk of loss in the event of
default of the borrower should be slight.
6. Borrow money, except that the Fund may borrow from banks and other
financial institutions on an unsecured basis, in an amount not
exceeding 10% of its total assets, to finance the repurchase of its
stock. The Fund also may borrow money on a secured basis from banks as
a temporary measure for extraordinary or emergency purposes. Temporary
borrowings may not exceed 5% of the value of the total assets of the
Fund at the time the loan is made. The Fund may pledge up to 10% of
the lesser of the cost or value of its total assets to secure
temporary borrowings. The Fund will not borrow for investment
purposes. Immediately after any borrowing, the Fund will maintain
asset coverage of not less than 300% with respect to all borrowings.
While the borrowing of the Fund exceeds 5% of its respective total
assets, the Fund will make no further purchases of securities,
although this limitation will not apply to repurchase transactions as
described above.
7. Issue senior securities, except to the extent permitted by applicable
law.
8. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act in selling portfolio
securities; provided, however, this restriction shall not
S-8
apply to securities of any investment company organized by the Fund
that are to be distributed pro rata as a dividend to its stockholders.
9. Invest more than 10% of its total assets in illiquid securities, such
as repurchase agreements with maturities in excess of seven days, or
securities that at the time of purchase have legal or contractual
restrictions on resale.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction
of its Board, and the day-to-day operations are conducted through or under the
direction of its officers.
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. Directors who are "interested persons" of the Fund, as defined by the
1940 Act, are listed under the caption "Interested Directors."
DIRECTORS
NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX
NAME, POSITION(S), ADDRESS AND LENGTH OF OVERSEEN BY PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE(1) TIME SERVED(2) DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR
--------------------------- -------------- ------------- ---------------------------------- ---------------------------
INTERESTED DIRECTORS:(3)
Mario J. Gabelli Since 1986*** 23 Chairman and Chief Executive Director of Morgan Group
Director and Chief Officer of GAMCO Investors, Inc. Holdings, Inc. (
Investment Officer and Chief Investment Officer -- transportation services);
Age: 64 Value Portfolios of Gabelli Funds, Chairman of the Board of
LLC and GAMCO Asset Management Lynch Interactive
Inc.; Director/Trustee or Chief Corporation (multimedia and
Investment Officer of other communication services
registered investment companies in company)
the Gabelli fund complex; Chairman
and Chief Executive Officer of
GGCP, Inc.
Anthony R. Pustorino Since 1986* 14 Certified Public Accountant; Director of LGL Group, Inc.
Director Professor Emeritus, Pace (diversified manufacturing)
Age: 81 University
NON-INTERESTED DIRECTORS:
Thomas E. Bratter Since 1986*** 3 Director, President and Founder of None
Director The John Dewey Academy
Age: 67 (residential college preparatory
therapeutic high school)
Anthony J. Colavita(4) Since 1999** 33 Partner in the law firm of Anthony None
Director J. Colavita, P.C.
Age: 70
James P. Conn(4) Since 1989* 14 Former Managing Director and Chief Director of First Republic
Director Investment Officer of Financial Bank (banking)
Age: 68 Security Assurance Holdings Ltd.
(insurance holding company)
(1992-1998)
Frank J. Fahrenkopf, Jr. Since 1998** 5 President and Chief Executive Director of First Republic
Director Officer of the American Gaming Bank (banking)
Age: 67 Association; Co-Chairman of the
Commission on Presidential
Debates; Chairman of the
Republican National Committee
(1983-1989)
S-9
Arthur V. Ferrara Since 2001*** 5 Former Chairman of the Board and Director of The Guardian
Director Chief Executive Officer of The Sponsored Mutual Funds
Age: 76 Guardian Life Insurance Company of
America (1993-1995)
Salvatore J. Zizza Since 1986** 24 Chairman of Hallmark Electrical Director of Hollis Eden
Director Supplies Corp. Pharmaceuticals
Age: 60 (biotechnology) and Earl
Scheib, Inc. (automotive
services)
OFFICERS
NAME, POSITION(S), PRINCIPAL OCCUPATION(S) DURING PAST FIVE
ADDRESS AND AGE(1) LENGTH OF TIME SERVED(2) YEARS
--------------------------- ------------------------ ----------------------------------------
Bruce N. Alpert Since 1988 Executive Vice President and Chief
President Operating Officer of Gabelli Funds, LLC
Age: 54 since 1988; Director and President of
Gabelli Advisers, Inc. since 1998;
Officer of all the registered investment
companies in the Gabelli fund complex.
Carter W. Austin Since 2000 Vice President of the Fund since 2000;
Vice President Vice President of The Gabelli Dividend &
Age: 40 Income Trust since 2003 and The Gabelli
Global Gold, Natural Resources & Income
Trust since 2005; Vice President of
Gabelli Funds, LLC since 1996.
Peter D. Goldstein Since 2004 Director of Regulatory Affairs for GAMCO
Chief Compliance Officer Investors, Inc. since 2004; Chief
Age: 53 Compliance Officer of all the registered
investment companies in the Gabelli fund
complex; Vice President of Goldman Sachs
Asset Management from 2000-2004.
James E. McKee Since 1995 Vice President, General Counsel and
Secretary Secretary of GAMCO Investors, Inc. since
Age: 43 1999 and GAMCO Asset Management Inc.
since 1993; Secretary of all the
registered investment companies advised
by Gabelli Advisers, Inc. and Gabelli
Funds, LLC.
Agnes Mullady Since 2006 Officer of all the registered investment
Treasurer and Principal companies in the Gabelli Funds complex;
Financial Officer Senior Vice President of U.S. Trust
Age: 47 Company, N.A. and Treasurer and Chief
Financial Officer of Excelsior Funds
from 2004-2005; Chief Financial Officer
of AMIC Distribution Partners from
2002-2004; Controller of Reserve
Management, Inc. and Reserve Partners,
Inc. and Treasurer of Reserve Funds from
2000-2002.
----------
(1) Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise noted.
(2) The Fund's Board 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 is as follows:
* Term continues until the Fund's 2009 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
** Term continues until the Fund's 2008 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
*** Term continues until the Fund's 2007 Annual Meeting of Shareholders or
until their successors are duly elected and qualified.
(3) "Interested person" of the Fund as defined in the 1940 Act. Mr. Gabelli is
considered an "interested person" of the Fund because of his affiliation with
the Investment Adviser and Gabelli & Company, Inc., which executes portfolio
transactions for the Fund, and as a controlling
S-10
shareholder because of the level of his ownership of shares of common stock
of the Fund. As a result of his ownership of securities of an affiliate of
Citigroup Global Markets Inc., Mr. Pustorino is considered an "interested
person" of the Fund until after the completion of this offering.
(4) As a Director, elected solely by holders of the Fund's preferred stock.
BENEFICIAL OWNERSHIP OF STOCK HELD IN THE FUND AND THE FUND COMPLEX FOR
EACH DIRECTOR
Set forth in the table below is the dollar range of equity securities
in the Fund beneficially owned by each Director and the aggregate dollar range
of equity securities in the Fund complex beneficially owned by each Director.
"Beneficial Ownership" is determined in accordance with Section 16a-1(a)(2) of
the Securities Exchange Act of 1934, as amended (the "1934 Act").
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES
IN ALL REGISTERED
DOLLAR RANGE OF EQUITY INVESTMENT COMPANIES
SECURITIES OVERSEEN BY DIRECTORS
NAME OF DIRECTOR IN THE FUND*(1) IN THE FUND COMPLEX*(1)(2)
------------------------- ---------------------- --------------------------
INTERESTED DIRECTORS:
Mario J. Gabelli E E
Anthony R. Pustorino** E E
NON-INTERESTED DIRECTORS:
Dr. Thomas E. Bratter E E
Anthony J. Colavita** C E
James P. Conn E E
Frank J. Fahrenkopf, Jr. A B
Arthur V. Ferrara A 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 shares were valued as of December 31, 2005.
** Messrs. Colavita and Pustorino each beneficially owned less than 1% of the
common stock of LGL Group, Inc., having a value of $16,517 and $19,272,
respectively, as of December 31, 2005. LGL Group, Inc may be deemed to be
controlled by Mario J. Gabelli and an affiliated person and in that event
would be deemed to be under common control with the Investment Adviser.
(1) This information has been furnished by each Director as of December 31,
2005.
(2) The "Fund Complex" includes all the funds that are considered part of the
same fund complex as the Fund because they have common or affiliated
investment advisers.
AUDIT COMMITTEE
The Audit Committee is composed of three of the Fund's independent (as
such term is defined by the NYSE's listing standards (the "NYSE Listing
Standards")) Directors, namely, Messrs. Colavita, Pustorino and Zizza. Each
member of the Audit Committee has been determined by the Board to be financially
literate. The role
S-11
of the Fund's Audit Committee is to assist the Board in its oversight of (i) the
quality and integrity of the Fund's financial statement reporting process and
the independent audit and reviews thereof; (ii) the Fund's accounting and
financial reporting policies and practices, its internal controls and, as
appropriate, the internal controls of certain of its service providers; (iii)
the Fund's compliance with legal and regulatory requirements; and (iv) the
independent registered public accounting firm's qualifications, independence and
performance. The Audit Committee also is required to prepare an audit committee
report pursuant to the rules of the Commission for inclusion in the Fund's
annual proxy statement. The Audit Committee operates pursuant to the Audit
Committee Charter (the "Audit Charter") that was most recently reviewed and
approved by the Board on February 15, 2006.
Pursuant to the Audit Charter, the Audit Committee is responsible for
conferring with the Fund's independent registered public accounting firm,
reviewing annual financial statements, approving the selection of the Fund's
independent registered public accounting firm and overseeing the Fund's internal
controls. The Audit Charter also contains provisions relating to the
pre-approval by the Audit Committee of certain non-audit services to be provided
by [AUDITOR] to the Fund and to the Investment Adviser and certain of its
affiliates. The Audit Committee advises the full Board with respect to
accounting, auditing and financial matters affecting the Fund. As set forth in
the Audit Charter, management is responsible for maintaining appropriate systems
for accounting and internal control, and the Fund's independent registered
public accounting firm is responsible for planning and carrying out proper
audits and reviews. The independent registered public accounting firm is
ultimately accountable to the Board and to the Audit Committee, as
representatives of shareholders. The independent registered public accounting
firm for the Fund reports directly to the Audit Committee.
In performing its oversight function, at a meeting held on February
13, 2006, the Audit Committee reviewed and discussed with management of the Fund
and [AUDITOR] the audited financial statements of the Fund as of and for the
fiscal year ended December 31, 2005, and discussed the audit of such financial
statements with the independent registered public accounting firm.
In addition, the Audit Committee discussed with the independent
registered public accounting firm the accounting principles applied by the Fund
and such other matters brought to the attention of the Audit Committee by the
independent registered public accounting firm required by Statement of Auditing
Standards No. 61, Communications with Audit Committees, as currently modified or
supplemented. The Audit Committee also received from the independent registered
public accounting firm the written disclosures and statements required by the
Commission's independence rules, delineating relationships between the
independent registered public accounting firm and the Fund and discussed the
impact that any such relationships might have on the objectivity and
independence of the independent registered public accounting firm.
As set forth above, and as more fully set forth in the Audit Charter,
the Audit Committee has significant duties and powers in its oversight role with
respect to the Fund's financial reporting procedures, internal control systems
and the independent audit process.
The members of the Audit Committee are not, and do not represent
themselves to be, professionally engaged in the practice of auditing or
accounting and are not employed by the Fund for accounting, financial
management, or internal control purposes. Moreover, the Audit Committee relies
on and makes no independent verification of the facts presented to it or
representations made by management or independent verification of the facts
presented to it or representations made by management or the Fund's independent
registered public accounting firm. Accordingly, the Audit Committee's oversight
does not provide an independent basis to determine that management has
maintained appropriate accounting and/or financial reporting principles and
policies, or internal controls and procedures, designed to assure compliance
with accounting standards and applicable laws and regulations. Furthermore, the
Audit Committee's considerations and discussions referred to above do not
provide assurance that the audit of the Fund's financial statements has been
carried out in accordance with the standards of the Public Company Accounting
Oversight Board (United States) or that the financial statements are presented
in accordance with generally accepted accounting principles (United States).
The Audit Committee met twice during the year ended December 31, 2005.
NOMINATING COMMITTEE
The Board has a Nominating Committee composed of three independent (as
such term is defined by the NYSE Listing Standards) Directors, namely, Messrs.
Colavita, Ferrara and Zizza. The Nominating Committee met once during the year
ended December 31, 2005. The Nominating Committee is responsible for identifying
and
S-12
recommending to the Board individuals believed to be qualified to become Board
members in the event that a position is vacated or created. The Nominating
Committee will consider Director candidates recommended by shareholders. In
considering candidates submitted by shareholders, the Nominating Committee will
take into consideration the needs of the Board, the qualifications of the
candidate and the interests of shareholders. The Nominating Committee may also
take into consideration the number of shares held by the recommending
shareholder and the length of time that such shares have been held. To recommend
a candidate for consideration by the Nominating Committee, a shareholder must
submit the recommendation in writing and must include the following information:
- The name of the shareholder and evidence of the shareholder's
ownership of shares of the Fund, including the number of shares owned
and the length of time of ownership;
- The name of the candidate, the candidate's resume or a listing of his
or her qualifications to be a Director of the Fund and the person's
consent to be named as a Director if selected by the Nominating
Committee and nominated by the Board; and
- If requested by the Nominating Committee, a completed and signed
director's questionnaire.
The shareholder's recommendation and information described above must
be sent to James E. McKee, the Fund's Secretary, c/o Gabelli Funds, LLC, and
must be received by the Secretary no less than 120 days prior to the anniversary
date of the Fund's most recent annual meeting of stockholders or, if the meeting
has moved by more than 30 days, a reasonable amount of time before the meeting.
The Nominating Committee believes that the minimum qualifications for
serving as a Director of the Fund are that the individual demonstrate, by
significant accomplishment in his or her field, an ability to make a meaningful
contribution to the Board'S oversight of the business and affairs of the Fund
and have an impeccable record and reputation for honest and ethical conduct in
both his or her professional and personal activities. In addition, the
Nominating Committee examines a candidate's specific experiences and skills,
time availability in light of other commitments, potential conflicts of interest
and independence from management and the Fund. The Nominating Committee also
seeks to have the Board represent a diversity of backgrounds and experience.
The Fund's Nominating Committee adopted a charter on May 12, 2004, and
amended the charter on November 17, 2004. The charter can be found on the Fund's
website at http://www.gabelli.com.
PROXY VOTING COMMITTEE
The Fund also has a Proxy Voting Committee, which, if so determined by
the Board, is authorized to exercise voting power and/or dispositive power over
specific securities held in the Fund's portfolio for such period as the Board
may determine. The Directors serving on the Proxy Voting Committee are Messrs.
Conn, Ferrara and Pustorino.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the Investment
Adviser or its affiliates a fee of $12,000 per year plus $1,500 per meeting
attended in person, $1,000 per Committee meeting attended in person, and $500
per telephonic meeting, together with the Director's actual out-of-pocket
expenses relating to his attendance at such meetings. In addition, the Audit
Committee Chairman receives an annual fee of $3,000, the Proxy Voting Committee
Chairman receives an annual fee of $1,500, and the Nominating Committee Chairman
receives an annual fee of $2,000. The aggregate remuneration (not including
out-of-pocket expenses) paid by the Fund to such Directors during the year ended
December 31, 2005 amounted to $139,991. During the year ended December 31, 2005,
the Directors of the Fund met seven times, three of which were special meetings
of Directors. Each Director then serving in such capacity attended at least 75%
of the meetings of Directors and of any Committee of which he is a member.
The following table shows certain compensation information for the
Directors and Officers of the Fund for the year ended December 31, 2005.
Officers of the Fund who are employed by the Investment Adviser receive no
compensation or expense reimbursement from the Fund.
S-13
COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2005
TOTAL COMPENSATION
FROM THE
AGGREGATE FUND AND FUND COMPLEX
COMPENSATION PAID
NAME OF PERSON AND POSITION FROM THE FUND TO DIRECTORS/OFFICERS*
--------------------------- ------------- ----------------------
DIRECTORS:
Mario J. Gabelli, Chairman of the Board $ 0 $ 0 (24)****
Dr. Thomas E. Bratter, Director $18,333 $ 32,750 (3)
Anthony J. Colavita, Director $22,085 $212,473 (37)***,****
James P. Conn, Director $17,538 $ 83,283 (14)
Frank J. Fahrenkopf, Jr., Director $18,225 $ 60,183 (5)
Arthur V. Ferrara, Director $18,063 $ 32,011 (9)***
Karl Otto Pohl, Director** $ 0 $ 7,571 (35)***,****
Anthony R. Pustorino, Director $25,154 $147,261 (17)***
Salvatore J. Zizza, Director $20,592 $143,962 (25) ****
OFFICER:
Dawn M. Donato, Assistant Vice President***** $75,000 $ 75,000(1)
----------
* Represents the total compensation paid to such persons during the calendar
year ended December 31, 2005 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 parentheses
represents the number of such investment companies and portfolios.
** Mr. Pohl resigned from the Board on November 15, 2005 and now serves as
Director Emeritus.
*** Includes compensation for serving as a Director of The Treasurer's Fund,
Inc., which was liquidated on October 28, 2005.
**** Includes compensation for serving as a Trustee of Ned Davis Research Funds,
Inc., which was liquidated on February 10, 2006.
***** Ms. Donato was employed by the Fund and not by the Investment Adviser
(although during her tenure she was eligible to receive incentive-based
variable compensation from affiliates of the Investment Adviser). Ms.
Donato resigned her position as an officer and an employee of the Fund on
October 6, 2006.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
The Fund's By-Laws provide that the Fund, to the fullest extent
permitted by law, will indemnify its current and former Directors and officers
and may indemnify its employees or agents against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices or association with the Fund. The By-Laws do not permit
indemnification against any liability to which such person would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office. Maryland law does not
permit indemnification of present or former directors, officers, employees or
agents in connection with any proceeding to which they may be made a party by
reason of their service to the Fund if (i) the act or omission of such person or
entity was material to the matter giving rise to the proceeding and (a) was
committed in bad faith; or (b) was the result of active and deliberate
dishonesty; (ii) such person or entity actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, such person or entity had reasonable cause to believe that the act
or omission was unlawful.
Under Maryland law, the Fund is not permitted to indemnify for an
adverse judgment in a suit by or in the right of the Fund for a judgment of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for expenses. The
termination of any proceeding by conviction or upon a plea of nolo contendere or
its equivalent or an entry of an order of probation prior to judgment creates a
rebuttable presumption that the director, officer, employee or agent did not
meet the requisite standard of
S-14
conduct required for permitted indemnification. The termination of any
proceeding by judgment, order or settlement, however, does not create such a
presumption.
The By-Laws and Maryland law permit the Fund to advance reasonable
expenses to current or former Directors, officers, employees and agents upon the
Fund's receipt of a written affirmation by such person or entity of its good
faith belief that it has met the standard of conduct necessary for
indemnification by the Fund, and a written undertaking by such person or entity
(or on its behalf) to repay the amount paid or reimbursed by the Fund if it is
ultimately determined that such person or entity did not meet the requisite
standard of conduct. The By-Laws further require that one of the following
conditions must also be met to advance payment of expenses: (i) the person or
entity seeking indemnification shall provide a security in the form and amount
acceptable to the Fund for its undertaking; (ii) the Fund is insured against
losses arising by reason of the advance; (iii) approval by a majority of a
quorum of the Directors of the Fund who are neither "interested persons" as
defined by Section 2(a)(19) of the 1940 Act nor parties to the proceeding; or
(iv) a written opinion of independent legal counsel, based on a review of the
facts readily available to the Fund at the time the advance is proposed to be
made, to the effect that there is reason to believe that the person or entity
seeking indemnification will ultimately be found to be entitled to
indemnification.
Maryland law permits a Maryland corporation to include in its charter
a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by final
judgment as being material to the cause of action. The Fund's Charter provides
for such a limitation, except to the extent such exemption is not permitted by
the 1940 Act, as amended from time to time.
MATTERS RELATING TO INVESTMENT ADVISER
Affiliates of the Investment Adviser, may, in the ordinary course of
their business, acquire for their own account or for the accounts of their
advisory clients, significant (and possibly controlling) positions in the
securities of companies that may also be suitable for investment by the Fund.
The securities in which the Fund might invest may thereby be limited to some
extent. For instance, many companies have adopted so-called "poison pill" or
other defensive measures designed to discourage or prevent the completion of
non-negotiated offers for control of the company. Such defensive measures may
have the effect of limiting the shares of the company, which might otherwise be
acquired by the Fund if the affiliates of the Investment Adviser or their
advisory accounts have or acquire a significant position in the same securities.
However, the Investment Adviser does not believe that the investment activities
of its affiliates will have a material adverse effect upon the Fund in seeking
to achieve its investment objectives. In addition, the Fund and the Investment
Adviser have adopted a code of ethics that is designed in part to ensure that
all such orders are accorded priority of execution over orders entered on behalf
of proprietary accounts or accounts in which the Investment Adviser or its
affiliates have a substantial pecuniary interest. See "General Information --
Code of Ethics." The Investment Adviser may give advice or take actions with
respect to other clients that differs from the action taken with respect to the
Fund. The Fund may invest in the securities of companies that are investment
management clients of the Investment Adviser's affiliates. In addition,
portfolio companies or their officers or directors may be minority shareholders
of the Investment Adviser's affiliates.
For the years ended December 31, 2003, December 31, 2004, and December
31, 2005, the Investment Adviser was paid $12,895,377, $15,167,775 and
$16,357,998, respectively, for advisory and administrative services rendered to
the Fund.
PORTFOLIO MANAGER INFORMATION
OTHER ACCOUNTS MANAGED
The information below lists other accounts for which the Fund's
portfolio managers were primarily responsible for the day-to-day management
during the year ended December 31, 2005.
S-15
NUMBER OF
ACCOUNTS
MANAGED
WITH
ADVISORY TOTAL ASSETS
NAME OF TOTAL NUMBER FEE WITH ADVISORY
PORTFOLIO TYPES OF OF ACCOUNTS BASED ON FEE BASED ON
MANAGER ACCOUNTS MANAGED TOTAL ASSETS PERFORMANCE PERFORMANCE
--------- -------------------------------- ------------ --------------- ----------- --------------
Mario J. Gabelli Registered Investment Companies 25 $13,060,000,000 6 $4,700,000,000
Other Pooled Investment Vehicles 20 $ 946,400,000 19 $ 704,600,000
Other Accounts 1882 $10,000,000,000 5 $1,300,000,000
Caesar M.P. Bryan Registered Investment Companies 6 $ 2,800,000,000 1 $1,900,000,000
Other Pooled Investment Vehicles 1 $ 6,600,000 1 $ 6,600,000
Other Accounts 5 $ 45,500,500 0 0
----------
* Represents the portion of assets for which the portfolio manager has
primary responsibility in the accounts indicated. The accounts indicated
may contain additional assets under the primary responsibility of other
portfolio managers.
POTENTIAL CONFLICTS OF INTEREST
Actual or apparent conflicts of interest may arise when a portfolio
manager for the Fund also has day-to-day management responsibilities with
respect to one or more other accounts. These potential conflicts include:
ALLOCATION OF LIMITED TIME AND ATTENTION. Because the portfolio
manager manages many accounts, he may not be able to formulate as complete a
strategy or identify equally attractive investment opportunities for each of
those accounts as if he were to devote substantially more attention to the
management of only a few accounts.
ALLOCATION OF LIMITED INVESTMENT OPPORTUNITIES. If the portfolio
manager identifies an investment opportunity that may be suitable for multiple
accounts, the Fund may not be able to take full advantage of that opportunity
because the opportunity may need to be allocated among all or many of these
accounts or other accounts primarily managed by other portfolio managers of the
Investment Adviser and its affiliates.
PURSUIT OF DIFFERING STRATEGIES. At times, the portfolio manager may
determine that an investment opportunity may be appropriate for only some of the
accounts for which he exercises investment responsibility, or may decide that
certain of these accounts should take differing positions with respect to a
particular security. In these cases, the portfolio manager may execute differing
or opposite transactions for one or more accounts which may affect the market
price of the security or the execution of the transactions, or both, to the
detriment of one or more of his accounts.
SELECTION OF BROKER/ DEALERS. Because of the portfolio manager's
position with, and his indirect majority ownership interest in, an affiliated
broker, Gabelli & Company, Inc., he may have an incentive to use Gabelli &
Company, Inc. to execute portfolio transactions for the Fund even if using
Gabelli & Company, Inc. is not in the best interest of the Fund.
VARIATION IN COMPENSATION. A conflict of interest may arise where the
financial or other benefits available to the portfolio manager differ among the
accounts that he manages. If the structure of the Investment Adviser's
management fee or the portfolio manager's compensation differs among accounts
(such as where certain funds or accounts pay higher management fees or
performance-based management fees), the portfolio manager may be motivated to
favor certain funds or accounts over others. The portfolio manager also may be
motivated to favor funds or accounts in which he has an investment interest, or
in which the Investment Adviser or its affiliates have investment interests. In
Mr. Gabelli's case, the Investment Adviser's compensation (and expenses) for the
Fund are marginally greater as a percentage of assets than for certain other
accounts and are less than for certain other accounts managed by Mr. Gabelli,
while his personal compensation structure varies with near term performance to a
greater degree in certain performance fee based accounts than with
non-performance fee based accounts. In addition, he has investment interests in
several of the funds managed by the Investment Adviser and its affiliates.
The Investment Adviser and the Fund have adopted compliance policies
and procedures that are designed to address the various conflicts of interest
that may arise for the Investment Adviser and its staff members. However, there
is no guarantee that such policies and procedures will be able to detect and
address every situation in which an actual or potential conflict may arise. In
Mr. Bryan's case, his compensation is not affected by changes in assets of the
Fund while it is for other accounts that he manages.
COMPENSATION STRUCTURE. Mr. Gabelli receives incentive-based variable
compensation based on a percentage of net revenues received by the Investment
Adviser for managing the Fund. Net revenues are determined by deducting from
gross investment management fees the firm's expenses (other than Mr. Gabelli's
compensation) allocable to the Fund. Additionally, he receives similar
incentive-based variable compensation for managing other accounts within the
firm. This method of compensation is based on the premise that superior
long-term performance
S-16
in managing a portfolio should be rewarded with higher compensation as a result
of growth of assets through appreciation and net investment activity. Five
closed-end registered investment companies managed by Mr. Gabelli have
arrangements whereby the Investment Adviser will only receive its investment
advisory fee attributable to the liquidation value of outstanding preferred
stock (and Mr. Gabelli would only receive his percentage of such advisory fee)
if certain performance levels are met. Mr. Gabelli manages other accounts with
performance fees. Compensation for managing these accounts has two components.
One component of his compensation is based on a percentage of net revenues
received by the Investment Adviser for managing the account. The second
component is based on absolute performance of the account, with respect to which
a percentage of such performance fee is paid to Mr. Gabelli. As an executive
officer of the Investment Adviser's parent company, GAMCO Investors, Inc., Mr.
Gabelli also receives ten percent of the net operating profits of the parent
company. Mr. Gabelli receives no base salary, no annual bonus and no stock
options.
The compensation of other portfolio managers in the Gabelli
organization is reviewed annually and structured to enable it to attract and
retain highly qualified professionals in a competitive environment. Mr. Bryan
receives a compensation package that includes a minimum draw or base salary,
equity-based incentive compensation via awards of stock options, and
incentive-based variable compensation based on a percentage of net revenues
received by the Investment Adviser for managing certain accounts other than the
Fund to the extent that the amount exceeds a minimum level of compensation. Net
revenues are determined by deducting from gross investment management fees
certain of the firm's expenses (other than Mr. Bryan's compensation) allocable
to such other accounts. This method of compensation is based on the premise that
superior long-term performance in managing a portfolio should be rewarded with
higher compensation as a result of growth of assets through appreciation and net
investment activity. Equity-based incentive compensation is based on an
evaluation by the Investment Adviser's parent, GAMCO Investors, Inc., of
quantitative and qualitative performance evaluation criteria.
Mr. Bryan's compensation for managing other pooled investment accounts
is based on a percentage of net revenues received by the Investment Adviser for
managing the account. Compensation for managing accounts that have a
performance-based fee will have two components. One component is based on a
percentage of net revenues received by the Investment Adviser for managing the
account. The second component is based on absolute performance of the account,
with respect to which a percentage of the performance fee is paid to the
portfolio manager.
OWNERSHIP OF STOCK IN THE FUND. Set forth in the table below is the
dollar range of equity securities in the Fund beneficially owned by Messrs.
Gabelli and Bryan:
DOLLAR RANGE OF
EQUITY SECURITIES
NAME HELD IN FUND*
---- -----------------
Mario J. Gabelli G
Caesar M.P. Bryan A
----------
* KEY TO DOLLAR RANGES -- INFORMATION AS OF DECEMBER 31, 2005
A. None
B. $1 -- $10,000
C. $10,001 -- $50,000
D. $50,001 -- $100,000
E. $100,001 -- $500,000
F. $500,001 -- $1,000,000
G. over $1,000,000
PORTFOLIO HOLDINGS INFORMATION
Employees of the Investment Adviser and its affiliates will often have
access to information concerning the portfolio holdings of the Fund. The Fund
and the Investment Adviser have adopted policies and procedures that require all
employees to safeguard proprietary information of the Fund, which includes
information relating to the Fund's portfolio holdings as well as portfolio
trading activity of the Investment Adviser with respect to the Fund
(collectively, "Portfolio Holdings Information"). In addition, the Fund and the
Investment Adviser have adopted policies and procedures providing that Portfolio
Holdings Information may not be disclosed except to the extent that it is (a)
made available to the general public by posting on the Fund's website or filed
as a part of a required filing on Form N-Q or NCSR or (b) provided to a third
party for legitimate business purposes or regulatory purposes, that has
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agreed to keep such data confidential under forms approved by the Investment
Adviser's legal department or outside counsel, as described below. The
Investment Adviser will examine each situation under (b) with a view to
determine that release of the information is in the best interest of the Fund
and its shareholders and, if a potential conflict between the Adviser's
interests and the Fund's interests arises, to have such conflict resolved by the
Chief Compliance Officer or the independent Board. These policies further
provide that no officer of the Fund or employee of the Investment Adviser shall
communicate with the media about the Fund without obtaining the advance consent
of the Chief Executive Officer, Chief Operating Officer, or General Counsel of
the Investment Adviser.
Under the foregoing policies, the Fund currently may disclose
Portfolio Holdings Information in the circumstances outlined below. Disclosure
generally may be either on a monthly or quarterly basis with no time lag in some
cases and with a time lag of up to 60 days in other cases (with the exception of
proxy voting services which require a regular download of data):
(1) To regulatory authorities in response to requests for such information
and with the approval of the Chief Compliance Officer of the Fund;
(2) To mutual fund rating and statistical agencies and to persons
performing similar functions where there is a legitimate business
purpose for such disclosure and such entity has agreed to keep such
data confidential at least until it has been made public by the
Investment Adviser;
(3) To service providers of the Fund, as necessary for the performance of
their services to the Fund and to the Board; the Fund's service
providers are its administrator, transfer agent, custodian,
independent registered public accounting firm, and legal counsel;
(4) To firms providing proxy voting and other proxy services provided each
such entity has agreed to keep such data confidential at least until
it has been made public by the Investment Adviser;
(5) To certain broker-dealers, investment advisers, and other financial
intermediaries for purposes of their performing due diligence on the
Fund and not for dissemination of this information to their clients or
use of this information to conduct trading for their clients.
Disclosure of portfolio holdings information in these circumstances
requires the broker, dealer, investment adviser, or financial
intermediary to agree to keep such information confidential and is
further subject to prior approval of the Chief Compliance Officer of
the Fund and shall be reported to the Board at the next quarterly
meeting; and
(6) To consultants for purposes of performing analysis of the Fund, which
analysis (but not the Portfolio Holdings Information) may be used by
the consultant with its clients or disseminated to the public,
provided that such entity shall have agreed to keep such information
confidential at least until it has been made public by the Investment
Adviser.
Under the Fund's policies described in item 2 above the following
entities receive information about the portfolio holdings including information
derived from the portfolio monthly:
(1) Lipper Inc. receives information derived from the portfolio, with a
one (1) business day lag, and
(2) The Investment Company Institute receives information derived from the
portfolio, with up to a ten (10) business day lag.
Disclosures made pursuant to a confidentiality agreement are subject
to periodic confirmation by the Chief Compliance Officer of the Fund that the
recipient has utilized such information solely in accordance with the terms of
the agreement. Neither the Fund nor the Investment Adviser, nor any of the
Investment Adviser's affiliates, will accept on behalf of itself, its
affiliates, or the Fund any compensation or other consideration in connection
with the disclosure of portfolio holdings of the Fund. The Board will review
such arrangements annually with the Fund's Chief Compliance Officer.
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PROXY VOTING PROCEDURES
The Fund has adopted the proxy voting procedures of the Investment
Adviser and has directed the Investment Adviser to vote all proxies relating to
the Fund's voting securities in accordance with such procedures. The proxy
voting procedures are set forth below as Appendix A to this SAI.
Information on how proxies relating to the Fund's voting securities
were voted by the Investment Adviser during the 12 month period ended June 30,
2006 is available, upon request, by calling (800) 422-3554 or on the website of
the Commission at http://www.sec.gov.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board, the Investment Adviser
is responsible for placing purchase and sale orders and the allocation of
brokerage on behalf of the Fund. Transactions in equity securities are in most
cases effected on U.S. stock exchanges and involve the payment of negotiated
brokerage commissions. In general, there may be no stated commission in the case
of securities traded in over-the-counter markets, but the prices of those
securities may include undisclosed commissions or mark-ups. Principal
transactions are not entered into with affiliates of the Fund. However, Gabelli
& Company, Inc. may execute transactions in the over-the-counter markets on an
agency basis and receive a stated commission therefrom. To the extent consistent
with applicable provisions of the 1940 Act and the rules and exemptions adopted
by the Commission thereunder, as well as other regulatory requirements, the
Fund's Board has determined that portfolio transactions may be executed through
Gabelli & Company, Inc. and its broker-dealer affiliates if, in the judgment of
the Investment Adviser, the use of those broker-dealers is likely to result in
price and execution at least as favorable as those of other qualified
broker-dealers and if, in particular transactions, those broker-dealers charge
the Fund a rate consistent with that charged to comparable unaffiliated
customers in similar transactions. The Fund has no obligations to deal with any
broker or group of brokers in executing transactions in portfolio securities. In
executing transactions, the Investment Adviser seeks to obtain the best price
and execution for the Fund, taking into account such factors as price, size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund does
not necessarily pay the lowest commission available.
Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information or other services
(e.g. wire services) 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 such other accounts, it is the policy of the Investment Adviser and its
affiliates to allocate such purchases and sales in a manner deemed fair and
equitable to all of the accounts, including the Fund.
For the fiscal years ended December 31, 2003, December 31, 2004 and
December 31, 2005, the Fund paid a total of $837,474, $1,249,931 and $814,155,
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and its
affiliates received, $426,925, $835,136 and $469,081, 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, 2005 represented
approximately 57.62% of the aggregate dollar amount of brokerage
S-19
commissions paid by the Fund for such period and approximately _____% of the
aggregate dollar amount of transactions by the Fund for such period.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its stockholders. 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 interpretation 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 (including stockholders owning large positions in the Fund), and
the discussions set forth here and in the Prospectus do not constitute tax
advice. Investors are urged to consult their own tax advisers with any specific
questions relating to U.S. federal, state, local and foreign taxes.
TAXATION OF THE FUND
The Fund has elected to be treated and has qualified, and intends to
continue to qualify, as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "CODE") (a "RIC").
If the Fund were unable to satisfy the 90% distribution requirement
described under "Taxation" in the Prospectus 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
its 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 two taxable years, then the Fund would be required to elect to
recognize and pay tax on any net built-in gain (the excess of aggregate gain,
including items of income, over aggregate loss that would have been realized if
the Fund had been liquidated) or, alternatively, be subject to taxation on such
built-in gain recognized for a period of ten years, in order to qualify as a RIC
in a subsequent year.
Gain or loss on the sales of securities by the Fund will generally be
long-term capital gain or loss if the securities have been held by the Fund for
more than one year. Gain or loss on the sale of securities held for one year or
less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar-denominated
securities and on any non-U.S. dollar-denominated futures contracts, options and
forward contracts that are not section 1256 contracts (as defined in the Code)
generally will be treated as ordinary income and loss.
Gains or losses on section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses; however, foreign currency
gains or losses arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates as prescribed under the
Code) are "marked-to-market" with the result that unrealized gains or losses are
treated as though they were realized.
Investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could subject the Fund to federal income tax (including
interest charges) on certain distributions or dispositions with respect to those
investments which cannot be eliminated by making distributions to stockholders.
Elections may be available to the Fund to mitigate the effect of this tax
provided that the PFIC complies with certain reporting requirements, but such
elections generally accelerate the recognition of income without the receipt of
cash. Dividends paid by PFICs will not qualify for the reduced tax rates
discussed below under "Taxation of Stockholders."
The Fund may invest in debt obligations purchased at a discount with
the result that the Fund may be required to accrue income for U.S. 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 certain U.S. federal income tax
purposes.
S-20
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
currently include income it has not yet received. Any such income would be
treated as income earned by the Fund and therefore would be subject to the
distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or might
prevent the Fund from distributing enough ordinary income and capital gain net
income to avoid completely the imposition of the excise tax. To avoid this
result, the Fund may be required to borrow money or dispose of 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 shares of common stock until the asset
coverage is restored. Such a suspension of distributions might prevent the Fund
from distributing 90% of its investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or might
prevent the Fund from distributing enough income and capital gain net income to
avoid completely imposition of the excise tax.
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher taxed
short-term capital gains or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (vi) adversely alter the characterization of
certain complex financial transactions and (vii) produce income that will not
qualify as good income for purposes of the 90% annual gross income requirement
described above. The Fund will monitor its transactions and may make certain tax
elections to mitigate the effect of these rules and prevent disqualification of
the Fund as a RIC.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund intends to invest less
than 50% of its total assets in foreign securities. As long as the Fund
continues to invest less than 50% of its assets in foreign securities it will
not be eligible to elect to "pass-through" to stockholders of the Fund the
ability to use the foreign tax deduction or foreign tax credit for foreign taxes
paid with respect to qualifying taxes.
TAXATION OF STOCKHOLDERS
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.
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gain is 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 gain in a
notice to its stockholders, each of whom (i) will be required to include in
income for tax purposes as long-term capital gain 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 stock of the Fund by an amount equal to
65% of the amount of undistributed capital gain included in such stockholder's
gross income.
Distributions paid by the Fund from its investment company taxable
income, which includes net short-term capital gain, generally are taxable as
ordinary income to the extent of the Fund's earnings and profits. Such
distributions (if designated by the Fund) may, however, qualify (provided
holding period and other requirements are met by both the Fund and the
stockholder) (i) for the dividends received deduction available to corporations,
but only to the extent that the Fund's income consists of dividend income from
U.S. corporations and (ii) through December 31, 2010, as qualified dividend
income eligible for the reduced maximum federal rate to individuals of generally
15% (currently 5% for individuals in lower tax brackets) to the extent that the
Fund receives qualified dividend income. Qualified dividend income is, in
general, dividend income from taxable domestic corporations
S-21
and certain qualified foreign corporations (e.g., generally, foreign
corporations incorporated in a possession of the United States or in certain
countries with a qualifying comprehensive tax treaty with the United States, or
whose stock with respect to which such dividend is paid is readily tradable on
an established securities market in the United States). A qualified foreign
corporation does not include a foreign corporation which for the taxable year of
the corporation in which the dividend was paid, or the preceding taxable year,
is a PFIC. If the Fund lends portfolio securities, the amount received by the
Fund that is the equivalent of the dividends paid by the issuer on the
securities loaned will not be eligible for qualified dividend income treatment.
Distributions of net capital gain designated as capital gain distributions, if
any, are taxable to stockholders at rates applicable to long-term capital gain,
whether paid in cash or in stock, and regardless of how long the stockholder has
held the Fund's stock. Capital gain distributions are not eligible for the
dividends received deduction. The maximum federal tax rate on net long-term
capital gain of individuals is reduced generally from 20% to 15% (currently 5%
for individuals in lower brackets) for such gain realized before January 1,
2011. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's stock and, after such adjusted tax
basis is reduced to zero, will constitute capital gain to such holder (assuming
the stock is held as a capital asset). For non-corporate taxpayers, investment
company taxable income (other than qualified dividend income) will currently be
taxed at a maximum rate of 35%, while net capital gain generally will be taxed
at a maximum rate of 15%. For corporate taxpayers, both investment company
taxable income and net capital gain are taxed at a maximum rate of 35%.
If an individual receives a regular dividend qualifying for the
long-term capital gains rates and such dividend constitutes an "extraordinary
dividend," and the individual subsequently recognizes a loss on the sale or
exchange of stock in respect of which the extraordinary dividend was paid, then
the loss will be long-term capital loss to the extent of such extraordinary
dividend. An "extraordinary dividend" on preferred stock for this purpose is
generally a dividend (i) in an amount greater than or equal to 5% of the
taxpayer's tax basis (or trading value) in a share of stock, aggregating
dividends with ex-dividend dates within an 85-day period or (ii) in an amount
greater than 20% of the taxpayer's tax basis (or trading value) in a share of
stock, aggregating dividends with ex-dividend dates within a 365-day period.
The IRS currently requires that a RIC that has two or more classes of
stock allocate to each such class proportionate amounts of each type of its
income (such as ordinary income, capital gains, dividends qualifying for the
dividends received deduction ("DRD") and qualified dividend income) based upon
the percentage of total dividends paid out of current or accumulated earnings
and profits to each class for the tax year. Accordingly, the Fund intends each
year to allocate capital gain dividends, dividends qualifying for the DRD and
dividends that constitute qualified dividend income, if any, between its common
stock and preferred stock in proportion to the total dividends paid out of
current or accumulated earnings and profits to each class with respect to such
tax year. Distributions in excess of the Fund's current and accumulated earnings
and profits, if any, however, will not be allocated proportionately among the
common stock and preferred stock. Since the Fund's current and accumulated
earnings and profits will first be used to pay dividends on its preferred stock
(including the Series F Preferred ), distributions in excess of such earnings
and profits, if any, will be made disproportionately to holders of shares of
common stock.
Stockholders may be entitled to offset their capital gain
distributions (but not distributions eligible for qualified dividend income
treatment) with capital loss. There are a number of statutory provisions
affecting when capital loss may be offset against capital gain, and limiting the
use of loss from certain investments and activities. Accordingly, stockholders
with capital loss are urged to consult their own tax advisers.
The price of stock purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing stock just prior to a distribution
will receive a distribution which generally will be taxable to them even though
it represents in part a return of invested capital.
Certain types of income received by the Fund from real estate
investment trusts ("REITs"), real estate mortgage investment conduits
("REMICs"), taxable mortgage pools or other investments may cause the Fund to
designate some or all of its distributions as "excess inclusion income." To Fund
shareholders such excess inclusion income may (1) constitute taxable income, as
"unrelated business taxable income" ("UBTI") for those shareholders who would
otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts,
Keogh plans, pension plans and certain charitable entities; (2) not be offset
against net operating losses for tax purposes; ( 3) not be eligible for reduced
U.S. withholding for non- U.S. shareholders even from tax treaty countries; and
( 4) cause the Fund to be subject to tax if certain "disqualified organizations"
as defined by the Code are Fund shareholders.
S-22
Upon a sale, exchange, redemption or other disposition of stock, a
stockholder will generally realize a taxable gain or loss equal to the
difference between the amount of cash and the fair market value of other
property received and the stockholder's adjusted tax basis in the stock. Such
gain or loss will be treated as long-term capital gain or loss if the stock has
been held for more than one year. Any loss realized on a sale or exchange will
be disallowed to the extent the stock disposed of is replaced by substantially
identical stock within a 61-day period beginning 30 days before and ending 30
days after the date that the stock is disposed of. In such a case, the basis of
the stock acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund stock held by
the stockholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain distributions received
by the stockholder (or amounts credited to the stockholder as an undistributed
capital gain) with respect to such stock.
Ordinary income distributions and capital gain distributions also may
be subject to state and local taxes. Stockholders are urged to consult their own
tax advisers regarding specific questions about federal (including the
application of the alternative minimum tax rules), state, local or foreign tax
consequences to them of investing in the Fund.
Distributions of investment company taxable income made by the Fund to
stockholders who are non-resident aliens or foreign entities ("foreign
investors") are generally subject to withholding tax at a 30% rate or a reduced
rate specified by an applicable income tax treaty. In order to obtain a reduced
rate of withholding, a foreign investor will be required to provide an IRS Form
W-8BEN certifying its entitlement to benefits under a treaty. The withholding
tax does not apply to regular dividends paid to a foreign investor who provides
a Form W-8ECI, certifying that the dividends are effectively connected with the
foreign investor's conduct of a trade or business within the United States.
Instead, the effectively connected dividends will be subject to regular U.S.
income tax as if the foreign investor were a U.S. stockholder. A non-U.S.
corporation receiving effectively connected dividends may also be subject to
additional "branch profits tax" imposed at a rate of 30% (or lower treaty rate).
A foreign investor who fails to provide an IRS Form W-8BEN or other applicable
form may be subject to backup withholding at the appropriate rate.
In general, United States federal withholding tax will not apply to
any gain or income realized by a foreign investor in respect of any capital gain
distributions, undistributed capital gains, exempt-interest dividends, or upon
the sale or other disposition of shares of the Fund.
For taxable years beginning before January 1, 2008,
properly-designated dividends are generally exempt from United States federal
withholding tax where they (i) are paid in respect of the Fund's "qualified net
interest income" (generally, the Fund'S U.S. source interest income, other than
certain contingent interest and interest from obligations of a corporation or
partnership in which the Fund is at least a 10% shareholder, reduced by expenses
that are allocable to such income) (such dividend, an "interest-related
dividend") or (ii) are paid in respect of the Fund's "qualified short-term
gain" (generally, the excess of the Fund's net short-term capital gain
over the Fund's long-term capital loss for such taxable year) (such dividend, a
"short-term capital gain dividend"). However, depending on its circumstances,
the Fund may designate all, some or none of its potentially eligible dividends
as such interest -related dividends or as short-term capital gain dividends,
and/or treat such dividends, in whole or in part, as ineligible for this
exemption from withholding. In order to qualify for this exemption from
withholding, a foreign investor will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or substitute Form). In the case of
shares held through an intermediary, the intermediary may withhold even if the
Fund designates the payment as an interest -related dividend or short-term
capital gain dividend. Foreign investors should contact their intermediaries
with respect to the application of these rules to their accounts.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
stockholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be refunded or
credited against such stockholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
S-23
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 SHARES OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF COMMON STOCK.
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a stockholder whose shares of common stock are
registered in his own name will have all distributions reinvested automatically
by Computershare Trust Company, N.A. ("Computershare"), which is agent under the
Plan, unless the stockholder elects to receive cash. Distributions with respect
to shares of common stock 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 of common stock 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 shares of 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 Computershare as
dividend -disbursing agent.
Under the Plan, whenever the market price of the shares of common
stock is equal to or exceeds net asset value at the time shares of common stock
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 shares
of common stock. The valuation date is the dividend or distribution payment date
or, if that date is not a NYSE trading day, the next preceding trading day. If
the net asset value of the shares of common stock at the time of valuation
exceeds the market price of the shares of common stock, participants will
receive shares of common stock from the Fund, valued at market price. If the
Fund should declare a dividend or capital gains distribution payable only in
cash, Computershare will purchase the shares of common stock for such Plan in
the open market, on the NYSE or elsewhere, for the participants' accounts,
except that Computershare will endeavor to terminate purchases in the open
market and cause the Fund to issue shares of common stock at the greater of net
asset value or 95% of market value if, following the commencement of such
purchases, the market value of the shares of common stock exceeds net asset
value.
Participants in the Plan have the option of making additional cash
payments to Computershare, semi-monthly, for investment in the common stock as
applicable. Such payments may be made in any amount from $250 to $10,000.
Computershare will use all funds received from participants to purchase shares
of common stock in the open market on or about the 1st and 15th of each month.
Computershare 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 Computershare
in a manner that ensures that Computershare will receive these payments
approximately 10 days before the 1st and 15th of the month. A participant may
without charge withdraw a voluntary cash payment by written notice, if the
notice is received by Computershare at least 48 hours before such payment is to
be invested.
Computershare 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 of
common stock in the account of each Plan participant will be held by
Computershare in noncertificated form in the name of the participant. A Plan
participant may send its stock certificates to Computershare so that the shares
of common stock represented by such certificates will be held by Computershare
in the participant's stockholder account under the Plan. In the case of
stockholders such as banks, brokers or nominees, which hold shares of common
stock for others who are the beneficial owners, Computershare will administer
the Plan on the basis of the number of shares of common stock 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
S-24
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 Computershare on at
least 90 days' written notice to the participants in such Plan. All
correspondence concerning the Plan should be directed to Computershare at P.O.
Box 43010, Providence, RI 02940-3010.
ADDITIONAL INFORMATION CONCERNING THE SERIES F PREFERRED
The additional information concerning the Series F Preferred contained in this
SAI does not purport to be a complete description of the Series F Preferred and
should be read in conjunction with the description of the Series F Preferred
contained in the Prospectus under "Description of the Series F Preferred." This
description is subject to and qualified in its entirety by reference to the
Fund's Governing Documents (as defined in the Glossary), including the
provisions of the Articles Supplementary establishing the Series F Preferred.
Copies of these Articles Supplementary are filed as exhibits to the
registration statement of which the Prospectus and this SAI are a part and may
be inspected, and a copy thereof may be obtained, as described under
"Additional Information" in the Prospectus.
MOODY'S GUIDELINES
The description of the Moody's Guidelines contained in this SAI does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Articles Supplementary. A copy of the Articles Supplementary is
filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under "Additional Information" in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by Moody's in
connection with the Fund's receipt of a rating of "Aaa" from Moody's for the
Series F Preferred. These Rating Agency Guidelines relate, among other things,
to industry and credit quality characteristics of issuers and diversification
requirements and specify various Discount Factors for different types of
securities (with the level of discount greater as the rating of a security
becomes lower). Under the Rating Agency Guidelines, certain types of securities
in which the Fund may otherwise invest consistent with its investment strategy
are not eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio. Such instruments include, for example, private placements
(other than Rule 144A securities) and other securities not within the Rating
Agency Guidelines. Accordingly, although the Fund reserves the right to invest
in such securities to the extent set forth herein, such securities have not
constituted and it is anticipated that they will not constitute a significant
portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of such
guidelines, greater than the aggregate liquidation preference of the Outstanding
Series F Preferred and other Preferred Stock plus specified liabilities, payment
obligations and other amounts, as of periodic Valuation Dates. The Rating Agency
Guidelines also require the Fund to maintain asset coverage for the Outstanding
Preferred Stock (including the Series F Preferred ) on a non-discounted basis of
at least 200% as of the end of each month, and the 1940 Act requires this asset
coverage as a condition to paying dividends or other distributions on its shares
of common stock. See "Description of the Series F Preferred -- Asset Maintenance
Requirements" in the Prospectus. The effect of compliance with the Rating Agency
Guidelines may be to cause the Fund to invest in higher quality assets and/or to
maintain relatively substantial balances of highly liquid assets or to restrict
the Fund's ability to make certain investments that would otherwise be deemed
potentially desirable by the Investment Adviser, including private placements of
other than Rule 144A securities. The Rating Agency Guidelines are subject to
change from time to time with the consent of the relevant Rating Agency and will
apply to the Series F Preferred only so long as the relevant Rating Agency is
rating such stock at the request of the Fund. If in the future the Fund elected
to issue senior securities rated by a rating agency other than Moody's, other
similar arrangements might apply with respect to those securities.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each Rating Agency
(the "Basic Maintenance Amount"), the determination of which is as set forth
under "Description of the Series F Preferred -- Asset Maintenance Requirements"
in the Prospectus. To the extent any particular portfolio holding does not
satisfy the applicable Rating Agency Guidelines, all or a portion of such
holding's value will not be included in the calculation of Discounted Value (as
defined by such Rating
S-25
Agency). Upon any failure to maintain the required Discounted Value, the Fund
may seek to alter the composition of its portfolio to reestablish required asset
coverage within the specified ten Business Day cure period, thereby incurring
additional transaction costs and possible losses and/or gains on dispositions of
portfolio securities.
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
A rating of preferred stock as "Aaa" (as described by Moody's )
indicates strong asset protection, conservative balance sheet ratios and
positive indications of continued protection of preferred dividend requirements.
A Moody's credit rating of preferred stock does not address the likelihood that
a resale mechanism will be successful. As described by Moody's, an issue of
preferred stock which is rated "Aaa" is considered to be top-quality preferred
stock with good asset protection and the least risk of dividend impairment
within the universe of preferred stock.
The Fund will pay certain fees to Moody's for rating the Series F
Preferred. Such ratings may be subject to revision or withdrawal by the
assigning Rating Agency at any time. Any rating of the Series F Preferred should
be evaluated independently of any other rating. Ratings are not recommendations
to purchase, hold, or sell Series F Preferred inasmuch as the rating does not
comment as to market price or suitability for a particular investor. The rating
is based on current information furnished to Moody's by the Fund and obtained by
Moody's from other sources. The rating may be changed, suspended or withdrawn as
a result of changes in, or unavailability of, such information. The Fund has no
current intention to file a voluntary application for relief under federal
bankruptcy law or any similar application under state law for so long as the
Fund is solvent and does not foresee becoming insolvent.
Under the Moody's guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Preferred
Stock's Basic Maintenance Amount. To the extent any particular portfolio holding
does not meet the applicable guidelines, it is not included for purposes of
calculating the Discounted Value of the Fund's portfolio.
The following Discount Factors apply to portfolio holdings as
described below, subject to diversification, issuer size and other requirements,
in order to constitute Moody's Eligible Assets includable within the calculation
of Discounted Value:
TYPE OF MOODY'S ELIGIBLE ASSET*: MOODY'S DISCOUNT FACTOR
-------------------------------- -----------------------------
U.S. Treasury Securities with final maturities that are less than or equal
to 60 days 1.00
Demand or time deposits, certificates of deposit and bankers' acceptances
includible in Short Term Money Market Instruments 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or less 1.00
Commercial paper rated P-1 by Moody's maturing in more than 30 days but in
270 days or less 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less 1.25
Repurchase obligations includible in Short Term Money Market Instruments if
term is less than 30 days and counterparty is rated at least A2 1.00
Other repurchase obligations Discount factor applicable to
underlying assets
U.S. Common Stocks and Common Stocks of foreign issuers for which ADRs are
traded:
Large Cap Stocks (Market Capitalization in excess of $10 billion) 2.00
Mid Cap Stocks (Market Capitalization in between $2 billion and $10 billion) 2.05
Small Cap Stocks (Market Capitalization less than $2 billion) 2.20
Common Stocks of foreign issuers (in existence for at least five years) for
which no ADRs are traded 4.00
Convertible Preferred Stocks and Convertible Corporate Debt Securities
having a delta range of:
.8-.4 (investment grade) 1.92
.8-.4 (below investment grade) 2:26
1-.8 (investment grade) 1.95
1-.8 (below investment grade) 2:29
Convertible Preferred Stocks and Convertible Corporate Debt Securities that
are unrated 2.50
Preferred Stocks:
Auction rate preferred stocks 3.50
Other preferred stock rated:
Aaa 1.50
Aa 1.55
S-26
TYPE OF MOODY'S ELIGIBLE ASSET*: MOODY'S DISCOUNT FACTOR
-------------------------------- -----------------------------
A 1.60
Baa 1.65
Ba 1.96
B 2.16
Less than B or not rated 2.40
DRD Preferred (investment grade) 1.65
DRD Preferred (below investment grade) 2.16
U.S. Government Obligations (other than U.S. Treasury Securities Strips set
forth below) with remaining terms to maturity of:
1 year or less 1.04
2 years or less 1.09
3 years or less 1.12
4 years or less 1.15
5 years or less 1.18
7 years or less 1.21
10 years or less 1.24
15 years or less 1.25
20 years or less 1.26
30 years or less 1.26
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less 1.04
2 years or less 1.10
3 years or less 1.14
4 years or less 1.18
5 years or less 1.21
7 years or less 1.27
10 years or less 1.34
15 years or less 1.45
20 years or less 1.54
30 years or less 1.66
Corporate Debt:
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Aal with remaining terms to maturity of:
1 year or less 1.09
2 years or less 1.15
3 years or less 1.20
4 years or less 1.26
5 years or less 1.32
7 years or less 1.39
10 years or less 1.45
15 years or less 1.50
20 years or less 1.50
30 years or less 1.50
Greater than 30 years 1.65
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Aa3 with remaining terms to maturity of:
1 year or less 1.12
2 years or less 1.18
3 years or less 1.23
4 years or less 1.29
5 years or less 1:35
7 years or less 1.43
10 years or less 1.50
15 years or less 1.55
20 years or less 1.55
30 years or less 1.55
Greater than 30 years 1.73
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least A3 with remaining terms to maturity of:
1 year or less 1.15
2 years or less 1.22
3 years or less 1.27
4 years or less 1.33
S-27
TYPE OF MOODY'S ELIGIBLE ASSET*: MOODY'S DISCOUNT FACTOR
-------------------------------- -----------------------------
5 years or less 1.39
7 years or less 1.47
10 years or less 1.55
15 years or less 1.60
20 years or less 1.60
30 years or less 1.60
Greater than 30 years 1.81
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Baa3 with remaining terms of maturity of:
1 year or less 1.18
2 years or less 1.25
3 years or less 1.31
4 years or less 1.38
5 years or less 1.44.
7 years or less 1.52
10 years or less 1.60
15 years or less 1.65
20 years or less 1.65
30 years or less 1.65
Greater than 30 years 1.89
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Ba3 with remaining terms of maturity of:
1 year, or less 1.37
2 years or less 1.46
3 years or less 1.53
4 years or less 1.61
5 years or less 1.68
7 years or less 1.79
10 years or less 1.89
15 years or less 1.96
20 years or less 1.96
30 years or less 1.96
Greater than 30 years 2.05
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Bl and B2 with remaining terms of
maturity of:
1 year or less 1.50
2 years or less 1.60
3 years or less 1.68
4 years or less 1.76
5 years or less 1.85
7 years or less 1.97
10 years or less 2.08.
15 years or less 2.16
20 years or less 2.28
30 years or less 2.29
Greater than 30 years 2.40
----------
* Discount Factors are for a seven-week exposure period; the Discount Factor
applicable to Rule 144A securities shall be increased by 20%. Unless
conclusions regarding liquidity risk and estimates of both the probability
and severity of default for the Fund's assets can be derived from other
sources, securities rated below B by Moody's and unrated securities, which
are securities rated by neither Moody's, S&P nor Fitch, are limited to 10%
of Moody's Eligible Assets. If a convertible corporate debt security is
unrated by Moody's, S&P or Fitch, the Fund will use the percentage set
forth under "NR" in this table. Ratings assigned by S&P or Fitch are
generally accepted by Moody's at face value. However, adjustments to face
value may be made to particular categories of credits for which an S&P
and/or Fitch rating does not seem to approximate a Moody's rating
equivalent. Securities with different ratings assigned by S&P and Fitch
will be accepted at the lower of the two ratings.
S-28
"MOODY'S ELIGIBLE ASSETS" MEANS:
(a) cash (including, for this purpose, receivables for investments
sold to a counterparty whose senior debt securities are rated at least Baa3 by
Moody's or a counterparty approved by Moody's and payable within five Business
Days following such Valuation Date and dividends and interest receivable within
49 days on investments);
(b) Short-Term Money Market Instruments;
(c) commercial paper that is not includible as a Short-Term Money
Market Instrument having on the Valuation Date a rating from Moody's of at least
P-1 and maturing within 270 days;
(d) preferred stocks (i) which either (A) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (B) are rated at
least Baa3 by Moody's or (C) in the event an issuer's senior debt securities or
preferred stock is not rated by Moody's, which either (1) are issued by an
issuer whose senior debt securities are rated at least A- by S&P or (2) are
rated at least A- by S&P and for this purpose have been assigned a Moody's
equivalent rating of at least Baa3, (ii) of issuers which have (or, in the case
of issuers which are special purpose corporations, whose parent companies have)
common stock listed on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market System, (iii) which have a minimum issue size
(when taken together with other of the issuer's issues of similar tenor) of
$40,000,000, (iv) which have paid cash dividends consistently during the
preceding three-year period (or, in the case of new issues without a dividend
history, are rated at least A1 by Moody's or, if not rated by Moody's, are rated
at least A+ by S&P), (v) which pay cumulative cash dividends in U.S. dollars,
(vi) which are not convertible into any other class of stock and do not have
warrants attached, (vii) which are not issued by issuers in the transportation
industry and (viii) in the case of auction rate preferred stocks, which are
rated at least Aa3 by Moody's, or. if not rated by Moody's, AA- by S&P, AA- by
Fitch or are otherwise approved in writing by Moody's and have never had a
failed auction; provided, however, that for this purpose the aggregate Market
Value of the Fund's holdings of any single issue of auction rate preferred stock
shall not be more than 1% of the Fund's total assets;
(e) common stocks (i) (A) which are traded on a nationally recognized
stock exchange or in the over-the-counter market, (B) if cash dividend paying,
pay cash dividends in U.S. dollars and (C) which may be sold without restriction
by the Fund; provided, however, that (y) common stock which, while a Moody's
Eligible Asset owned by the Fund, ceases paying any regular cash dividend will
no longer be considered a Moody's Eligible Asset until 71 days after the date of
the announcement of such cessation, unless the issuer of the common stock has
senior debt securities rated at least A3 by Moody's and (z) the aggregate Market
Value of the Corporation's holdings of the common stock of any issuer in excess
of 4% in the case of utility common stock and 6% in the case of non-utility
common stock of the aggregate Market Value of the Fund's holdings shall not be
Moody's Eligible Assets, (ii) which are securities denominated in any currency
other than the U.S. dollar or securities of issuers formed under the laws of
jurisdictions other than the United States, its states and the District of
Columbia for which there are American Depositary Receipts ("ADRs") or their
equivalents which are traded in the United States on exchanges or
over-the-counter and are issued by banks formed under the laws of the United
States, its states or the District of Columbia or (iii) which are securities of
issuers formed under the laws of jurisdictions other than the United States (and
in existence for at least five years) for which no ADRs are traded; provided,
however, that the aggregate Market Value of the Fund's holdings of securities
denominated in currencies other than the U.S. dollar and ADRs in excess of (A)
6% of the aggregate Market Value of the Outstanding shares of common stock of
such issuer thereof or (B) in excess of 10% of the Market Value of the Fund's
Moody's Eligible Assets with respect to issuers formed under the laws of any
single such non-U.S. jurisdiction, other than Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland and the
United Kingdom shall not be a Moody's Eligible Asset;
(f) ADR securities, based on the following guidelines: (i) Sponsored
ADR program or (ii) Level II or Level III ADRs. Private placement Rule 144A ADRs
are not eligible for collateral consideration. Global GDR programs will be
evaluated on a case by case basis;
(g) U.S. Government Obligations;
(h) corporate evidences of indebtedness (i) which may be sold without
restriction by the Fund which are rated at least B3 (Caa subordinate) by Moody's
(or, in the event the security is not rated by Moody's, the security is rated at
least B- by S&P and which for this purpose is assigned a Moody's equivalent
rating of one full rating category lower), with such rating confirmed on each
Valuation Date, (ii) which have a minimum issue size of at least (A)
$100,000,000 if rated at least Baa3 or (B) $50,000,000 if rated B or Ba3, (iii)
which are not convertible
S-29
or exchangeable into equity of the issuing corporation and have a maturity of
not more than 30 years and (iv) for which, if rated below Baa3 or not rated, the
aggregate Market Value of the Fund's holdings do not exceed 10% of the aggregate
Market Value of any individual issue of corporate evidences of indebtedness
calculated at the time of original issuance;
(i) convertible corporate evidences of indebtedness (i) which are issued by
issuers whose senior debt securities are rated at least B2 by Moody's (or, in
the event an issuer's senior debt securities are not rated by Moody's, which are
issued by issuers whose senior debt securities are rated at least B by S&P and
which for this purpose is assigned a Moody's equivalent rating of one full
rating category lower), (ii) which are convertible into common stocks which are
traded on the New York Stock Exchange or the American Stock Exchange or are
quoted on the Nasdaq National Market System and (iii) which, if cash dividend
paying, pay cash dividends in U.S. dollars; provided, however, that once
convertible corporate evidences of indebtedness have been converted into common
stock, the common stock issued upon conversion must satisfy the criteria set
forth in clause (e) above and other relevant criteria set forth in this
definition in order to be a Moody's Eligible Asset; provided, however, that the
Fund's investments in auction rate preferred stocks described in clause (d)
above shall be included in Moody's Eligible Assets only to the extent that the
aggregate Market Value of such stocks does not exceed 10% of the aggregate
Market Value of all of the Corporation's investments meeting the criteria set
forth in clauses (a) through (g) above less the aggregate Market Value of those
investments excluded from Moody's Eligible Assets pursuant to the paragraph
appearing after clause (i) below; and
(j) no assets which are subject to any lien or irrevocably deposited by the
Fund for the payment of amounts needed to meet the obligations described in
clauses (a) through (d) of the definition of "Basic Maintenance Amount" in
"Description of the Series F Preferred Rating Agency Guidelines" may be
includible in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses (a)-(j),
the FUND's investment in preferred stock, common stock, corporate evidences of
indebtedness and convertible corporate evidences of indebtedness shall not be
treated as Moody's Eligible Assets except to the extent they satisfy the
following diversification requirements (utilizing Moody's Industry and
Sub-industry Categories) with respect to the Market Value of the Fund's
holdings:
ISSUER
NON-UTILITY
MAXIMUM UTILITY MAXIMUM
MOODY'S RATING (1)(2) SINGLE ISSUER(3)(4) SINGLE ISSUER(3)(4)
--------------------- ------------------- -------------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 or lower 2% 2%
INDUSTRY AND STATE
NON-UTILITY UTILITY MAXIMUM
MAXIMUM SINGLE SUB- UTILITY MAXIMUM
MOODY'S RATING (1) SINGLE INDUSTRY(3) INDUSTRY(3)(6) SINGLE ISSUER(3)(4)
------------------ ------------------ --------------- -------------------
Aaa 100% 100% 100%
Aa 60% 60% 20%
A 40% 50% 10%(7)
CS/CB, Baa(5) 20% 50% 7%(7)
Ba 12% 12% 0%
B1/B2 8% 8% 0%
B3 or lower 5% 5% 0%
----------
(1) Unless conclusions regarding liquidity risk and estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate, municipal or
other debt security is unrated by Moody's, S&P or Fitch, the
S-30
Fund will use the percentage set forth under "B3 or lower" in this table.
Ratings assigned by S&P or Fitch are generally accepted by Moody's at face
value. However, adjustments to face value may be made to particular
categories of credits for which the S&P and/or Fitch rating does not seem
to approximate a Moody's rating equivalent.
(2) Corporate evidences of indebtedness from issues ranging from $50,000,000 to
$100,000,000 are limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate evidences of
indebtedness, which are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility
evidences of indebtedness and utility convertible evidences of
indebtedness, the definition of industry refers to sub-industries
(electric, water, hydro power, gas, diversified). Investments in other
sub-industries are eligible only to the extent that the combined sum
represents a percentage position of the Moody's Eligible Assets less than
or equal to the percentage limits in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities regulated by
California, New York and Texas.
MOODY'S HEDGING TRANSACTIONS. For so long as any Preferred Stock is
rated by Moody's, the Fund may buy or sell financial futures contracts, write,
purchase or sell call options on financial futures contracts or purchase put
options on financial futures contracts or write call options on portfolio
securities, swaps and securities lending unless it receives written confirmation
from Moody's that engaging in such transactions would impair the ratings then
assigned to the Preferred Stock by Moody's (collectively "Moody's Hedging
Transactions"), subject to the following limitations:
(i) Future and call options: For purposes of the Basic Maintenance
Amount, futures held by the Fund and call options sold by the Fund shall not be
included as Moody's Eligible Assets. However, such assets shall be valued at
Market Value by subtracting the good faith margin and the maximum daily trading
variance as of a Valuation Date. For call options purchased by the Fund, the
Market Value of the call option will be included as a Moody's Eligible Asset
subject to a Moody's Discount Factor mutually agreed to between the Fund and
Moody's based on the characteristics of the option contract such as its maturity
and the underlying security of the contract.
(ii) Securities lending: The Fund may engage in securities lending in
an amount not to exceed 10% of the Fund's total gross assets (provided term and
conditions of the securities lending program are disclosed in advance to
Moody's, if Moody's is rating the Preferred Stock). For purposes of calculating
the Basic Maintenance Amount, such securities lent shall be included as Moody's
Eligible Assets with the appropriate Moody's Discount Factor applied to such
lent security. The obligation to return such collateral shall not be included as
an obligation/liability for purposes of calculating the Basic Maintenance
Amount. However, the Fund may reinvest cash collateral for securities lent in
conformity with its investment objectives and policies and the provisions of
these By-Laws. In such event, to the extent that securities lending collateral
received is invested by the Fund in assets that otherwise would be Moody's
Eligible Assets and the value of such assets exceeds the amount of the Fund's
Moody's Eligible Assets by applying the applicable Moody's Discount Factor to
this amount and adding the product to total Moody's Eligible Assets. Conversely,
if the value of assets in which securities lending collateral has been invested
is less then the amount of the Fund's obligation to return the collateral on a
Valuation Date, such difference shall be included as an obligation/liability of
the Fund for purposes of calculating the Basic Maintenance Amount. Collateral
received by the Fund in a securities lending transaction and maintained by the
Fund in the form received shall not be included as a Moody's Eligible Asset for
purposes of calculating the Basic Maintenance Amount.
(iii) Swaps (including Total Return Swaps and Interest Rate Swaps):
Total Return and Interest Rate Swaps are subject to the following provisions:
S-31
(A) Only the cumulative unsettled profit and loss from a Total Return
Swap transaction will be calculated when determining the Basic Maintenance
Amount. If the Fund has an outstanding gain from a swap transaction on a
Valuation Date, the gain will be included as a Moody's Eligible Asset subject to
the Moody's Discount Factor on the counterparty to the swap transaction. If the
Fund has an outstanding liability from a swap transaction on a Valuation Date,
the Fund will subtract the outstanding liability from the total Moody's Eligible
Assets in calculating the Basic Maintenance Amount.
In addition, for swaps other than Total Return Swaps, the Market Value
of the position (positive or negative) will be included as a Moody's Eligible
Asset. The aggregate notional value of all swaps will not exceed the Liquidation
Preference of the Outstanding Preferred Stock. At the time a swap is executed,
the Fund will only enter into swap transactions where the counterparty has at
least a S&P or Fitch rating of A- or Moody's long-term rating of A3.
(B) (1) The underlying securities subject to a Credit Default Swap
sold by the Fund will be subject to the applicable Moody's Discount Factor for
each security subject to the swap;
(2) If the Fund purchases a Credit Default Swap and holds the
underlying security, the Market Value of the Credit Default Swap and the
underlying security will be included as a Moody's Eligible Asset subject to the
Moody's Discount Factor assessed based on the counterparty risk and the duration
of the swap agreement.
If not otherwise provided for in (i)-(iii) above, derivative
instruments shall be treated as follows: Any derivative instruments will be
valued pursuant to the Fund's valuation procedures on a Valuation Date. The
amount of the net payment obligation and the cost of a closing transaction, as
appropriate, on any derivative instrument on a Valuation Date will be counted as
a liability for purposes of determining the Basic Maintenance Amount (e.g.,
written call option that is in the money for the holder). Any derivative
instrument with respect to which the Fund is owed payment on the Valuation Date
that is not based upon an individual security or securities that are Moody's
Eligible Assets will have a mutually agreed -upon valuation by Moody's and the
Fund for purposes of determining Moody's Eligible Assets. Any derivative
instrument with respect to which the Fund is owed payment on the Valuation Date
that is based upon an individual security or securities that are Moody's
Eligible Assets (e.g., a purchased call option on a bond that is in the money)
will be valued as follows for purposes of determining Moody's Eligible Assets:
(A) For such derivative instruments that are exchange traded, the value of the
in-the-money amount of the payment obligation to the Fund will be reduced by
applying the Moody's Discount Factor (as it would apply to the underlying
security or securities) and then added to Moody's Eligible Assets; and (B) for
such derivative instruments that are not exchange -traded, the value of the
in-the-money amount of the payment obligation to the Fund will be (1) reduced as
described in (A) and (B) further reduced by applying to the remaining amount the
Moody's Discount Factor determined by reference to the credit rating of the
derivative counterparty with the remaining amount after these reductions then
added to Moody's Eligible Assets.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Fund is a party and of all securities deliverable to the Fund pursuant to such
Forward Commitments shall be zero.
NET ASSET VALUE
For purposes of determining the Fund's net asset value per share,
portfolio securities listed or traded on a nationally recognized securities
exchange or traded in the U.S. over-the-counter market for which market
quotations are readily available are valued at the last quoted sale price or a
market's official closing price as of the close of business on the day the
securities are being valued. If there were no sales that day, the security is
valued at the average of the closing bid and asked prices or, if there were no
asked prices quoted on that day, then the security is valued at the most
recently available price, or, if the Board so determines, by such other method
as the Board shall determine in good faith, to reflect its fair market value.
Portfolio securities traded on more than one national securities exchange or
market are valued according to the broadest and most representative market, as
determined by the Investment Adviser.
Portfolio securities primarily traded on foreign markets are generally
valued at the preceding closing values of such securities on their respective
exchanges or, if after the close, market conditions change significantly,
certain foreign securities may be fair valued pursuant to procedures established
by the Board. Debt instruments that are not credit impaired with remaining
maturities of 60 days or less are valued at amortized cost, unless the Board
S-32
determines such amount does not reflect the securities' fair value, in which
case these securities will be valued at their fair value as determined by the
Board. Debt instruments having a maturity greater than 60 days for which market
quotations are readily available are valued at the average of the latest bid and
asked prices. If there were no asked prices quoted on such day, the security is
valued using the closing bid price. Futures contracts are valued at the closing
settlement price of the exchange or board of trade on which the applicable
contract is traded.
Securities and other assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board.
Fair valuation methodologies and procedures may include, but are not limited to:
analysis and review of available financial and non-financial information about
the company; comparisons to the valuation and changes in valuation of similar
securities, including a comparison of foreign securities to the equivalent U.S.
dollar value ADR securities at the close of the U.S. exchange; and evaluation of
any other information that could be indicative of the value of the security.
The Fund obtains valuation on the basis of prices provided by one or
more pricing services approved by the Board. All other investment assets,
including restricted and not readily marketable securities, are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision of the Board. In addition, whenever developments in one
or more securities markets after the close of the principal markets for one or
more portfolio securities and before the time as of which the Fund determines
its net asset value would, if such developments had been reflected in such
principal markets, likely have had more than a minimal effect on the Fund's
asset value per share, the Fund may fair value such portfolio securities based
on available market information as of the time the Fund determines its net asset
value.
S-33
BENEFICIAL OWNERS
PRINCIPAL STOCKHOLDERS AND OWNERSHIP BY DIRECTORS
Set forth below is information as of October 31, 2006 with respect to the
beneficial ownership of our shares of common stock by(i) each person who is
known by us to be the beneficial owner of more than five percent of the
outstanding shares of common stock,(ii) each of our interested and
non-interested Directors, and(iii) all of our interested and non-interested
Directors as a group. Except as otherwise indicated, to our knowledge, all
shares are beneficially owned and investment and voting power is held by the
persons named as owners. At this time, we are unaware of any stockholder owning
5 percent or more of the outstanding shares of common stock. Unless otherwise
provided, the address of each holder is Gabelli Funds, LLC, One Corporate
Center, Rye, NY, 10580-1422.
Set forth in the table below is the amount of shares beneficially owned by each
Director of the Fund.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF SHARES
NAME OF DIRECTOR OWNERSHIP(1) OUTSTANDING(2)
---------------- --------------------------------- -----------------
INTERESTED DIRECTORS:
Mario J. Gabelli 1,827,970 shares of common stock(3) 1.1%
Anthony R. Pustorino 13,620 shares of common stock(4) *
NON-INTERESTED DIRECTORS:
Dr. Thomas E. Bratter 29,075 shares of common stock; *
375 shares of Series B Preferred
Anthony J. Colavita 2,835 shares of common stock(5); *
750 shares of Series B Preferred(6)
James P. Conn 43,439 shares of common stock; *
750 shares of Series B Preferred
Frank J. Fahrenkopf, Jr. 0 *
Arthur V. Ferrara 0 *
Salvatore J. Zizza 41,390(7) *
----------
(1) This information has been furnished by each Director as of October 31,
2006. "Beneficial Ownership" is determined in accordance with Section
16a-1(a)(2) of the 1934 Act. Reflects ownership of common stock unless
otherwise noted.
(2) An asterisk indicates that the ownership amount constitutes less than 1% of
the total shares outstanding.
(3) Includes 947,963 shares of common stock owned directly by Mr. Gabelli,
37,358 shares of common stock owned by a family partnership for which Mr.
Gabelli serves as general partner, and 842,649 shares of common stock owned by
GAMCO Investors, Inc. or its affiliates. Mr. Gabelli disclaims beneficial
ownership of the shares held by the discretionary accounts and by the
entities named except to the extent of his interest in such entities.
(4) Includes 2,632 shares of common stock owned by Mr. Pustorino's spouse for
which he disclaims beneficial ownership.
(5) Comprised of 2,835 shares of common stock owned by Mr. Colavita's spouse
for which he disclaims beneficial ownership.
(6) Comprised of 750 shares of preferred stock owned by Mr. Colavita's spouse
for which he disclaims beneficial ownership.
(7) Includes 30,500 shares of common stock owned by Mr. Zizza's sons for which
he disclaims beneficial ownership.
As of October 31, 2006, the Directors and Officers of the Fund as a
group beneficially owned approximately 1.2% of the Fund's outstanding shares of
common stock and less than 1% of the Fund's outstanding Series B Preferred.
S-34
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
DTC will act as securities depository for the stock of Series F
Preferred offered pursuant to the Prospectus. The information in this section
concerning DTC and DTC's book-entry system is based upon information obtained
from DTC. The securities offered hereby initially will be issued only as
fully-registered securities registered in the name of Cede & Co. (as nominee for
DTC). One or more fully-registered global security certificates initially will
be issued, representing in the aggregate the total number of securities, and
deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the 1934 Act, as
amended. DTC holds securities that its participants deposit with DTC. DTC also
facilitates 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, and 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 distributions 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.
S-35
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York
10019, is counsel to the Fund. As to certain matters of Maryland law, Willkie
Farr & Gallagher LLP will rely on the opinion of Venable LLP, 1800 Mercantile
Bank and Trust Building, 2 Hopkins Plaza, Baltimore, Maryland 21201
[AUDITOR] [ADDRESS] serves as the Independent Registered Public
Accounting Firm of the Fund and will annually audit the financial statements of
the Fund.
PROXY VOTING PROCEDURES
The Fund has adopted the proxy voting procedures of the Investment
Adviser and has directed the Investment Adviser to vote all proxies relating to
the Fund's voting securities in accordance with such procedures. The proxy
voting procedures are attached hereto as Appendix A. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available (i) without charge, upon request, by
calling 800-422-3554, or on the Registrant's website at http://www.gabelli.com,
and (ii) on the Commission's website at http://www.sec.gov.
CODE OF ETHICS
The Fund and the Investment Adviser have adopted a code of ethics (the
"Code of Ethics") under Rule 17(j)-1 under the 1940 Act. The Code of Ethics
permits directors/trustees, officers and employees of the Fund, the Investment
Adviser and their affiliates, 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 Commission's
Public Reference Room in Washington, D.C. Information on the operations of the
Public Reference Room may be obtained by calling the Commission at 800-SEC-0330.
The Code of Ethics is also available on the EDGAR database on the Commission's
website 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 Commission's Public
Reference Room Section, Washington, D.C. 20549-0102.
JOINT CODE OF ETHICS FOR CHIEF EXECUTIVE AND SENIOR FINANCIAL OFFICERS
The Fund and the Investment Adviser have adopted a joint code of
ethics (the "Joint Code") that serves as a code of conduct. This Joint Code sets
forth policies to guide the chief executive and senior financial officers in the
performance of their duties. The Joint Code can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information on the
operations of the Public Reference Room may be obtained by calling the
Commission at 800-SEC-0330. The Joint Code is also available on the EDGAR
database on the Commission's website at http://www.sec.gov. Copies of the Joint
Code 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
Commission's Public Reference Room Section, Washington, D.C. 20549-0102.
FINANCIAL STATEMENTS
The audited financial statements included in the annual report to the
Fund's shareholders for the year ended December 31, 2005, and the unaudited
financial statements included in the semi-annual report to the Fund's
shareholders for the period ended June 30, 2006, together with the reports of
[AUDITOR] for the Fund's annual report, are incorporated herein by reference
from the Fund's annual report and semi-annual report to shareholders. All other
portions of the annual report and semi-annual report to shareholders are not
incorporated herein by reference and are not part of the Registration Statement.
A copy of the annual report or the semi-annual report to shareholders may be
obtained without charge by writing to the Fund at its address at One Corporate
Center, Rye, New York 10580-1422 or by calling the Fund toll-free at 800-GABELLI
(422-3554).
S-36
GLOSSARY
"ADJUSTED VALUE" of each Eligible Asset shall be computed as follows:
(i) cash shall be valued at 100% of the face value thereof; and
(ii) all other Eligible Assets shall be valued at the applicable
Discounted Value thereof; and
(iii) each asset that is not an Eligible Asset shall be valued at
zero.
"ADMINISTRATOR" means the other party to the Administration Agreement
with the Fund, which shall initially be Gabelli Funds, LLC, a New York limited
liability company, and will include, as appropriate, any sub-administrator
appointed by the Administrator.
"ARTICLES OF INCORPORATION" means the Articles of Incorporation of the
Fund, dated as of May 20, 1986, as amended, supplemented or restated from time
to time (including by the Articles Supplementary).
"ARTICLES SUPPLEMENTARY" means the Articles Supplementary of the Fund
establishing a series of preferred stock, including the Series F Preferred.
"BASIC MAINTENANCE AMOUNT" has the meaning set forth in "Moody's
Guidelines."
"BOARD" means the Board of Directors of the Fund or any duly
authorized committee thereof as permitted by applicable law.
"BUSINESS DAY" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which banks
in the City of New York, New York are authorized or obligated by law to close.
"BY-LAWS" means the By-Laws of the Fund, as amended from time to time.
"CHARTER" means the Charter of the Fund (together with any amendments
or supplements thereto, including any articles supplementary).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the United States Securities and Exchange
Commission.
"DEPOSIT ASSETS" means cash, Short-Term Money Market Instruments and
U.S. Government Securities. Except for determining whether the Fund has Eligible
Assets with an Adjusted Value equal to or greater than the Basic Maintenance
Amount, each Deposit Asset shall be deemed to have a value equal to its
principal or face amount payable at maturity plus any interest payable thereon
after delivery of such Deposit Asset but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"DISCOUNT FACTOR" means (i) so long as Moody's is rating the Series F
Preferred at the Fund's request, the Moody's Discount Factor, and/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)
such other formula for determining the discounted value of an Eligible Asset as
may be established by an applicable Rating Agency, provided that, with respect
to an Eligible Asset that is currently callable, Discounted Value will be equal
to the applicable quotient or product as calculated above or the call price,
whichever is lower, and that, with respect to an Eligible Asset that is
prepayable, Discounted Value will be equal to the applicable quotient or product
as calculated above or the par value, whichever is lower.
"DIVIDEND PAYMENT DATE" means, with respect to the Series F Preferred,
any date on which dividends and distributions declared by the Board thereon are
payable pursuant to the provisions of paragraph 2(a) of Article II of the
Articles Supplementary of the Series F Preferred and shall have a correlative
meaning with respect to any other class or series of Preferred Stock.
"DIVIDEND PERIOD" means, with respect to Series F Preferred, the
quarterly dividend and distribution specified in paragraph 1(a) of Article II of
the Articles Supplementary for the Series F Preferred and, with respect to any
other Preferred Stock issued by the Fund, the periods specified in or
determinable by reference to the Articles Supplementary therefor.
S-37
"ELIGIBLE ASSETS" means Moody's Eligible Assets (if Moody's is then
rating the Series F Preferred at the request of the Fund), and/or Other Rating
Agency Eligible Assets if any Other Rating Agency is then rating the Series F
Preferred, whichever is applicable.
"GOVERNING DOCUMENTS" means the Articles of Incorporation and the
By-Laws.
"LIQUIDATION PREFERENCE" means $25 per share of Series F Preferred and
will have a correlative meaning with respect to shares of any other class or
series of Preferred Stock.
"MARKET CAPITALIZATION" means, with respect to any issue of common
stock, as of any date, the product of (i) the number of shares of such common
stock issued and outstanding as of the close of business on the date of
determination thereof and (ii) the Market Value per share of such common stock
as of the close of business on the date of determination thereof.
"MARKET VALUE" means the amount determined by the Fund with respect to
specific Eligible Assets in accordance with valuation policies adopted from time
to time by the Board 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:
1. 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
National Market System, the last sales price reported on the Valuation Date or
(b) if there was no reported sales price on the Valuation Date, the price
obtained from a Pricing Service as of the Valuation Date, or (c) if there was no
reported sales price on the Valuation Date or price available from a Pricing
Service, the lower of two bid prices for such stock provided to the
Administrator by two recognized securities dealers with a minimum capitalization
of $25,000,000 (or otherwise approved for such purpose by Moody's) 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;
2. as to any U.S. Government Obligation, Short-Term Money Market
Instrument (other than demand deposits, federal funds, bankers' acceptances and
next Business Day repurchase agreements) and commercial paper with a maturity of
greater than 60 days, the product of (a) the principal amount (accreted
principal to the extent such instrument accretes interest) of such instrument
and (b) the price provided by a Pricing Service or, if not obtainable through a
Pricing Service, the lower of the bid prices for the same kind of instruments
having, as nearly as practicable, comparable interest rates and maturities
provided by two recognized securities dealers having minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by Moody's) 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;
3. as to cash, demand and timed deposits, federal funds, bankers'
acceptances and next Business Day repurchase agreements included in Short-Term
Money Market Instruments, the face value thereof;
4. 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 determines that such value does not constitute fair value;
or
5. 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 National Market System, the last
sales price reported on the Valuation Date or (B) if there was no reported sales
price on the Valuation Date and if such indebtedness is not traded on a national
securities exchange or quoted on the NASDAQ National Market System, the price
obtained from a Pricing Service as of the Valuation Date or (C) if there was no
reported sales price on the Valuation Date or if such indebtedness is not traded
on a national securities exchange or quoted on the NASDAQ National Market
System, and a price was not obtainable from a Pricing Service as of the
Valuation Date, the lower of two bid prices for such indebtedness provided by
two recognized dealers with a minimum capitalization of $25,000,000 (or
otherwise approved for such purpose by Moody's) to the administrator of the
Fund's assets, at least one of which
S-38
will be provided in writing or by telecopy, telex, other electronic
transcription, computer obtained quotation reducible to written form or similar
means, and in turn provided to the Fund by any such means by such administrator,
plus (b) accrued interest on such indebtedness.
Notwithstanding the foregoing, in the case of preferred stock that is
rated by a single Rating Agency, "Market Value" shall have the meaning set forth
in the governing documents of such preferred stock.
"MOODY'S" means Moody's Investors Service, Inc. and its successors.
"MOODY'S DISCOUNT FACTOR" has the meaning ascribed to it in "Moody's
Guidelines."
"MOODY'S ELIGIBLE ASSETS" has the meaning ascribed to it in "Moody's
Guidelines."
"MOODY'S HEDGING TRANSACTION" has the meaning ascribed to it in
"Moody's Guidelines."
"1940 ACT" means the Investment Company Act of 1940, as amended, or
any successor statute.
"1940 ACT ASSET COVERAGE" means asset coverage, as determined in
accordance with Section 18(h) of the 1940 Act, of at least 200% with respect to
all outstanding senior securities of the Fund which are stock, including all
Outstanding Series F Preferred (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are stock of a closed-end investment company as a
condition of declaring dividends and distributions on its shares of 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.
"OTHER RATING AGENCY" means any rating agency other than Moody's then
providing a rating for the Series F Preferred pursuant to the request of the
Fund.
"OTHER RATING AGENCY ELIGIBLE ASSETS" means assets of the Fund
designated by any Other Rating Agency as eligible for inclusion in calculating
the discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Series F Preferred.
"OUTSTANDING" means, as of any date, Preferred Stock theretofore
issued by the Fund except:
(i) any such Preferred Stock theretofore cancelled by the Fund or
delivered to the Fund for cancellation;
(ii) any such share of Preferred Stock other than shares of Auction
Rate Preferred (as defined in the Prospectus), as to which a
notice of redemption will have been given and for whose payment
at the redemption thereof Deposit Assets in the necessary amount
are held by the Fund in trust for, or have been irrevocably
deposited with the relevant disbursing agent for payment to, the
holder of such stock pursuant to the Articles Supplementary with
respect thereto;
(iii) in the case of Auction Rate Preferred stock, any such shares
theretofore delivered to the applicable auction agent for
cancellation or with respect to which the Fund has given notice
of redemption and irrevocably deposited with the applicable
paying agent sufficient funds to redeem such stock; and
(iv) any such Preferred Stock in exchange for or in lieu of which
other shares have been issued and delivered.
Notwithstanding the foregoing, (x) for purposes of voting rights
(including the determination of the number of shares required to constitute a
quorum), any shares of Preferred Stock as to which the Fund or any subsidiary is
the holder, as applicable, will be disregarded and deemed not Outstanding; and
(y) in connection with any auction, any Auction Rate Preferred stock as to which
the Fund or any Person known to the auction agent to be a subsidiary is the
holder or Existing Holder, as applicable, will be disregarded and not deemed
Outstanding.
"PERSON" means and includes an individual, a partnership, the Fund, a
trust, a corporation, a limited liability company, an unincorporated
association, a joint venture or other entity or a government or any agency or
political subdivision thereof.
S-39
"PREFERRED STOCK" means the preferred stock, par value $0.001 per
share, of the Fund, and includes the Series F Preferred.
"PRICING SERVICE" means any of the following: Bloomberg Financial
Service, Bridge Information Services, Data Resources Inc., FT Interactive,
International Securities Market Association, Merrill Lynch Securities Pricing
Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Telerate, Trepp Pricing and
Wood Gundy.
"RATING AGENCY" means Moody's as long as Moody's is then rating the
Series F Preferred at the request of the Fund, or any Other Rating Agency then
rating the Series F Preferred at the request of the Fund.
"RATING AGENCY GUIDELINES" has the meaning set forth in "Moody's
Guidelines."
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute.
"SERIES F PREFERRED" means the Fund's Series F Cumulative Preferred
Stock, $0.001 par value per share and liquidation preference $25 per share.
"SHORT-TERM MONEY MARKET INSTRUMENTS" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Fund, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper matures in 30
days, or A-1+ if such commercial paper matures in over 30 days;
(ii) AAAm rated money market funds
(iii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of
America or any state thereof or the District of Columbia or (B) a
United States branch office or agency of a foreign depository
institution (provided that such branch office or agency is
subject to banking regulation under the laws of the United
States, any state thereof or the District of Columbia) or (C)
A-1+ rated institutions;
(iv) overnight funds; and
(v) U.S. Government Securities.
Notwithstanding the foregoing, in the case of preferred stock that is
rated by a single Rating Agency, "Short-Term Money Market Instruments" shall
have the meaning set forth in the governing documents of such preferred stock.
"U.S. GOVERNMENT SECURITIES" means direct obligations of the United
States or by its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
"VALUATION DATE" means the last Business Day of each month, or such
other date as the Fund and Rating Agencies may agree to for purposes of
determining the Basic Maintenance Amount. Notwithstanding the foregoing, in the
case of preferred stock that is rated by a single Rating Agency, "Valuation
Date" shall have the meaning set forth in the governing documents of such
preferred stock.
S-40
GAMCO INVESTORS, INC. AND AFFILIATES
THE VOTING OF PROXIES ON BEHALF OF CLIENTS
Rules 204(4)-2 and 204-2 under the Investment Advisers Act of 1940 and
Rule 30b1-4 under the Investment Company Act of 1940 require investment advisers
to adopt written policies and procedures governing the voting of proxies on
behalf of their clients.
These procedures will be used by GAMCO Asset Management, Inc., Gabelli
Funds, LLC and Gabelli Advisers, Inc. (collectively, the "Advisers") to
determine how to vote proxies relating to portfolio securities held by their
clients, including the procedures that the Advisers use when a vote presents a
conflict between the interests of the shareholders of an investment company
managed by one of the Advisers, on the one hand, and those of the Advisers; the
principal underwriter; or any affiliated person of the investment company, the
Advisers, or the principal underwriter. These procedures will not apply where
the Advisers do not have voting discretion or where the Advisers have agreed
with a client to vote the client's proxies in accordance with specific
guidelines or procedures supplied by the client (to the extent permitted by
ERISA).
I. PROXY VOTING COMMITTEE
The Proxy Voting Committee was originally formed in April 1989 for the
purpose of formulating guidelines and reviewing proxy statements within the
parameters set by the substantive proxy voting guidelines originally published
by GAMCO Asset Management, Inc. in 1988 and updated periodically, a copy of
which is appended as Exhibit A. The Committee will include representatives of
Research, Administration, Legal, and the Advisers. Additional or replacement
members of the Committee will be nominated by the Chairman and voted upon by the
entire Committee. As of June 30, 2006, the members were:
Bruce N. Alpert, Chief Operating Officer of Gabelli Funds, LLC
Caesar M. P. Bryan, Portfolio Manager
Joshua W. Fenton, Director of Research
Peter D. Goldstein, Director of Regulatory Affairs
Douglas R. Jamieson, Chief Operating Officer of GAMCO
James E. McKee, General Counsel
Karyn-Marie Prylucki, Director of Proxy Voting Services
Christopher J. Michailoff, Deputy General Counsel
George Maldonado, Proxy Administrator
William S. Selby, Managing Director of GAMCO
Howard F. Ward, Portfolio Manager
Mr. Joshua Fenton currently chairs the Committee. In his absence, the
[_____] will chair the Committee. Meetings are held on an as needed basis to
form views on the manner in which the Advisers should vote proxies on behalf of
their clients.
In general, the Director of Proxy Voting Services, using the Proxy
Guidelines, recommendations of Institutional Shareholder Corporate Governance
Service ( "ISS"), other third-party services and the analysts of Gabelli &
Company, Inc., will determine how to vote on each issue. For non-controversial
matters, the Director of Proxy Voting Services may vote the proxy if the vote is
(1) consistent with the recommendations of the issuer's Board of Directors and
not contrary to the Proxy Guidelines; (2) consistent with the recommendations of
the issuer's Board of Directors and is a non-controversial issue not covered by
the Proxy Guidelines; or (3) the vote is contrary to the recommendations of the
issuer's Board of Directors but is consistent with the Proxy Guidelines. In
those instances, the Director of Proxy Voting Services or the Chairman of the
Committee may sign and date the proxy statement indicating how each issue will
be voted.
All matters identified by the Chairman of the Committee, the Director
of Proxy Voting Services or the Legal Department as controversial, taking into
account the recommendations of ISS or other third party services and the
analysts of Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy Voting
Services or the Legal Department has identified the matter as one that (1) is
controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a
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conflict of interest between the Advisers and their clients, the Chairman of the
Committee will initially determine what vote to recommend that the Advisers
should cast and the matter will go before the Committee.
For matters submitted to the Committee, each member of the Committee
will receive, prior to the meeting, a copy of the proxy statement, any relevant
third party research, a summary of any views provided by the Chief Investment
Officer and any recommendations by Gabelli & Company, Inc. analysts. The Chief
Investment Officer or the Gabelli & Company, Inc. analysts may be invited to
present their viewpoints. If the Legal Department believes that the matter
before the committee is one with respect to which a conflict of interest may
exist between the Advisers and their clients, counsel will provide an opinion to
the Committee concerning the conflict. If the matter is one in which the
interests of the clients of one or more Advisers may diverge, counsel will so
advise and the Committee may make different recommendations as to different
clients. For any matters where the recommendation may trigger appraisal rights,
counsel will provide an opinion concerning the likely risks and merits of such
an appraisal action.
Each matter submitted to the Committee will be determined by the vote
of a majority of the members present at the meeting. Should the vote concerning
one or more recommendations be tied in the Committee, the Chairman of the
Committee will cast the deciding vote. The Committee will notify the proxy
department of its decisions and the proxies will be voted accordingly.
Although the Proxy Guidelines express the normal preferences for the
voting of any shares not covered by a contrary investment guideline provided by
the client, the Committee is not bound by the preferences set forth in the Proxy
Guidelines and will review each matter on its own merits. Written minutes of all
Proxy Voting Committee meetings will be maintained. The Advisers subscribe to
ISS, which supplies current information on companies, matters being voted on,
regulations, trends in proxy voting and information on corporate governance
issues.
If the vote cast either by the analyst or as a result of the
deliberations of the Proxy Voting Committee runs contrary to the recommendation
of the Board of Directors of the issuer, the matter will be referred to legal
counsel to determine whether an amendment to the most recently filed Schedule
13D is appropriate.
II. SOCIAL ISSUES AND OTHER CLIENT GUIDELINES
If a client has provided special instructions relating to the voting
of proxies, they should be noted in the client's account file and forwarded to
the Proxy Voting Department. This is the responsibility of the investment
professional or sales assistant for the client. In accordance with Department of
Labor guidelines, the Advisers' policy is to vote on behalf of ERISA accounts in
the best interest of the plan participants with regard to social issues that
carry an economic impact. Where an account is not governed by ERISA, the
Advisers will vote shares held on behalf of the client in a manner consistent
with any individual investment/voting guidelines provided by the client.
Otherwise the Advisers will abstain with respect to those shares.
III. CLIENT RETENTION OF VOTING RIGHTS
If a client chooses to retain the right to vote proxies or if there is
any change in voting authority, the following should be notified by the
investment professional or sales assistant for the client.
- Operations
- Legal Department
- Proxy Department
- Investment professional assigned to the account
In the event that the Board of Directors (or a Committee thereof) of
one or more of the investment companies managed by one of the Advisers has
retained direct voting control over any security, the Proxy Voting Department
will provide each Board member (or Committee member) with a copy of the proxy
statement together with any other relevant information including recommendations
of ISS or other third-party services.
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IV. VOTING RECORDS
The Proxy Voting Department will retain a record of matters voted upon
by the Advisers for their clients. The Advisers' staff may request proxy-voting
records for use in presentations to current or prospective clients. Requests for
proxy voting records should be made at least ten days prior to client meetings.
If a client wishes to receive a proxy voting record on a quarterly,
semi-annual or annual basis, please notify the Proxy Voting Department. The
reports will be available for mailing approximately ten days after the quarter
end of the period. First quarter reports may be delayed since the end of the
quarter falls during the height of the proxy season.
A letter is sent to the custodians for all clients for which the
Advisers have voting responsibility instructing them to forward all proxy
materials to:
Attn: Proxy Voting Department
One Corporate Center
Rye, New York 10580-1433
The sales assistant sends the letters to the custodians along with the
trading/DTC instructions. Proxy voting records will be retained in compliance
with Rule 204-2 under the Investment Advisers Act.
V. VOTING PROCEDURES
1. Custodian banks, outside brokerage firms and First Clearing
Corporation are responsible for forwarding proxies directly to GAMCO. Proxies
are received in one of two forms:
- Shareholder Vote Authorization Forms (VAFs) -- Issued by ADP.
VAFs must be voted through the issuing institution causing a time
lag. ADP is an outside service contracted by the various
institutions to issue proxy materials.
- Proxy cards which may be voted directly.
2. Upon receipt of the proxy, the number of shares each form
represents is logged into the proxy system according to security.
3. In the case of a discrepancy such as an incorrect number of shares,
an improperly signed or dated card, wrong class of security, etc., the issuing
custodian is notified by phone. A corrected proxy is requested. Arrangements are
made to insure that a proper proxy is received in time to be voted (overnight
delivery, fax, etc.). When securities are out on loan on the record date, the
custodian is requested to supply written verification.
4. Upon receipt of instructions from the proxy committee, the votes
are cast and recorded for each account on an individual basis.
Since January 1, 1992, records have been maintained on the Proxy Edge
system. The system is backed up regularly. From 1990 through 1991, records were
maintained on the PROXY VOTER system and in hardcopy format. Prior to 1990,
records were maintained on diskette and in hardcopy format.
PROXY EDGE RECORDS INCLUDE:
Security Name and Cusip Number
Date and Type of Meeting (Annual, Special, Contest)
Client Name
Adviser or Fund Account Number
Directors' Recommendation
How GAMCO voted for the client on each issue
The rationale for the vote when appropriate
RECORDS PRIOR TO THE INSTITUTION OF THE PROXY EDGE SYSTEM INCLUDE:
Security name
Type of Meeting (Annual, Special, Contest)
Date of Meeting
Name of Custodian
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Name of Client
Custodian Account Number
Adviser or Fund Account Number
Directors' Recommendation
How the Adviser voted for the client on each issue
Date the proxy statement was received and by whom
Name of person posting the vote
Date and method by which the vote was cast
- From these records individual client proxy voting records are
compiled. It is our policy to provide institutional clients with
a proxy voting record during client reviews. In addition, we will
supply a proxy voting record at the request of the client on a
quarterly, semi-annual or annual basis.
5. VAFs are kept alphabetically by security. Records for the current
proxy season are located in the Proxy Voting Department office. In preparation
for the upcoming season, files are transferred to an offsite storage facility
during January/February.
6. Shareholder Vote Authorization Forms issued by ADP are always sent
directly to a specific individual at ADP.
7. If a proxy card or VAF is received too late to be voted in the
conventional matter, every attempt is made to vote in one of the following
manners:
- VAFs can be faxed to ADP up until the time of the meeting. This
is followed up by mailing the original form.
- When a solicitor has been retained, the solicitor is called. At
the solicitor's direction, the proxy is faxed.
8. In the case of a proxy contest, records are maintained for each
opposing entity.
9. Voting in Person. At times it may be necessary to vote the shares
in person. In this case, a "legal proxy" is obtained in the following manner:
- Banks and brokerage firms using the services at ADP:
A call is placed to ADP requesting legal proxies. The VAFs are then
sent overnight to ADP. ADP issues individual legal proxies and sends them back
via overnight mail. A lead-time of at least two weeks prior to the meeting is
needed to do this. Alternatively, the procedures detailed below for banks not
using ADP may be implemented.
- Banks and brokerage firms issuing proxies directly:
The bank is called and/or faxed and a legal proxy is requested. All
legal proxies should appoint: "REPRESENTATIVE OF WITH FULL POWER OF
SUBSTITUTION."
The legal proxies are given to the person attending the meeting along
with the following supplemental material:
- A limited Power of Attorney appointing the attendee an Adviser
representative.
- A list of all shares being voted by custodian only. Client names
and account numbers are not included. This list must be
presented, along with the proxies, to the Inspectors of Elections
and/or tabulator at least one-half hour prior to the scheduled
start of the meeting. The tabulator must "qualify" the votes
(i.e., determine if the votes have previously been cast, if the
votes have been rescinded, etc.).
- A sample ERISA and Individual contract.
- A sample of the annual authorization to vote proxies form.
A-4
- A copy of our most recent Schedule 13D filing (if applicable).
PROXY VOTING GUIDELINES
GENERAL POLICY STATEMENT
It is the policy of GAMCO Investors Inc. to vote in the best economic
interests of our clients. As we state in our Magna Carta of Shareholders Rights,
established in May 1988, we are neither for nor against management. We are for
shareholders.
At our first proxy committee meeting in 1989, it was decided that each
proxy statement should be evaluated on its own merits within the framework first
established by our Magna Carta of Shareholders Rights. The attached guidelines
serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all
of our research on the company, its directors, and their short- and long-term
goals for the company. In cases where issues that we generally do not approve of
are combined with other issues, the negative aspects of the issues will be
factored into the evaluation of the overall proposals but will not necessitate a
vote in opposition to the overall proposals.
BOARD OF DIRECTORS
The advisers do not consider the election of the Board of Directors a
routine issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
- Historical responsiveness to shareholders. This may include
such areas as:
- Paying greenmail
- Failure to adopt shareholder resolutions receiving a
majority of shareholder votes
- Qualifications
- Nominating committee in place
- Number of outside directors on the board
- Attendance at meetings
- Overall performance
SELECTION OF AUDITORS
In general, we support the Board of Directors' recommendation for
auditors.
BLANK CHECK PREFERRED STOCK
We oppose the issuance of blank check preferred stock.
Blank check preferred stock allows the company to issue stock and
establish dividends, voting rights, etc. without further shareholder approval.
CLASSIFIED BOARD
A classified board is one where the directors are divided into classes
with overlapping terms. A different class is elected at each annual meeting.
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While a classified board promotes continuity of directors facilitating
long-range planning, we feel directors should be accountable to shareholders on
an annual basis. We will look at this proposal on a case-by-case basis taking
into consideration the board's historical responsiveness to the rights of
shareholders.
Where a classified board is in place we will generally not support
attempts to change to an annually elected board. When an annually elected board
is in place, we generally will not support attempts to classify the board.
INCREASE AUTHORIZED COMMON STOCK
The request to increase the amount of outstanding shares is considered
on a case-by-case basis. Factors taken into consideration include:
- Future use of additional shares
- Stock split
- Stock option or other executive compensation plan
- Finance growth of company/strengthen balance sheet
- Aid in restructuring
- Improve credit rating
- Implement a poison pill or other takeover defense
- Amount of stock currently authorized but not yet issued or
reserved for stock option plans
- Amount of additional stock to be authorized and its dilutive
effect
We will support this proposal if a detailed and verifiable plan for
the use of the additional shares is contained in the proxy statement.
CONFIDENTIAL BALLOT
We support the idea that a shareholder's identity and vote should be
treated with confidentiality.
However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse
the use of independent Inspectors of Election.
CUMULATIVE VOTING
In general, we support cumulative voting.
Cumulative voting is a process by which a shareholder may multiply the
number of directors being elected by the number of shares held on record date
and cast the total number for one candidate or allocate the voting among two or
more candidates.
Where cumulative voting is in place, we will vote against any proposal
to rescind this shareholder right.
Cumulative voting may result in a minority block of stock gaining
representation on the board. When a proposal is made to institute cumulative
voting, the proposal will be reviewed on a case-by-case basis. While we feel
that each board member should represent all shareholders, cumulative voting
provides minority shareholders an opportunity to have their views represented.
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DIRECTOR LIABILITY AND INDEMNIFICATION
We support efforts to attract the best possible directors by limiting
the liability and increasing the indemnification of directors, except in the
case of insider dealing.
EQUAL ACCESS TO THE PROXY
The Commission's rules provide for shareholder resolutions. However,
the resolutions are limited in scope and there is a 500 word limit on
proponents' written arguments. Management has no such limitations. While we
support equal access to the proxy, we would look at such variables as length of
time required to respond, percentage of ownership, etc.
FAIR PRICE PROVISIONS
Charter provisions requiring a bidder to pay all shareholders a fair
price are intended to prevent two-tier tender offers that may be abusive.
Typically, these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders
should be entitled to receive the same benefits. Provisions are reviewed on a
case-by-case basis.
GOLDEN PARACHUTES
Golden parachutes are severance payments to top executives who are
terminated or demoted after a takeover.
We support any proposal that would assure management of its own
welfare so that they may continue to make decisions in the best interest of the
company and shareholders even if the decision results in management losing their
jobs. We do not, however, support excessive golden parachutes. Therefore, each
proposal will be decided on a case-by-case basis.
Note: Congress has imposed a tax on any parachute that is more than
three times the executive's average annual compensation.
ANTI-GREENMAIL PROPOSALS
We do not support greenmail. An offer extended to one shareholder
should be extended to all shareholders equally across the board.
LIMIT SHAREHOLDERS' RIGHTS TO CALL SPECIAL MEETINGS
We support the right of shareholders to call a special meeting.
CONSIDERATION OF NONFINANCIAL EFFECTS OF A MERGER
This proposal releases the directors from only looking at the
financial effects of a merger and allows them the opportunity to consider the
merger's effects on employees, the community, and consumers.
As a fiduciary, we are obligated to vote in the best economic
interests of our clients. In general, this proposal does not allow us to do
that. Therefore, we generally cannot support this proposal.
Reviewed on a case-by-case basis.
MERGERS, BUYOUTS, SPIN-OFFS, RESTRUCTURINGS
Each of the above is considered on a case-by-case basis. According to
the United States Department of Labor, we are not required to vote for a
proposal simply because the offering price is at a premium to the current market
price. We may take into consideration the long-term interests of the
shareholders.
MILITARY ISSUES
Shareholder proposals regarding military production must be evaluated
on a purely economic set of criteria for our ERISA clients. As such, decisions
will be made on a case-by-case basis.
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In voting on this proposal for our non-ERISA clients, we will vote
according to the client's direction when applicable. Where no direction has been
given, we will vote in the best economic interests of our clients. It is not our
duty to impose our social judgment on others.
NORTHERN IRELAND
Shareholder proposals requesting the signing of the MacBride
principles for the purpose of countering the discrimination against Catholics in
hiring practices must be evaluated on a purely economic set of criteria for our
ERISA clients. As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote
according to client direction when applicable. Where no direction has been
given, we will vote in the best economic interests of our clients. It is not our
duty to impose our social judgment on others.
OPT-OUT OF STATE ANTI-TAKEOVER LAW
This shareholder proposal requests that a company opt out of the
coverage of the state's takeover statutes. Example: Delaware law requires that a
buyer must acquire at least 85% of the company's stock before the buyer can
exercise control unless the board approves.
We consider this on a case-by-case basis. Our decision will be based
on the following:
- State of incorporation
- Management history of responsiveness to shareholders
- Other mitigating factors
POISON PILL
In general, we do not endorse poison pills.
In certain cases where management has a history of being responsive to
the needs of shareholders and the stock is very liquid, we will reconsider this
position.
REINCORPORATION
Generally, we support reincorporation for well-defined business
reasons. We oppose reincorporation if proposed solely for the purpose of
reincorporating in a state with more stringent anti-takeover statutes that may
negatively impact the value of the stock.
STOCK OPTION PLANS
Stock option plans are an excellent way to attract, hold and motivate
directors and employees. However, each stock option plan must be evaluated on
its own merits, taking into consideration the following:
- Dilution of voting power or earnings per share by more than
10%
- Kind of stock to be awarded, to whom, when and how much
- Method of payment
- Amount of stock already authorized but not yet issued under
existing stock option plans
SUPERMAJORITY VOTE REQUIREMENTS
Supermajority vote requirements in a company's charter or bylaws
require a level of voting approval in excess of a simple majority of the
outstanding shares. In general, we oppose supermajority-voting requirements.
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Supermajority requirements often exceed the average level of shareholder
participation. We support proposal approval by a simple majority of the shares
voting.
LIMIT SHAREHOLDERS' RIGHT TO ACT BY WRITTEN CONSENT
Written consent allows shareholders to initiate and carry on a
shareholder action without having to wait until the next annual meeting or to
call a special meeting. It permits action to be taken by the written consent of
the same percentage of the shares that would be required to effect the proposed
action at a shareholder meeting.
Reviewed on a case-by-case basis.
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PART C
OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements (11)
(a) Portfolio of Investments
(b) Statement of Assets and Liabilities
(c) Statement of Operations
(d) Statement of Changes in Net Assets for the year
(e) Financial highlights for a share outstanding throughout the periods
1996 through June 30, 2006
(f) Notes to Financial Statements
(g) Report of Independent Accountants
2. Exhibits
(a) (i) Articles of Incorporation (2)
(ii) Articles Supplementary for the Series B 7.20% Cumulative
Preferred Stock (3)
(iii) Articles Supplementary for the Series C Auction Rate Preferred
Cumulative Stock (5)
(iv) Articles Supplementary for the Series D 5.875% Cumulative
Preferred Stock (11)
(v) Articles Supplementary for the Series E Auction Rate Preferred
Cumulative Preferred Stock (11)
(vi) Articles Supplementary for the Series F [ ] Cumulative Preferred
Stock (11)
(vii) Articles of Amendment dated May 12, 2004 to the Articles of
Incorporation (8)
(viii) Articles of Amendment dated September 12, 2005 to the Articles
of Incorporation (9)
(b) Amended and Restated By-Laws of Registrant (9)
(c) Not applicable
(d) Specimen Stock Certificate:
(i) Form of certificate for Common Stock, par value $.001 per share
(6)
(ii) 7.20% Tax Advantaged Series B Cumulative Preferred Stock (3)
(iii) Series C Auction Rate Cumulative Preferred Stock (5)
(iv) 5.875% Series D Cumulative Preferred Stock (7)
(v) Series E Auction Rate Cumulative Preferred Stock (7)
(vi) Form of Certificate for Series F _____% Cumulative Preferred
Stock (11)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan of
The Gabelli Equity Trust Inc. (the "Registrant") (2)
(f) Not applicable
(g) Investment Advisory Agreement between Registrant and Gabelli Funds,
LLC (the "Investment Adviser") (6)
(h) Form of Underwriting Agreement (11)
(i) Not applicable
(j) Custodian Contract between Registrant and Mellon Trust of New England,
N.A. (6)
(k) (i) Registrar, Transfer Agency and Service Agreement between
Registrant and Computershare Shareholder Services, Inc. (6)
(ii) Transfer Agent and Registrar Services Fee Agreement between
Registrant and Computershare Shareholder Services, Inc. (6)
(iii) Sub-Administration Agreement between the Registrant and PFPC,
Inc. (11)
(iv) Form of Auction Agency Agreement for the Series C Auction Rate
Cumulative Preferred Stock (5)
(v) Form of Auction Agency Agreement for the Series E Auction Rate
Cumulative Preferred Stock (7)
(vi) Form of Broker-Dealer Agreement for the Series C Auction Rate
Cumulative Preferred Stock (5)
(vii) Form of Broker-Dealer Agreement for the Series E Auction Rate
Cumulative Preferred Stock (7)
(viii) Form of DTC Agreement (11)
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(l) (i) Opinion and Consent of Willkie Farr & Gallagher LLP (11)
(ii) Opinion and Consent of Venable LLP (11)
(m) Not applicable
(n) (i) Consent of Independent Registered Public Accounting Firm (11)
(ii) Powers of Attorney (10)
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Codes of Ethics of the Registrant and the Investment Adviser (4)
1. Incorporated by reference to the Registrant's semi-annual report filed
September 6, 2006 on form N-CSRS (File No. 811-4700) and the Registrant's
annual report filed on March 13, 2006 on form N-CSR (File No. 811-04700).
2. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-2 (File Nos. 33 3-4595
1 and 811-4700); as filed with the Securities and Exchange Commission on
February 10, 1998.
3. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2 (File Nos. 333-47012
and 811-4700); as filed with the Securities and Exchange Commission on June
11, 2001.
4. Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-2 (File Nos. 333-62323 and
811-4700); as filed with the Securities and Exchange Commission on December
12, 2000.
5. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 3
to the Registrant's Registration Statement on Form N-2 (File Nos. 333-86554
and 811-4700); as filed with the Securities and Exchange Commission on June
25, 2002.
6. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2 (File Nos. 333-62323
and 811-4700); as filed with the Securities and Exchange Commission on
October 13, 1995.
7. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-2 (File Nos.
333-106081 and 8114700); as filed with the Securities and Exchange
Commission on October 1, 2003.
8. Incorporated by reference to the Registrant's Registration Statement on
Form N-14 (File Nos. 333-126111) as filed with the Securities and Exchange
Commission on June 24, 2005.
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9. Incorporated by reference to the Registrant's Pre-Effective Amendment No. 1
to the Registrant's Registration Statement on Form N-2 (File Nos.
333-127724 and 811-04700) as filed with the Securities and Exchange
Commission on September 14, 2005.
10. Incorporated by reference to the Registrant's Registration Statement on N-2
(File Nos. 333-137298 and 811-04700) as filed with the Securities and
Exchange Commission on September 13, 2006.
11. To be filed by amendment.
Item 26. Marketing Arrangements
Please refer to exhibit 2(h) of this Registration Statement
Item 27. 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 $[ ]
Rating Agency fees $[ ]
Printing expenses $[ ]
Postage and mailing expenses $[ ]
Auditing fees and expenses $[ ]
Legal fees and expenses $[ ]
Miscellaneous $[ ]
Total $[ ]
Item 28. Persons Controlled by or Under Common Control with Registrant
NONE
Item 29. Number of Holders of Securities as of ___________, 2006:
Number of
Class of Stock Record Holders
-------------- --------------
Common Stock [ ]
Series B Preferred [ ]
Series C Auction Rate Preferred [ ]
Series D Preferred [ ]
Series E Auction Rate Preferred [ ]
Item 30. Indemnification
The response to this Item is incorporated by reference to the caption
"Management of the Fund - Limitation of Officers' and Directors' Liability" in
the Part B of this Registration Statement.
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Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers
and controlling persons of Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Item 31. 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 31 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 1940 Act (Commission File No. 801-37706).
Item 32. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at
the office of the Investment Adviser at One Corporate Center, Rye, New York
10580-1422, in part at the offices of the Custodian, Mellon Trust of New
England, N.A., 135 Santilli Highway, Everett, Massachusetts 02149, in part at
the offices of the Registrant's Sub-Administrator, PFPC, Inc, 400 Bellevue
Parkway, Wilmington, Delaware, 19808, and in part at the offices of
Computershare Shareholder Services, Inc., N.A., PO Box 43025, Providence, RI
02940-3025.
Item 33. Management Services
Not applicable.
Item 34. 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.
-5-
4. Not applicable.
5. a. 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.
b. Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a
form of prospectus will be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time will be deemed to be the initial bona fide offering
thereof.
6. Registrant undertakes to send by first class mail or other means designed
to ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information
constituting Part B of this Registration Statement.
-6-
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, this Registrant's Registration Statement has been signed on behalf
of the Registrant, in the City of Rye, State of New York, on the 2nd day of
November, 2006.
THE GABELLI EQUITY TRUST INC.
By: /s/ Bruce N. Alpert
------------------------------------
Bruce N. Alpert
President and Principal Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates set forth below.
Signature Title Date
--------- ----- ----
* Director and Chairman November 2, 2006
-------------------------------------
Mario J. Gabelli
/s/ Agnes Mullady Treasurer and Principal November 2, 2006
------------------------------------- Financial Officer
* Director November 2, 2006
-------------------------------------
Thomas E. Bratter
* Director November 2, 2006
-------------------------------------
Anthony J. Colavita
* Director November 2, 2006
-------------------------------------
James P. Conn
* Director November 2, 2006
-------------------------------------
Frank J. Fahrenkopf, Jr.
* Director November 2, 2006
-------------------------------------
Arthur V. Ferrara
* Director November 2, 2006
-------------------------------------
Anthony R. Pustorino
* Director November 2, 2006
-------------------------------------
Salvatore J. Zizza
/s/ Bruce N. Alpert
-------------------------------------
Bruce N. Alpert
Attorney-in-Fact
* Pursuant to a Power of Attorney