As filed with the Securities and Exchange Commission on November 24, 2003
Securities Act No. 333-108409
Investment Company Act File No. 811-21423
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM N-2
________________________
[X] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 3
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940
[X] Amendment No. 3
(Check Appropriate Box or Boxes)
________________________
THE GABELLI DIVIDEND & INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
________________________
One Corporate Center
Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Dividend & Income Trust
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100
(Name and Address of Agent for Service)
________________________
Copies to:
Richard T. Prins, Esq. James E. McKee, Esq. Leonard B. Mackey, Jr., Esq.
Skadden, Arps, Slate, The Gabelli Dividend & Income Trust Clifford Chance US LLP
Meagher & Flom LLP One Corporate Center 200 Park Avenue
Four Times Square Rye, New York 10580-1422 New York, New York 10166
New York, New York 10036 (914) 921-5100 (212) 878-8000
(212) 735-3000
________________________
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, as amended, other than securities offered in connection with a
dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check
appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is [ ].
________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed
Proposed Maximum
Maximum Aggregate
Amount Being Offering Price Offering Amount of
Title of Securities Registered Per Share Price Registration Fee (1)
-----------------------------------------------------------------------------------------------------------------------
Common Shares, 90,000,000 Shares $20 $1,800,000,000 $227,251
$.001 par value
(1) $809 previously paid.
________________________
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
===============================================================================
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
-------------------------------------------------------------------------------------------------------------------
PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page............................................. Outside Front Cover Page; Inside Front Cover Page
3. Fee Table and Synopsis............................. Summary; Summary of Fund Expenses
4. Financial Highlights............................... Not Applicable
5. Plan of Distribution............................... Outside Front Cover Page; Summary; Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Use of Proceeds; Investment Objective and Policies
8. General Description of the
Registrant....................................... Outside Front Cover Page; Summary; The Fund;
Investment Objective and Policies; Risk Factors &
Special Considerations; How the Fund Manages Risk;
Description of the Shares; Anti-takeover Provisions of
the Fund's Governing Documents
9. Management......................................... Outside Front Cover Page; Summary; Management of
the Fund; Custodian, Transfer Agent,
Dividend-Disbursing Agent
10. Capital Shares, Long-Term Debt,
and Other Securities............................. Outside Front Cover Page; Summary; Investment
Objective and Policies; Description of the Shares;
Description of Capitalization; Taxation
11. Defaults and Arrears on Senior
Securities....................................... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement
of Additional Information........................ Table of Contents of the Statement of Additional
Information
PART B Location in Statement of
Additional Information
-------------------------------------------------------------------------------------------------------------------
14. Cover Page......................................... Outside Front Cover Page
15. Table of Contents.................................. Outside Front Cover Page
16. General Information and History.................... Not Applicable
17. Investment Objective and
Policies......................................... Investment Objective and Policies; Investment Restrictions
18. Management......................................... Management of the Fund
19. Control Persons and Principal
Holders of Securities............................ Not Applicable
20. Investment Advisory and Other
Services......................................... Management of the Fund
21. Brokerage Allocation and Other
Practices........................................ Portfolio Transactions
22. Tax Status......................................... Taxation
23. Financial Statements............................... Not Applicable
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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated November , 2003
PROSPECTUS Shares [GABELLI LOGO]
The Gabelli Dividend & Income Trust
Common Shares of Beneficial Interest
$20.00 per share
The Gabelli Dividend & Income Trust, or the Fund, is a newly
organized, non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended. The Fund's
investment objective is to seek a high level of total return with an emphasis
on dividends and income. Gabelli Funds, LLC serves as investment adviser to
the Fund. An investment in the Fund is not appropriate for all investors. We
cannot assure you that the Fund's objective will be achieved.
Under normal market conditions, the Fund invests at least 80% of its
assets in dividend paying or other income producing securities. In addition,
under normal market conditions, at least 50% of the Fund's assets will consist
of dividend paying equity securities. In making stock selections, the Fund's
investment adviser looks for securities that have a superior yield, as well as
capital gains potential.
The Fund currently anticipates that it will issue preferred shares
following the completion of this offering of common shares in order to seek
incremental return for the Fund's common shareholders. The use of preferred
shares to leverage the common shares may involve greater risk to common
shareholders.
The Fund expects the common shares to be listed on the New York Stock
Exchange, subject to notice of issuance, under the symbol "GDV."
Because the Fund is newly organized, its shares have no history of
public trading. Shares of closed-end funds often trade at a discount from net
asset value and this creates a risk of loss for an investor purchasing shares
in an initial public offering.
Investing in the Fund's common shares involves risks. See "Risk
Factors and Special Considerations" on page for factors that should be
considered before investing in the common shares of the Fund.
_____________________
Per Share Total
--------- -----
Public Offering Price $20.00 $
Sales Load (1) $.90 $
Estimated offering expenses (2) $.04 $
Proceeds to the Fund
(after expenses) $19.06 $
(1) The Fund has agreed to pay the underwriters $.0067 per common
share as a partial reimbursement of expenses incurred in
connection with the offering. See "Underwriting."
(2) Offering expenses payable by the Fund are estimated at $2,600,000.
The underwriters may also purchase up to an additional common shares
at the public offering price, less the sales load, within 45 days from the
date of this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The common shares will be ready for delivery on or about on , 2003.
______________________
Merrill Lynch & Co. Citigroup A.G. Edwards & Sons, Inc.
Gabelli & Company, Inc.
Raymond James RBC Capital Markets Wells Fargo Securities, LLC
Advest, Inc. BB&T Capital Markets H&R Block Financial Advisors, Inc.
J.J.B. Hilliard, W.L. Lyons, Inc. Janney Montgomery Scott LLC
Legg Mason Wood Walker McDonald Investments Inc. Morgan Keegan & Company, Inc.
Incorporated
Oppenheimer Quick & Reilly, Inc. Ryan Beck & Co.
Stifel, Nicolaus & Company SunTrust Robinson Humphrey TD Waterhouse
Incorporated
Wedbush Morgan Securities Inc. Claymore Securities, Inc. Hennion & Walsh, Inc.
____________________
The date of this prospectus is ,2003.
(continued from previous page)
You should read this prospectus, which contains important information
about the Fund, before deciding whether to invest in the common shares, and
retain it for future reference. A Statement of Additional Information, dated ,
2003, containing additional information about the Fund, has been filed with
the Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 51 of this
prospectus, by calling (800) GABELLI (422-3554) or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities
and Exchange Commission's web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
Page
You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not, and the underwriters have not,
authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely
on it. The Fund is not, and the underwriters are not, making an offer to sell
these securities in any state where the offer or sale is not permitted.
Prospectus Summary..........................................................4
Summary of Fund Expenses...................................................14
Use of Proceeds............................................................16
The Fund...................................................................16
Investment Objective and Policies..........................................16
Leverage...................................................................23
Risk Factors and Special Considerations....................................26
How the Fund Manages Risk..................................................34
Management of the Fund.....................................................35
Portfolio Transactions.....................................................37
Dividends and Distributions................................................37
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan...........38
Description of the Shares..................................................39
Anti-takeover Provisions of the Fund's Governing Documents.................41
Closed-end Fund Structure..................................................42
Repurchase of Common Shares................................................42
Taxation...................................................................43
Custodian, Transfer Agent and Dividend Disbursing Agent....................45
Underwriting...............................................................46
Legal Matters..............................................................49
Additional Information.....................................................49
Privacy Principles of the Fund.............................................49
Special Note Regarding Forward-looking Statements..........................50
Table of Contents of SAI...................................................51
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in the common shares.
You should review the more detailed information contained in this prospectus
and the Statement of Additional Information, dated , 2003 (the "SAI").
The Fund................................ The Gabelli Dividend & Income Trust is a newly organized, closed-end,
non-diversified management investment company organized under the laws
of the State of Delaware. Throughout this prospectus, we refer to The
Gabelli Dividend & Income Trust as the "Fund" or as "we," "us" or "our."
See "The Fund."
The Offering............................ The Fund is offering common shares of beneficial interest at $20.00 per
share through a group of underwriters (the "Underwriters") led by Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). The
common shares of beneficial interest are called "common shares" in the
rest of this prospectus. You must purchase at least 100 common shares
($2,000) in order to participate in this offering. The Fund has given the
Underwriters an option to purchase up to additional common shares to
cover orders in excess of common shares. See "Underwriting." The
Fund's Investment Adviser (together with its affiliates) intends to
purchase the lesser of $50,000,000 or 3% of the common shares sold
in the offering (not including any additional shares sold to the
underwriters pursuant to the option referred to above).
Investment Objective and Policies....... The Fund's investment objective is to provide a high level of total return on
its assets with an emphasis on dividends and income. No assurance can be
given that the Fund will achieve its investment objective. The Fund will
attempt to achieve its investment objective by investing, under normal
market conditions, at least 80% of its assets in dividend paying
securities (such as common and preferred stock) or other income producing
securities (such as fixed income debt securities and securities that are
convertible into common stock). In addition, under normal market
conditions, at least 50% of the Fund's assets will consist of dividend
paying equity securities. The Fund may invest up to 35% of its total
assets in the securities of non-U.S. issuers and up to 25% of its total
assets in securities of issuers in a single industry. There is no minimum
credit rating for debt securities in which the Fund may invest, although
the Fund will not invest more than 10% of its total assets in fixed-income
nonconvertible securities rated in the lower rating categories of
recognized statistical rating agencies or non-rated securities of
comparable quality, which are commonly referred to as "junk bonds." See
"Investment Objective and Policies."
The Investment Adviser's investment philosophy with respect to both equity
and debt 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. In making stock
selections, the Fund's Investment Adviser looks for securities that have a
superior yield, as well as capital gains potential.
Use of Leverage..................... The Fund currently anticipates issuing preferred shares following completion
of this offering of common shares, upon a determination by the Board of
Trustees that the issuance of preferred shares is in the best interests of
the Fund's common shareholders. As provided in the Investment Company Act of
1940 (the "1940 Act") and subject to certain exceptions, the Fund may issue
preferred shares so long as the Fund's total assets immediately after such
issuance, less certain ordinary course liabilities, exceed 200% of the sum of
the amount of preferred shares and debt outstanding. In accordance with
Securities and Exchange Commission staff guidelines, the Fund may also issue
convertible preferred shares, which may permit the Fund to obtain leverage at
attractive rates. Use of leverage may magnify the impact on the common
shareholder of changes in net asset value and the cost of leverage may exceed
the return on the securities acquired with the proceeds of the leverage,
thereby diminishing rather than enhancing the return to such shareholders and
generally making the Fund's total return to such shareholders more volatile.
In addition, the Fund may be required to sell investments in order to meet
dividend or interest payment obligations on the preferred shares when it may
be disadvantageous to do so. Leveraging through the issuance of preferred
shares requires that the holders of the preferred shares have class voting
rights on various matters that could make it more difficult for the holders
of the common shares to change the investment objective or fundamental
policies of the Fund, to convert it to an open-end fund or make certain other
changes. See "Leverage" and "Risk Factors and Special Considerations --
Leverage Risk."
The fee paid to the Investment Adviser is calculated on the basis of the
Fund's net assets including proceeds from the issuance of preferred shares.
However, the Investment Adviser has voluntarily agreed to waive investment
management fees on assets attributable to preferred shares for any calendar
year except to the extent the Fund's rate of total return allocable to common
shareholders, including distributions and the management fee subject to
potential waiver, is equal to or exceeds the cost of the leverage for that
year. This waiver will apply as long as any such preferred shares are
outstanding. Consequently, during periods in which the Fund has preferred
shares outstanding, the investment management fees payable to the Investment
Adviser may be higher than if the Fund did not utilize a leveraged capital
structure. See "Leverage."
Dividends and Distributions............. In order to allow its holders of common shares to realize a predictable, but
not assured, level of cash flow and some periodic liquidity from their
investment without having to sell shares, the Fund's Board of Trustees has
adopted a policy, which may be modified at any time by the Board of
Trustees, of paying quarterly distributions on its common shares. The
Board has initially determined to pay distributions on each share of $.30
per quarter, which is equal to an annual rate of 6% of the offering price per
share. The Board also determined to pay additional distributions on an
annual basis equal to any realized income in excess of the quarterly
distributions as may be necessary to distribute substantially all of the
Fund's taxable income for that year. Quarterly distributions are expected to
be paid in March, June, September and December of each year,
commencing in March, 2004.
If, for any calendar year, the total quarterly distributions exceed
investment company taxable income and net capital gain, the excess will
generally be treated as a tax-free return of capital up to the amount of a
shareholder's tax basis in the common shares. Any distributions which (based
upon the Fund's full year performance) constitute tax-free return of capital
will reduce a shareholder's tax basis in the common shares, thereby
increasing such shareholder's potential gain or reducing his or her potential
loss on the sale of the common shares. Any amounts distributed to a
shareholder in excess of the shareholder's basis in the common shares will
generally be taxable to the shareholder as capital gain. See "Taxation."
Ordinary income and capital gain distributions paid (or in the case of
capital gain, credited) by the Fund will be automatically reinvested in
additional shares of the Fund unless a shareholder elects to receive cash or
the shareholder's broker does not provide reinvestment services. See
"Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan." Because
the Fund's distribution policy may be changed by the Board at any time, there
can be no assurance that the Fund will pay distributions or pay distributions
at a particular rate.
Tax Treatment of Common
Share Distributions................ The Fund expects that taxable distributions paid on the common shares will
consist of (i) qualified dividend income (income from domestic and certain
foreign corporations), (ii) long-term capital gain (gain from the sale of a
capital asset held longer than 12 months) 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, currently the maximum federal
income tax rate is 15% on qualified dividend income, 15% on long-term
capital gain and 35% on investment company taxable income (other than
qualified dividend income). These tax rates are scheduled to apply through
2008. We cannot assure you as to what percentage of the distributions paid
on the common shares, if any, will consist of tax-advantaged qualified
dividend income or long-term capital gains or what the tax rates on
various types of income will be in future years. For a more detailed
discussion, see "Taxation."
Use of Proceeds......................... The Fund will use the net proceeds from the offering to purchase portfolio
securities in accordance with its investment objective and policies. See
"Use of Proceeds."
Listing of the Common Shares............ The common shares are expected to be listed on the New York Stock
Exchange, subject to notice of issuance, under the trading or "ticker"
symbol "GDV." See "Description of the Shares."
Market Price of Shares.................. Common shares of closed-end investment companies often trade at prices lower
than their net asset value. Common shares of closed-end investment companies
like the Fund have during some periods traded at prices higher than their net
asset value and have during other periods traded at prices lower than their
net asset value. We cannot assure you that the Fund's common shares will
trade at a price higher than or equal to net asset value. The Fund's net
asset value will be reduced immediately following this offering by the sales
load and the amount of the organization and offering expenses paid by the
Fund. See "Use of Proceeds." In addition to net asset value, the market price
of the Fund's common shares may be affected by such factors as the Fund's
distribution stability, liquidity, market supply and demand, any use of
leverage and the Fund's distribution level. See "Risk Factors and Special
Considerations," "Description of the Shares" and "Repurchase of Common
Shares." The common shares are designed primarily for long-term investors,
and you should not purchase common shares of the Fund if you intend to
sell them shortly after purchase.
Risk Factors and
Special Considerations............. Risk is inherent in all investing. Therefore, before investing in common
shares you should consider the risks carefully.
Fund Distribution Risk. Pursuant to its distribution policy, the Fund intends
to make regular quarterly distributions on its common shares. See "Taxation."
To the extent the total quarterly distributions for a year exceed the Fund's
net investment company taxable income and net realized capital gain for that
year, the excess will generally constitute a return of capital. Return of
capital distributions are generally tax-free up to the amount of a
shareholder's tax basis in the shares. See "Taxation." In addition, such excess
distributions will decrease the Fund's total assets and may increase the Fund's
expense ratio. In order to make such distributions, the Fund may have to sell a
portion of its investment portfolio at a time when independent investment
judgment may not dictate such action. See "Risk Factors and Special
Considerations -- Fund Distribution Risk."
No Operating History. The Fund is a newly organized, non-diversified,
closed-end management investment company with no operating history. See "Risk
Factors and Special Considerations -- No Operating History."
Long-Term Objective; Not a Complete Investment Program. The Fund is intended
for investors seeking long-term capital growth and income. The Fund is not
meant to provide a vehicle for those who wish to play short-term swings in
the stock market. An investment in shares of the Fund should not be
considered a complete investment program. Each shareholder should take into
account the Fund's investment objective as well as the shareholder's other
investments when considering an investment in the Fund. See "Risk Factors and
Special Considerations -- Long-term Objective; Not a Complete Investment
Program."
Leverage Risk. Leverage entails two primary risks. The first risk is that
the use of leverage magnifies the impact on the holders of common shares
of changes in net asset value. For example, if the Fund were to use
leverage equal to 50% of its common shares, it would show a 1.5% increase
or decline in net asset value for each 1% increase or decline in the value
of its total assets. The second risk is that the cost of leverage will
exceed the return on the securities acquired with the proceeds of
leverage, thereby diminishing rather than enhancing the return to holders
of common shares. These two risks would generally make the Fund's total
return to holders of common shares more volatile were it to use leverage.
So long as the Fund uses leverage it may be required to sell investments
in order to meet dividend or interest payments on the debt or preferred
shares when it may be disadvantageous to do so. In addition, a decline in
net asset value could affect the ability of the Fund to make common share
distributions and such a failure to make distributions could result in the
Fund ceasing to qualify as a regulated investment company under the Code.
See "Taxation." Finally, if the asset coverage for preferred shares or
debt securities declines to less than 200% or 300%, respectively (as a
result of market fluctuations or otherwise), the Fund may be required to
sell a portion of its investments to redeem the preferred shares or repay
the debt when it may be disadvantageous to do so. See "Risk Factors and
Specific Considerations -- Leverage Risk."
Equity Risk. A principal risk of investing in the Fund is equity risk,
which is the risk that the securities held by the Fund will fall due to
general market and economic conditions, perceptions regarding the
industries in which the issuers of securities held by the Fund participate
and the particular circumstances and performance of particular companies
whose securities the Fund holds. An investment in the Fund represents an
indirect investment in the securities owned by the Fund, which are for the
most part traded on securities exchanges or in the over-the-counter
markets. The value of these securities, like other market investments, may
move up or down, sometimes rapidly and unpredictably. The value of an
investment in the Fund may at any point in time be worth less than the
original investment, even after taking into account any reinvestment of
distributions. See "Risk Factors and Special Considerations -- Equity
Risk."
Market Discount Risk. Whether investors will realize gains or losses upon the
sale of shares of the Fund will depend upon the market price of the shares at
the time of sale, which may be less or more than the Fund's net asset value
per share. Since the market price of the shares will be affected by such
factors as the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control
of the Fund, the Fund cannot predict whether the shares will trade at, below
or above net asset value or at, below or above the public offering price.
Shares of closed-end funds often trade at a discount to their net asset
values and the Fund's shares may trade at such a discount. This risk may be
greater for investors expecting to sell their shares of the Fund soon after
completion of the public offering. The shares of the Fund were designed
primarily for long-term investors, and investors in the shares should not
view the Fund as a vehicle for trading purposes. See "Risk Factors and
Special Considerations -- Market Discount Risk."
Common Stock Risk. Common stock of an issuer in the Fund's portfolio may
decline in price if the issuer fails to make anticipated dividend payments
because, among other reasons, the issuer of the security experiences a
decline in its financial condition. Common stock in which the Fund will
invest is structurally subordinated to preferred stock, bonds and other debt
instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater dividend risk than
preferred stock or debt instruments of such issuers. In addition, while
common stock has historically generated higher average returns than fixed
income securities, common stock has also experienced significantly more
volatility in those returns. See "Risk Factors and Special Considerations --
Common Stock Risk."
Distribution Risk for Equity Income Portfolio Securities. The Fund will
invest a portion of its assets in the shares of issuers that pay dividends.
Such dividends are not guaranteed and in the event an issuer does not realize
sufficient income in a particular period to both service its liabilities and
to pay dividends, it may forgo paying dividends. See "Risk Factors and
Special Considerations -- Distribution Risk for Equity Income Securities."
Special Risks Related to Preferred Securities. Special risks associated with
investing in preferred securities include deferral of distributions or
dividend payments, in some cases the right of an issuer never to pay missed
dividends, subordination, illiquidity, limited voting rights and redemption
by the issuer. See "Risk Factors and Special Considerations -- Special Risks
Related to Preferred Securities."
Income Risk. The income shareholders receive from the Fund is based primarily
on the dividends and interest it earns from its investments, which can vary
widely over the short and long-term. If prevailing market interest rates
drop, distribution rates of the Fund's preferred shares and any bond holdings
and shareholder's income from the Fund could drop as well. The Fund's income
also would likely be affected adversely when prevailing short-term interest
rates increase and the Fund is utilizing leverage. See "Risk Factors and
Special Considerations -- Income Risk."
Interest Rate Risk. Interest rate risk is the risk that fixed-income
securities such as preferred and debt securities will decline in value
because of changes in market interest rates. When market interest rates rise,
the market value of such securities generally will fall. The Fund's
investment in such securities means that the net asset value and market price
of common shares will tend to decline if market interest rates rise. See
"Risk Factors and Special Considerations -- Interest Rate Risk."
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred and debt securities frequently have call features
that allow the issuer to redeem the securities prior to their stated
maturities. An issuer may redeem such a security if the issuer can refinance
it at a lower cost due to declining interest rates or an improvement in the
credit standing of the issuer. During periods of rising interest rates, the
average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest
rate, increase the security's duration and reduce the value of the security.
This is known as extension risk.
Market interest rates for investment grade fixed-income securities in which
the Fund will invest have recently declined significantly below the
historical average rates for such securities. This decline may have increased
the risk that these rates will rise in the future (which would cause the
value of the Fund's assets invested in fixed income securities to decline)
and the degree to which asset values may decline in such event; however,
historical interest rate levels are not necessarily predictive of future
interest rate levels. See "Risk Factors and Special Considerations --
Interest Rate Risk."
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investments will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of
the Fund's shares and distributions thereon can decline. In addition,
during any periods of rising inflation, dividend rates of any preferred
shares issued by the Fund would likely increase, which would tend to
further reduce returns to common shareholders. See "Risk Factors and
Special Considerations -- Inflation Risk."
Dilution Risk for Convertible Securities. In the absence of adequate
anti-dilution provisions in a convertible security, dilution in the value of
the Fund's holding may occur in the event the underlying stock is subdivided,
additional equity securities are issued for below market value, a stock
dividend is declared, or the issuer enters into another type of corporate
transaction that has a similar effect. See "Risk Factors and Special
Considerations -- Dilution Risk for Convertible Securities."
Value Investing Risk. The Fund focuses its investments on 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. See "Risk Factors and Special
Considerations -- Value Investing Risk."
Non-Diversified Status. As a non-diversified investment company under the
1940 Act, the Fund is not limited in the proportion of its assets that may be
invested in securities of a single issuer, and accordingly, an investment in
the Fund may, under certain circumstances, present greater risk to an
investor than an investment in a diversified company. See "Risk Factors and
Special Considerations -- Non-Diversified Status."
Industry Concentration Risk. 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 --
Industry Concentration Risk."
Illiquid Securities. The Fund has no limit on the amount of its net assets
it may invest in unregistered and otherwise illiquid investments.
Unregistered securities are securities that cannot be sold publicly in the
United States without registration under the Securities Act of 1933.
Unregistered securities generally can be resold only in privately
negotiated transactions with a limited number of purchasers or in a public
offering registered under the Securities Act. Considerable delay could be
encountered in either event and, unless otherwise contractually provided
for, the Fund's proceeds upon sale may be reduced by the costs of
registration or underwriting discounts. The difficulties and delays
associated with such transactions could result in the Fund's inability to
realize a favorable price upon disposition of unregistered securities, and
at times might make disposition of such securities impossible. See "Risk
Factors and Special Considerations -- Illiquid Securities."
Foreign Securities Risk. The Fund may invest up to 35% of its total net
assets in foreign securities. Investing in securities of foreign companies
(or foreign governments), which are generally denominated in foreign
currencies, may involve certain risks and opportunities not typically
associated with investing in domestic companies and could cause the Fund to
be affected favorably or unfavorably by changes in currency exchange rates
and revaluation of currencies. See "Risk Factors and Special Considerations
-- Foreign Securities Risk."
Smaller Companies. While the Fund intends to focus on the securities of
established suppliers of accepted products and services, the Fund may also
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. See "Risk Factors and Special
Considerations -- Smaller Companies."
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 shares will be subject to
duplicative investment expenses. See "Risk Factors and Special
Considerations -- Investment Companies."
Lower Grade Securities. The Fund may invest up to 10% of its total assets in
fixed-income securities rated below investment grade by recognized
statistical rating agencies or unrated securities of comparable quality. The
prices of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade securities. Securities
of below investment grade quality are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal when due and
therefore involve a greater risk of default and are commonly referred to as
"junk bonds." See "Risk Factors and Special Considerations -- Lower Grade
Securities."
Special Risks of Derivative Transactions. 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 and interest rate markets is
inaccurate, the consequences to the Fund may leave the Fund in a worse
position than if it had not used such strategies. See "Risk Factors and
Special Considerations -- Special Risks of Derivative Transactions."
Loans of Portfolio Securities. The Fund may seek to earn income by lending
portfolio securities to broker-dealers or other institutional borrowers.
As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the securities loaned if the borrower of the
securities violates the terms of the loan or fails financially. See "Risk
Factors and Special Considerations -- 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. See
"Risk Factors and Special Considerations -- Management Risk."
Dependence on Key Personnel. The Investment Adviser is dependent upon the
expertise of Mr. Mario J. Gabelli in providing advisory services with respect
to the Fund's investments. If the Investment Adviser were to lose the
services of Mr. Gabelli, its ability to service the Fund could be adversely
affected. There can be no assurance that a suitable replacement could be
found for Mr. Gabelli in the event of his death, resignation, retirement or
inability to act on behalf of the Investment Adviser. See "Risk Factors and
Special Considerations -- Dependence on Key Personnel."
Tax Risk. We cannot assure you what percentage of the distributions paid on the
common shares, if any, will consist of tax-advantaged qualified dividend income
or long-term capital gains or what the tax rates on various types of income
will be in future years. See "Risk Factors and Special Considerations -- Tax
Risk."
Current Developments. As a result of the terrorist attacks on the World Trade
Center and the Pentagon on September 11, 2001, some of the U.S. Securities
Markets were closed for a four-day period. These terrorists attacks, the war
in Iraq and its aftermath and other geopolitical events have led to, and may
in the future lead to, increased short-term market volatility and may have
long-term effects on U.S. and world economies and markets. Similar events in
the future or other disruptions of financial markets could affect interest
rates, securities exchanges, auctions, secondary trading, ratings, credit
risk, inflation and other factors relating to the common shares. See "Risk
Factors and Special Considerations -- Current Developments."
Anti-takeover Provisions. The Fund's governing documents 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 Governing Documents."
Management and Fees..................... Gabelli Funds, LLC serves as the Fund's investment adviser ("Investment
Adviser") and is compensated for its services and its related expenses at an
annual rate of 1.00% of the Fund's average weekly net assets. As used in
this prospectus, net assets means the aggregate net asset value of the
common shares (which includes for this purpose assets attributable to
outstanding preferred shares, if any, with no deduction for the liquidation
preference of such preferred shares). However, the Investment Adviser has
voluntarily agreed that in the event the Fund issues preferred shares, it will
waive investment management fees on assets attributable to such preferred
shares for any calendar year except to the extent the Fund's rate of total
return allocable to common shareholders, including distributions and the
management fee subject to potential waiver, is equal to or exceeds the
blended dividend or swap rate on such leverage for that year. The
Investment Adviser is responsible for administration of the Fund and
currently utilizes and pays the fees of a third party sub-administrator.
See "Management of the Fund."
During periods when the Fund has outstanding preferred shares, the fees paid
to the Investment Adviser for its services to the Fund may be higher than if
the Fund did not issue preferred shares because such fees will be calculated
on the basis of the Fund's average weekly net assets (subject to the fee
waiver described above). Consequently, the Fund and the Investment Adviser
may have differing interests in determining whether to leverage the Fund's
assets. The Board of Trustees will monitor this potential conflict.
The Securities and Exchange Commission, the New York Attorney General and
officials of other states have been conducting inquiries into, and bringing
enforcement and other proceedings regarding, trading abuses involving open-end
investment companies. The Investment Adviser (as defined below) has received
information requests from the New York Attorney General in the form a subpoena
and from the Securities and Exchange Commission in connection with these
inquiries. The Investment Adviser and its affiliates have been complying with
these requests and have been independently reviewing their mutual fund
practices in a variety of areas. For further details regarding the Investment
Adviser's ongoing review in connection with these requests, see "Management of
the Fund -- Regulatory Matters."
Repurchase of Common
Shares and Anti-takeover
Provisions......................... The Fund's Board of Trustees expects to authorize the Fund to repurchase its
common shares in the open market when the common 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. See "Repurchase of
Common Shares."
Certain provisions of the Fund's Agreement and Declaration of Trust and
By-Laws (collectively, the "Governing Documents") may be regarded as
"anti-takeover" provisions. Pursuant to these provisions, only one of three
classes of trustees is elected each year, and the affirmative vote of the
holders of 75% of the outstanding shares of the Fund are necessary to
authorize the conversion of the Fund from a closed-end to an open-end
investment company. The overall effect of these provisions is to render more
difficult the accomplishment of a merger with, or the assumption of control
by, a principal shareholder. These provisions may have the effect of
depriving Fund shareholders of an opportunity to sell their shares at a
premium to the prevailing market price. See "Anti-takeover Provisions of the
Fund's Governing Documents."
Custodian, Transfer Agent and
Dividend Disbursing Agent.......... State Street Bank and Trust (the "Custodian"), located at One Heritage Drive,
Palmer 2N, North Quincy, MA 02171, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement, the
custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon, among other
things, the average value of the total assets of the Fund, plus certain
charges for securities transactions.
Equiserve Trust Company, N.A., located at P.O. Box 43025, Providence, RI
09240-3025, serves as the Fund's distribution disbursing agent, as agent
under the Fund's automatic dividend reinvestment and voluntary cash purchase
plan and as transfer agent and registrar with respect to the common shares of
the Fund.
SUMMARY OF FUND EXPENSES
The following table shows Fund expenses as a percentage of net assets
attributable to common shares. Because the Fund has no operating history, the
following tables are based on the assumption that the Fund has issued
65,000,000 common shares and has issued preferred shares or utilized other
leverage in an aggregate amount of approximately 33% of the Fund's assets
under management.
Shareholder Transaction Expenses
Sales Load Paid By You (as a percentage of offering price)....................................... 4.50%
Offering Expenses Borne by the Fund (as a percentage of offering price)*......................... .20%
Dividend Reinvestment Plan Fees.................................................................. None**
Percentage of Net Assets
Attributable to Common Shares
(Assumes Preferred Shares Are Issued)***+
Annual Expenses
Management Fees............................................... 1.50%
Other Expenses................................................ .26%
Total Annual Expenses......................................... 1.76%
___________________
* Gabelli Funds, LLC, the Fund's Investment Adviser, has agreed to pay
the Fund's offering costs (other than the sales load) that exceed $.04
per share of common stock (.20% of the offering price).
** You will be charged a $2.50 service charge and pay brokerage charges
if you direct the plan agent to sell your common shares held in a
dividend reinvestment account.
*** If the Fund offers preferred shares, it expects to incur certain
annual expenses associated with maintaining such preferred shares.
The Fund also would expect to incur offering costs estimated to be
approximately 1.12% of the total dollar amount of the preferred share
offering, which will be borne immediately by common shareholders and
result in a reduction of the net asset value of the common shares.
Assuming the issuance of preferred shares in an amount equal to 33%
of the Fund's assets under management (after their issuance) and that
the Fund issues 65,000,000 common shares, these offering costs are
estimated to be $7,300,000, or $.11 per common share (.56% of the
offering price of the common shares). These offering costs are not
included among the expenses shown in this table.
+ The table presented below in this footnote estimates what the Fund's
annual expenses would be stated as percentages of the Fund's net
assets attributable to common shares. This table assumes the Fund is
the same size as in the table above, but unlike the table above,
assumes that no preferred shares are, or other leverage is, issued or
outstanding. This would be the case, for instance, prior to the
Fund's expected issuance of preferred shares. In accordance with
these assumptions, the Fund's expenses would be estimated to be as
follows:
Percentage of Net Assets
Attributable to Common Shares
(Assumes No Preferred Shares Are Issued)
Annual Expenses
Management Fees............................................... 1.00%
Other Expenses................................................ .12%
Total Annual Expenses......................................... 1.12%
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Annual Expenses" are based on estimated amounts for the
Fund's first year of operations and assume that the Fund issues 65,000,000
common shares. If the Fund issues fewer common shares, all other things being
equal, these expenses would increase.
The following example illustrates the expenses (including the sales
load of $45, estimated offering expenses of this offering of $2 and estimated
offering expenses for the preferred shares of $5.60) that an investor would pay
on a $1,000 investment in common shares, assuming (1) total net annual
expenses of 1.76% of net assets attributable to common shares, (2) a 2% annual
cost of preferred shares issued in an amount equal to 33% of the Fund's assets
under management (after their issuance), and (3) a 5% annual portfolio total
return (which is equal to a 6.5% total return to common shareholders, due to
the use of leverage).*
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Total Expenses Incurred.................. $70 $106 $146 $265
___________________
* The example should not be considered a representation of future
expenses. The example assumes that the estimated "Other Expenses" set
forth in the Annual Expenses table are accurate and that all
distributions are reinvested at net asset value. Actual expenses may
be greater or less than those assumed. Moreover, the Fund's actual
rate of return may be greater or less than the hypothetical 5% return
shown in the example. In addition, the Fund currently expects to
issue auction rate preferred shares, the cost of which to the Fund
will vary depending upon, among other factors, changes in short-term
interest rates. Accordingly, the actual interest cost associated with
such preferred shares may be greater or less than the 2% cost assumed
by this example.
USE OF PROCEEDS
The net proceeds of the offering are estimated at approximately $ ($
if the Underwriters exercise the overallotment option in full), after
deduction of the underwriting discounts and estimated offering expenses
payable by the Fund. The Investment Adviser expects that it will initially
invest the proceeds of the offering in high quality short-term debt securities
and instruments. The Investment Adviser anticipates that the investment of the
proceeds will be made in accordance with the Fund's investment objective and
policies as appropriate investment opportunities are identified, which is
expected to substantially be completed within three months; however, changes
in market conditions could result in the Fund's anticipated investment period
extending to as long as six months.
THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Delaware statutory trust on August 20, 2003, pursuant to an Agreement and
Declaration of Trust governed by the laws of the State of Delaware. As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at One Corporate Center, Rye, New York, 10580-1422.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is to provide a high level of total
return on its assets with an emphasis on dividends and income. Under normal
market conditions, the Fund will invest at least 80% of the value of its total
assets in dividend paying or income producing equity or debt securities.
Investment Methodology of the Fund
In selecting securities for the Fund, the Investment Adviser normally
will consider the following factors, among others:
o the Investment Adviser's own evaluations of the private
market value (which is defined below), cash flow, earnings
per share and other fundamental aspects of the underlying
assets and business of the company;
o the interest or dividend income generated by the securities;
o the potential for capital appreciation of the securities;
o the prices of the securities relative to other comparable
securities;
o whether the securities are entitled to the benefits of call
protection or other protective covenants; and
o the existence of any anti-dilution protections or guarantees
of the security.
The Investment Adviser's investment philosophy (as hereinafter
described) with respect to debt and 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
Equity Securities. Under normal market conditions the Fund will
invest at least 50% of its total assets in dividend paying equity securities,
i.e., common stocks and preferred stocks.
Common stocks represent the residual ownership interest in the issuer
and holders of common stock are entitled to the income and increase in the
value of the assets and business of the issuer after all of its debt
obligations and obligations to preferred stockholders are satisfied. Common
stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.
Equity securities also include preferred stock (whether or not
convertible into common stock) and debt securities convertible into or
exchangeable for common or preferred stock. Preferred stock has a preference
over common stock in liquidation (and generally dividends as well) but is
subordinated to the liabilities of the issuer in all respects. As a general
rule the market value of preferred stock with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk, while the market price of convertible preferred stock generally also
reflects some element of conversion value. Because preferred stock is junior
to debt securities and other obligations of the issuer, deterioration in the
credit quality of the issuer will cause greater changes in the value of a
preferred stock than in a more senior debt security with similarly stated
yield characteristics. The market value of preferred stock will also generally
reflect whether (and if so when) the issuer may force holders to sell their
preferred stock back to the issuer and whether (and if so when) the holders
may force the issuer to buy back their preferred stock. Generally speaking the
right of the issuer to repurchase the preferred stock tends to reduce any
premium that the preferred stock might otherwise trade at due to interest rate
or credit factors, while the right of the holders to require the issuer to
repurchase the preferred stock tend to reduce any discount that the preferred
stock might otherwise trade at due to interest rate or credit factors. In
addition, some preferred stocks 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.
There is no assurance that dividends or distributions on non-cumulative
preferred stocks in which the Fund invests will be declared or otherwise made
payable.
Securities that are convertible into or exchangeable for preferred or
common stock are liabilities of the issuer but are generally subordinated to
more senior elements of the issuer's balance sheet. Although such securities
also generally reflect an element of conversion value, their market value also
varies with interest rates and perceived credit risk. Many convertible
securities are not investment grade, that is, not rated BBB or better by
Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors
Service, Inc. ("Moody's") and not considered by the Investment Adviser to be
of similar quality. There is no minimum credit rating or independent
investment limitation for these securities in which the Fund may invest.
Preferred stocks and convertible securities may have many of the same
characteristics and risks as nonconvertible debt securities. See " -- Lower
Grade Securities."
The Investment Adviser believes that preferred stock and convertible
securities of certain companies offer the opportunity for capital appreciation
as well as periodic income. This is particularly true in the case of companies
that have performed below expectations. If a company's performance has been
poor enough, its preferred stock and convertible securities may trade more
like common stock than like fixed income securities, which may result in above
average appreciation if the company's performance improves. Even if the credit
quality of such a company is not in question, the market price of its
convertible securities may reflect little or no element of conversion value if
the price of its common stock has fallen substantially below the conversion
price. This can result in the possibility of capital appreciation if the price
of the company's common stock recovers.
Lower Grade Securities. The Fund may invest up to 10% of its total
assets in fixed-income nonconvertible securities rated in the lower rating
categories of recognized statistical rating agencies or non-rated securities
of comparable quality. These securities, which may be preferred stock or debt,
are predominantly speculative and involve major risk exposure to adverse
conditions. Debt securities that are not rated or rated lower than "BBB" by
S&P or lower than "Baa" by Moody's are referred to in the financial press as
"junk bonds."
Generally, such lower grade 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 rating 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 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
grade 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 and 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 grade securities also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a
feature of fixed income securities), the Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of nonconvertible bonds and preferred stocks
moves inversely with movements in interest rates, in the event of rising
interest rates the value of the securities held by the Fund may decline
proportionately more than a portfolio consisting of higher rated securities.
Investments in zero coupon bonds may be more speculative and subject to
greater fluctuations in value due to changes in interest rates than bonds that
pay interest currently. Interest rates are at historical lows and, therefore,
it is likely that they will rise in the future.
As part of its investments in lower grade securities, the Fund may
invest in securities of issuers in default. The Fund will make an investment
in securities of issuers in default only when the Investment Adviser believes
that such issuers will honor their obligations or emerge from bankruptcy
protection and the value of these securities will appreciate. By investing in
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 otherwise appreciate.
In addition to using recognized rating agencies and other sources,
the Investment Adviser also performs its own analysis of issues in seeking
investments that it believes to be underrated (and thus higher-yielding) in
light of the financial condition of the issuer. Its analysis of issuers may
include, among other things, current and anticipated cash flow and borrowing
requirements, value of assets in relation to historical cost, strength of
management, responsiveness to business conditions, credit standing and current
anticipated results of operations. In selecting investments for the Fund, the
Investment Adviser may also consider general business conditions, anticipated
changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may
cease to be rated or its rating may be reduced. In addition, it is possible
that statistical rating agencies might change their ratings of a particular
issue to reflect subsequent events on a timely basis. Moreover, such ratings
do not assess the risk of a decline in market value. None of these events will
require the sale of the securities by the Fund, although the Investment
Adviser will consider these events in determining whether the Fund should
continue to hold the securities.
The market for lower grade and comparable unrated securities has
experienced periods of significantly adverse price and liquidity several
times, particularly at or around times of economic recessions. Past market
recessions have adversely affected the value of such securities as well as the
ability of certain issuers of such securities to repay principal and pay
interest thereon or to refinance such securities. The market for those
securities may react in a similar fashion in the future.
Securities Subject to Reorganization. The Fund may invest without
limit in securities of companies for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if,
in the judgment of the Investment Adviser, there is a reasonable prospect of
high total return significantly greater than the brokerage and other
transaction expenses involved.
In general, securities which are the subject of such an offer or
proposal sell at a premium to their historic market price immediately prior to
the announcement of the offer or may also discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when the
discount significantly overstates the risk of the contingencies involved;
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or
proposal of greater value. The evaluation of such contingencies requires
unusually broad knowledge and experience on the part of the Investment Adviser
which must appraise not only the value of the issuer and its component
businesses as well as the assets or securities to be received as a result of
the contemplated transaction but also the financial resources and business
motivation of the offer and/or the dynamics and business climate when the
offer or proposal is in process. Since such investments are ordinarily
short-term in nature, they will tend to increase the turnover ratio of the
Fund, thereby increasing its brokerage and other transaction expenses. The
Investment Adviser intends to select investments of this type which, in its
view, have a reasonable prospect of capital appreciation which is significant
in relation to both risk involved and the potential of available alternative
investments.
Temporary Defensive Investments. Under normal market conditions at
least 80% of the Fund's assets will consist of "dividend paying securities"
i.e., common stock and other equity securities of foreign and domestic
companies which have historically paid periodic dividends to holders, or
"income securities," i.e., non-dividend paying equity or debt securities
having a history of regular payments or accrual of income to holders. However,
when a temporary defensive posture is believed by the Investment Adviser to be
warranted ("temporary defensive periods"), the Fund may without limitation
hold cash or invest its assets in money market instruments and repurchase
agreements in respect of those instruments. The money market instruments in
which the Fund may invest are obligations of the U.S. government, its agencies
or instrumentalities; commercial paper rated A-1 or higher by S&P or Prime-1
by Moody's; and certificates of deposit and bankers' acceptances issued by
domestic branches of U.S. banks that are members of the Federal Deposit
Insurance Corporation. During temporary defensive periods, the Fund may also
invest to the extent permitted by applicable law in shares of money market
mutual funds, which, under current law, in the absence of an exemptive order
will not be affiliated with the Investment Adviser. Money market mutual funds
are investment companies and the investments in those companies by the Fund
are in some cases subject to certain fundamental investment restrictions and
applicable law. As a shareholder in a mutual fund, the Fund will bear its
ratable share of its expenses, including management fees, and will remain
subject to payment of the fees to the Investment Adviser, with respect to
assets so invested. See "Management of the Fund -- General." The Fund may find
it more difficult to achieve it investment objective during temporary
defensive periods.
Options. The Fund may 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 over-the-counter ("OTC") market, as a
means of achieving additional return or of hedging the value of the Fund's
portfolio. A call option is a contract that, in return for a premium, gives
the holder of the option the right to buy from the writer of the call option
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 to the writer,
at a specified price, and obligating the writer to purchase the underlying
security from the holder at that price. The Fund may purchase call or put
options as long as the aggregate initial margins and premiums, measured at the
time of such investment, do not exceed 10% of the fair market value of the
Fund's total assets.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing
an option of the same series as the option previously written. However, once
the Fund has been assigned an exercise notice, the Fund will be unable to
effect a closing purchase transaction. Similarly, if the Fund is the holder of
an option it may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the same series as
the option previously purchased. There can be no assurance that either a
closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund will
realize a loss from a closing transaction if the price of the transaction is
more than the premium received from writing the option or is less than the
premium paid to purchase the option. Since call option prices generally
reflect increases in the price of the underlying security, any loss resulting
from the repurchase of a call option may also be wholly or partially offset by
unrealized appreciation of the underlying security. Other principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date. Gains
and losses on investments in options depend, in part, on the ability of the
Investment Adviser to predict correctly the effect of these factors. The use
of options cannot serve as a complete hedge since the price movement of
securities underlying the options will not necessarily follow the price
movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. In such event, it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options.
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. The Fund may 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. 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. These futures contracts and related options may be
on debt securities, financial indices, securities indices, U.S. government
securities and foreign currencies. 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 this Prospectus and the SAI are not limited by or
subject to regulation under the Commodity Exchange Act or otherwise regulated
by the Commodity Futures Trading Commission.
Forward Foreign Currency Exchange Contracts. Subject to guidelines of
the Board of Trustees, the Fund may enter into forward foreign currency
exchange contracts to protect the value of its portfolio against uncertainty
in the level of future 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 expects
to invest in forward currency contracts for hedging or currency risk
management purposes and not in order to speculate on currency exchange rate
movements. The Fund will only enter into forward currency contracts with
parties which it believes to be creditworthy.
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.
Short Sales. The Fund may make short sales of securities. A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. The market
value of the securities sold short of any one issuer will not exceed either
10% of the Fund's total assets or 5% of such issuer's voting securities. The
Fund also will not make a short sale, if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
assets. The Fund may also make short sales "against the box" without respect
to such limitations. In this type of short sale, at the time of the sale, the
Fund owns, or has the immediate and unconditional right to acquire at no
additional cost, the identical security.
The Fund expects to make short sales both to obtain capital gains
from anticipated declines in securities and as a form of hedging to offset
potential declines in long positions in the same or similar securities. The
short sale of a security is considered a speculative investment technique.
Short sales "against the box" may be subject to special tax rules, one of the
effects of which may be to accelerate income to the Fund.
When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and
is often obligated to pay over any payments received on such borrowed
securities.
If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss will be increased, by
the transaction costs incurred by the Fund, including the costs associated
with providing collateral to the broker-dealer (usually cash, U.S. government
securities or other highly liquid debt securities) and the maintenance of
collateral with its custodian. Although the Fund's gain is limited to the
price at which it sold the security short, its potential loss is theoretically
unlimited.
Repurchase Agreements. Repurchase agreements may be seen as loans by
the Fund collateralized by an underlying debt securities. Under the terms of a
typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed price and time. This arrangement results in a
fixed rate of return to the Fund that is not subject to market fluctuations
during the holding period. The Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the Fund
is delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period in which it seeks to assert
these rights. The Investment Adviser, acting under the supervision of the
Board of Trustees of the Fund, reviews the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
these risks and monitors on an ongoing basis the value of the securities
subject to repurchase agreements to ensure that the value is maintained at the
required level. The Fund will not enter into repurchase agreements with the
Investment Adviser or any of its affiliates.
Restricted and Illiquid Securities. The Fund may invest in securities
for which there is no readily available trading market or are otherwise
illiquid. Illiquid securities include securities legally restricted as to
resale, such as commercial paper issued pursuant to Section 4(2) of the
Securities Act of 1933 and securities eligible for resale pursuant to Rule
144A thereunder. Section 4(2) and Rule 144A securities may, however, be
treated as liquid by the Investment Adviser pursuant to procedures adopted by
the Board, which require consideration of factors such as trading activity,
availability of market quotations and number of dealers willing to purchase
the security. If the Fund invests in Rule 144A securities, the level of
portfolio illiquidity may be increased to the extent that eligible buyers
become uninterested in purchasing such securities.
It may be difficult to sell such securities at a price representing
the fair value until such time as such securities may be sold publicly. Where
registration is required, a considerable period may elapse between a decision
to sell the securities and the time when it would be permitted to sell. Thus,
the Fund may not be able to obtain as favorable a price as that prevailing at
the time of the decision to sell. The Fund may also acquire securities through
private placements under which it may agree to contractual restrictions on the
resale of such securities. Such restrictions might prevent their sale at a
time when such sale would otherwise be desirable.
Foreign Securities. The Fund may invest up to 35% of its total assets
in securities of non-U.S. issuers, which are generally denominated in foreign
currencies. See "Risk Factors and Special Considerations-- Foreign
Securities."
The Fund may purchase sponsored American Depository Receipts ("ADRs")
or U.S. dollar-denominated securities of foreign issuers, which will not be
included in this foreign securities limitation. ADRs are receipts issued by
United States banks or trust companies in respect of securities of foreign
issuers held on deposit for use in the United States securities markets.
Industry Concentration. The Fund may invest up to 25% of its total
assets in securities of issuers in a single industry. See "Risk Factors and
Special Considerations -- Industry Concentration Risk."
Leverage. As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue debt or preferred shares so long as its total
assets, less certain ordinary course liabilities, exceed 300% of the amount of
the debt outstanding and exceed 200% of the sum of the amount of preferred
shares and debt outstanding. Any such debt or preferred shares may be
convertible in accordance with Securities and Exchange Commission staff
guidelines, which may permit each fund to obtain leverage at attractive rates.
The Fund anticipates issuing preferred shares following the
completion of this offering of common shares, upon a determination by the
Board that the issuance of preferred shares is in the best interest of the
common shareholders. Subject to market conditions, the Fund expects to issue
preferred shares in an aggregate amount of approximately 33% of the Fund's
assets under management. There can be no assurance, however, that preferred
shares representing such percentage, or any percentage, of the managed assets
of the Fund will actually be issued.
The issuance of preferred shares would leverage the common shares.
Although the timing and other terms of the offering of preferred shares and
the terms of the preferred shares would be determined by the Fund's Board of
Trustees, the Fund expects to primarily invest the proceeds of any preferred
share offering in dividend paying or income producing equity or debt
securities. See "Investment Objective and Policies."
The concept of leveraging is based on the premise that so long as the
cost of the leverage on the assets to be obtained by the leverage is lower
than the return earned by the Fund on these leveraged assets, the common
shareholders will benefit from the incremental return. Should the differential
between the return produced by the underlying assets and the cost of leverage
narrow, the incremental return will be reduced. Furthermore, if the cost of
the leverage on the leveraged assets exceeds the return earned by the Fund on
these leveraged assets, the net asset value of the Fund will be diminished.
See "Leverage" and "Risk Factors and Special Considerations -- Leverage Risk."
Lastly, an issuance of preferred shares may subject the Fund to
certain restrictions on investments imposed by guidelines of one or more
rating agencies that may issue ratings for any preferred shares issued by the
Fund.
Loans of Portfolio Securities
To increase income, the Fund may lend its portfolio securities to
securities broker-dealers or financial institutions if the loan is
collateralized in accordance with applicable regulatory requirements.
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 violate the terms of
the loan or fail financially. There can be no assurance that borrowers will not
fail financially. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund. If the other party to the loan
petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. As a result, under
extreme circumstances, there may be a restriction on the Fund's ability to sell
the collateral and the Fund would suffer a loss. See "Investment Objective and
Policies -- Loans of Portfolio Securities" in the SAI.
Portfolio Turnover
The Fund will buy and sell securities to accomplish its investment
objective. The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest or
currency exchange rates.
Portfolio turnover generally involves some expense to the Fund,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less). Higher portfolio turnover may decrease the
after-tax return to individual investors in the Fund to the extent it results
in a decrease of the long term capital gains portion of distributions to
shareholders.
LEVERAGE
Following the completion of the offering of common shares, the Fund
expects to issue preferred shares, subject to current market conditions, in an
aggregate amount of approximately 33% of the Fund's assets under management.
There can be no assurance, however, that preferred shares representing such
percentage of the Fund's managed assets will actually be issued. Until the
Fund issues preferred shares or if the Fund were not to issue preferred shares
in an aggregate amount of approximately 33% of the Fund's assets under
management, the Fund may borrow from banks and other financial institutions or
use such other leveraging techniques as the Investment Adviser may from time
to time determine. Changes in the value of the Fund's investment portfolio,
including securities bought with the proceeds of the leverage, will be borne
entirely by the holders of common shares. If there is a net decrease, or
increase, in the value of the Fund's investment portfolio, the leverage will
decrease or increase (as the case may be) the net asset value per common share
to a greater extent than if the Fund were not leveraged. During periods when
the Fund has outstanding preferred shares, the fees paid to the Investment
Adviser for its services to the Fund may be higher than if the Fund did not
issue preferred shares because such fees will be calculated on the basis of
the Fund's average weekly net assets which (subject to the fee waiver
described below) will include proceeds from the sale of preferred shares.
Consequently, the Fund and the Investment Adviser may have differing interests
in determining whether to leverage the Fund's assets. The Board of Trustees
will monitor this potential conflict.
Preferred Shares
Although the Fund is able to issue preferred shares in an amount up to
50% of its assets, the Fund anticipates that under current market conditions it
will offer preferred shares representing in the aggregate approximately 33% of
the Fund's assets immediately after the issuance of the preferred shares. The
preferred shares would have complete priority upon distribution of assets over
the common shares. The issuance of preferred shares would leverage the common
shares. So long as the Fund's portfolio is invested in securities that provide
a higher rate of return than the dividend rate of the preferred shares, after
taking expenses into consideration, the leverage will cause common shareholders
to receive a higher rate of return than if the Fund were not leveraged. The use
of leverage by the Fund is based on the premise that the incremental assets of
the Fund will be able to earn a higher return, including capital appreciation,
than the cost of the leverage. If the Fund is able to do so, the holders of
common shares will be the beneficiaries of the incremental return. Should the
differential between the return on the underlying assets and the cost of
leverage narrow, the incremental return "pick up" will be reduced. Leverage in
the form of preferred shares creates risks for holders of the common shares,
including the likelihood of greater volatility of net asset value and market
price of the common shares, and the risk that fluctuations in the dividend
rates on any preferred shares may affect the return to the holders of the
common shares. If the income and capital appreciation from the securities
purchased with such funds is not sufficient to cover the cost of leverage, the
return on the Fund will be less than if leverage had not been used, and
therefore the amount available for distribution to common shareholders will be
reduced. In the latter case, the Investment Adviser in its best judgment
nevertheless may determine to maintain the Fund's leveraged position if it
expects that the benefits to the Fund's common shareholders of maintaining the
leveraged position will outweigh the current reduced return. The fee paid to
the Investment Adviser is calculated on the basis of the Fund's net assets
including proceeds from the issuance of preferred shares. However, the
Investment Adviser has voluntarily agreed that in the event the Fund issues
preferred shares, it will waive investment management fees on assets
attributable to such preferred shares for any calendar year except to the
extent the Fund's rate of total return allocable to common shareholders,
including distributions and the management fee subject to potential waiver, is
equal to or exceeds the blended dividend or swap rates on such leverage for
that year. This waiver will apply as long as any such preferred shares are
outstanding. Consequently, during periods in which the Fund is utilizing
leverage in the form of preferred shares, the investment management fees
payable to the Investment Adviser may be higher than if the Fund did not
utilize a leveraged capital structure. The use of leverage creates risks and
involves special considerations. See "Risk Factors and Special Considerations
-- Leverage Risk."
If the Fund has preferred shares outstanding the Fund may be subject
to certain restrictions on investments imposed by guidelines of one or more
rating agencies that may issue ratings for the preferred shares issued by the
Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies. Under the 1940 Act, the Fund is not
permitted to issue preferred shares unless immediately after such issuance the
value of the Fund's total assets, less certain ordinary course liabilities, is
at least 200% of the sum of the liquidation value of the outstanding preferred
shares and any indebtedness for leverage purposes (i.e., the liquidation value
may not exceed 50% of the Fund's managed assets). In addition, the Fund is not
permitted to declare any cash distributions on its common shares unless, at
the time of such declaration, the value of the Fund's total assets is at least
200% of such liquidation value. If preferred shares are issued, the Fund
intends, to the extent possible, to purchase or redeem preferred shares from
time to time to the extent necessary in order to maintain coverage of any
preferred shares of at least 200%. In addition, as a condition to obtaining
ratings on the preferred shares, the terms of any preferred shares issued are
expected to include asset coverage maintenance provisions which will require
the redemption of the preferred shares in the event of non-compliance by the
Fund and may also prohibit distributions on the common shares in such
circumstances. In order to meet redemption requirements, the Fund may have to
liquidate portfolio securities. Such liquidations and redemptions would cause
the Fund to incur related transaction costs and could result in capital losses
to the Fund. Prohibitions on distributions on the common shares could impair
the Fund's ability to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code").
If the Fund has preferred shares outstanding, two of the Fund's
trustees will be elected by the holders of preferred shares voting separately
as a class. The remaining trustees of the Fund will be elected by holders of
common shares and preferred shares voting together as a single class. In the
event the Fund failed to pay dividends on preferred shares for two years,
holders of preferred shares may be entitled to elect a majority of the
trustees of the Fund. The Fund may also borrow money as a temporary measure
for extraordinary or emergency purposes, including the payment of dividends
and the settlement of securities transactions which otherwise might require
untimely dispositions of Fund securities.
Assuming that preferred shares will represent approximately 33% of the
Fund's assets and that dividends are paid on the leverage at a blended annual
average rate of 2%, the income generated by the Fund's entire portfolio (net of
estimated expenses) would have to exceed 0.67% in order to cover the dividend
payments related to the leverage. Of course, these numbers are merely estimates
used for illustration. Actual rates on leverage are expected to vary frequently
and may be significantly higher or lower than the rate estimated above. The
following table is furnished in response to requirements of the Securities and
Exchange Commission. It is designed to illustrate the effect of leverage on
common share total return, assuming investment portfolio total returns
(comprised of income and changes in the value of securities held in the Fund's
portfolio) of -10%, -5%, and 0%, 5% and 10%. These assumed investment portfolio
returns are hypothetical figures and are not necessarily indicative of the
investment portfolio returns experienced or expected to be experienced by the
Fund. See "Risk Factors and Special Considerations." The table further reflects
leverage using preferred shares representing, in the aggregate, 33 1/3% of the
Fund's assets and the Fund's currently projected annual preferred share
dividend rate of 2%.
Assumed Portfolio Total Return (net of expenses)................ -10% -5% 0% 5% 10%
Common Share Total Return ...................................... -16.0% -8.5% -1.0% 6.5% 14.0%
For this purpose, common share total return is composed of two
elements - (i) distributions of income paid by the Fund (the amount of which
is largely determined by the net investment income of the Fund after paying
dividends on preferred shares) and capital gain distributions (the amount of
which is determined by netting losses against gains realized by the Fund on
its securities) and (ii) the appreciation or decline in the net asset value of
the Fund's common shares as a result of changes in the value of the securities
in the Fund's portfolio. As required by Securities and Exchange Commission
rules, the table assumes that the Fund is more likely to suffer capital losses
than to enjoy capital appreciation. For example, to assume a total return of
0% the Fund must assume that the income in excess of expenses it receives on
its income producing security investments is entirely offset by losses in the
value of those securities. Until the Fund borrows or issues preferred shares,
the Fund's shares will not be leveraged, and the risks and special
considerations related to leverage described in this prospectus will not
apply. Such leveraging of the shares cannot be fully achieved until the
proceeds resulting from the use of leverage have been invested in accordance
with the Fund's investment objective and policies.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special
considerations associated with investing in the Fund.
Fund Distribution Risk
Pursuant to its distribution policy, the Fund intends to make regular
quarterly distributions on its common shares. To the extent the total
quarterly distributions for a year exceed the Fund's investment company
taxable income and net capital gain for that year, the excess will generally
constitute a return of capital. Return of capital distributions are generally
tax-free up to the amount of a shareholder's tax basis in the shares. See
"Taxation." In addition, such excess distributions may have the effect of
decreasing the Fund's total assets and may increase the Fund's expense ratio
as the Fund's fixed expenses may become a larger percentage of the Fund's
average net assets. 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 may not dictate such action.
No Operating History
The Fund is a newly organized, non-diversified, closed-end management
investment company with no operating history.
Long-term Objective; Not a Complete Investment Program
The Fund is intended for investors seeking long-term capital growth
and income. The Fund is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. An investment in shares of the
Fund should not be considered a complete investment program. Each shareholder
should take into account the Fund's investment objective as well as the
shareholder's other investments when considering an investment in the Fund.
Leverage Risk
Leverage entails two primary risks. The first risk is that the use of
leverage magnifies the impact on the holders of common shares of changes in net
asset value. For example, if the Fund were to use leverage equal to 50% of its
common shares, it would show a 1.5% increase or decline in net asset value for
each 1% increase or decline in the value of its total assets. The second risk
is that the cost of leverage will exceed the return on the securities acquired
with the proceeds of leverage, thereby diminishing rather than enhancing the
return to holders of common shares. This risk may materialize as a result of
fluctuations in interest rates on borrowings and short-term debt or in the
dividend rates on any preferred shares that the Fund must pay (thereby reducing
the return to the shareholders) or as a result of declining markets likely to
cause a greater decline in the net asset value of the shares than if the Fund
were not leveraged, which may result in a greater decline in the market price
of the shares. These two risks would generally make the Fund's total return to
holders of common shares more volatile were it to use leverage.
So long as the Fund uses leverage it may be required to sell
investments in order to meet dividend or interest payments on the debt or
preferred shares when it may be disadvantageous to do so. In addition, a
decline in net asset value could affect the ability of the Fund to make common
share distributions and such a failure to make distributions could result in
the Fund ceasing to qualify as a regulated investment company under the Code.
See "Taxation." Finally, if the asset coverage for preferred shares or debt
securities declines to less than 200% or 300%, respectively (as a result of
market fluctuations or otherwise), the Fund may be required to sell a portion
of its investments to redeem the preferred shares or repay the debt when it
may be disadvantageous to do so.
Equity Risk
A principal risk of investing in the Fund is equity risk, which is
the risk that the securities held by the Fund will fall due to general market
and economic conditions, perceptions regarding the industries in which the
issuers of securities held by the Fund participate, and the particular
circumstances and performance of particular companies whose securities the
Fund holds. An investment in the Fund represents an indirect investment in the
securities owned by the Fund, which are for the most part traded on securities
exchanges or in the over-the-counter markets. The value of these securities,
like other market investments, may move up or down, sometimes rapidly and
unpredictably. The value of an investment in the Fund may at any point in time
be worth less than the original investment, even after taking into account any
reinvestment of distributions.
Market Discount Risk
Whether investors will realize gains or losses upon the sale of
shares of the Fund will depend upon the market price of the shares at the time
of sale, which may be less or more than the Fund's net asset value per share.
Since the market price of the shares will be affected by such factors as the
relative demand for and supply of the shares in the market, general market and
economic conditions and other factors beyond the control of the Fund, we
cannot predict whether the shares will trade at, below or above net asset
value or at, below or above the public offering price. Shares of closed-end
funds often trade at a discount to their net asset values and the Fund's
shares may trade at such a discount. This risk may be greater for investors
expecting to sell their shares of the Fund soon after completion of the public
offering. The shares of the Fund were designed primarily for long-term
investors, and investors in the shares should not view the Fund as a vehicle
for trading purposes.
Common Stock Risk
Common stock of an issuer in the Fund's portfolio may decline in
price if the issuer fails to make anticipated dividend payments because, among
other reasons, the issuer of the security experiences a decline in its
financial condition. Common stock in which the Fund will invest is
structurally subordinated to preferred stock, bonds and other debt instruments
in a company's capital structure, in terms of priority to corporate income,
and therefore will be subject to greater dividend risk than preferred stock or
debt instruments of such issuers. In addition, while common stock has
historically generated higher average returns than fixed income securities,
common stock has also experienced significantly more volatility in those
returns.
Distribution Risk for Equity Income Portfolio Securities
In selecting equity income securities in which the Fund will invest,
the Investment Adviser will consider the issuer's history of making regular
periodic distributions (i.e., dividends) to its equity holders. An issuer's
history of paying dividends, however, does not guarantee that the issuer will
continue to pay dividends in the future. The dividend income stream associated
with equity income securities generally is not guaranteed and will be
subordinate to payment obligations of the issuer on its debt and other
liabilities. Accordingly, in the event the issuer does not realize sufficient
income in a particular period both to service its liabilities and to pay
dividends on its equity securities, it may forgo paying dividends on its
equity securities. In addition, because in most instances issuers are not
obligated to make periodic distributions to the holders of their equity
securities, such distributions or dividends generally may be discontinued at
the issuer's discretion.
Special Risks Related to Preferred Securities
There are special risks associated with investing in preferred
securities, including:
Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its 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 stocks 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
stock held by the Fund determine not to pay dividends on such stock, the
amount of dividends the Fund pays may be adversely affected. There is no
assurance that dividends or distributions on non-cumulative preferred stocks
in which the Fund invests will be declared or otherwise made payable.
Subordination. Preferred securities are subordinated to bonds and
other debt instruments in a company'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 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 elect a number of directors 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. As with
call provisions, a redemption by the issuer may negatively impact the return
of the security held by the Fund.
Income Risk
The income investors in the Fund receive is based primarily on the
dividends and interest the Fund earns from its investments, which can vary
widely over the short and long-term. If prevailing market interest rates drop,
distribution rates of the Fund's preferred shares and any bond holdings could
drop as well.
Interest Rate Risk
Interest rate risk is the risk that fixed-income securities such as
preferred and debt securities will decline in value because of changes in
market interest rates. When market interest rates rise, the market value of
such securities generally will fall. The Fund's investment in such securities
means that the net asset value and market price of common shares will tend to
decline if market interest rates rise. Further, while longer term fixed rate
securities may pay higher interest rates than shorter term securities, longer
term fixed rate securities also tend to be more sensitive to interest rate
changes and, accordingly, tend to experience larger changes in value as a
result of interest rate changes.
During periods of declining interest rates, the issuer of a security
may exercise its option to prepay principal earlier than scheduled, forcing
the Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred and debt securities frequently have call features
that allow the issuer to redeem the securities prior to their stated
maturities. An issuer may redeem an obligation if the issuer can refinance the
debt at a lower cost due to declining interest rates or an improvement in the
credit standing of the issuer. During periods of rising interest rates, the
average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest
rate, increase the security's duration and reduce the value of the security.
This is known as extension risk.
Market interest rates for investment grade fixed-income securities in
which the Fund will invest have recently declined significantly below the
historical average rates for such securities. This decline has increased the
risk that these rates will rise in the future (which would cause the value of
the Fund's assets invested in fixed income securities to decline) and the
degree to which net asset values may decline in such event; however, historical
interest rate levels are not necessarily predictive of future interest rate
levels.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value
of money. As inflation increases, the real value of the Fund's shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, dividend rates of any preferred shares issued by the Fund would
likely increase, which would tend to further reduce returns to common
shareholders.
Dilution Risk for Convertible Securities
In the absence of adequate anti-dilution provisions in a convertible
security, dilution in the value of the Fund's holding may occur in the event
the underlying stock is subdivided, additional equity securities are issued
for below market value, a stock dividend is declared or the issuer enters into
another type of corporate transaction that has a similar effect.
Value Investing Risk
The Fund focuses its investments on 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 the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. 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.
Industry Concentration Risk
The Fund may invest up to 25% of its total assets in securities of a
single industry. Should the Fund chose 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.
Illiquid Securities
The Fund has no limit on the amount of its net assets it may invest
in unregistered and otherwise illiquid investments. Unregistered securities
are securities that cannot be sold publicly in the United States without
registration under the Securities Act of 1933. Unregistered securities
generally can be resold only in privately negotiated transactions with a
limited number of purchasers or in a public offering registered under the
Securities Act. Considerable delay could be encountered in either event and,
unless otherwise contractually provided for, the Fund's proceeds upon sale may
be reduced by the costs of registration or underwriting discounts. The
difficulties and delays associated with such transactions could result in the
Fund's inability to realize a favorable price upon disposition of unregistered
securities, and at times might make disposition of such securities impossible.
Foreign Securities Risk
The Fund may invest up to 35% of its total assets in the 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 U.S. companies. Foreign securities
exchanges, brokers and listed companies may be subject to less government
supervision and regulation than exists in the United States. Dividend and
interest income may be subject to withholding and other foreign taxes, which
may adversely affect the net return on such investments. There may be
difficulty in obtaining or enforcing a court judgment abroad. In addition, it
may be difficult to effect repatriation of capital invested in certain
countries. In addition, with respect to certain countries, there are risks of
expropriation, confiscatory taxation, political or social instability or
diplomatic developments that could affect assets of the Fund held in foreign
countries.
There may be less publicly available information about a foreign
company than a U.S. company. Foreign securities markets may have substantially
less volume than U.S. securities markets and some foreign company securities
are less liquid than securities of otherwise comparable U.S. companies. A
portfolio of foreign securities may also be adversely affected by fluctuations
in the rates of exchange between the currencies of different nations and by
exchange control regulations. Foreign markets also have different clearance
and settlement procedures that could cause the Fund to encounter difficulties
in purchasing and selling securities on such markets and may result in the
Fund missing attractive investment opportunities or experiencing loss. In
addition, a portfolio that includes foreign securities can expect to have a
higher expense ratio because of the increased transaction costs on non-U.S.
securities markets and the increased costs of maintaining the custody of
foreign securities. The Fund does not have an independent limit on the amount
of its assets that it may invest in the securities of foreign issuers.
The Fund also may purchase sponsored American Depository Receipts
("ADRs") or U.S. 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
While the Fund intends to focus on the securities of established
suppliers of accepted products and services, the Fund may also 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 shares will be subject to
duplicative investment expenses.
Lower Grade Securities
The Fund may invest up to 10% of its total assets in nonconvertible
preferred stock or debt securities rated in the lower rating categories of
recognized statistical rating agencies or unrated securities of comparable
quality, and an unlimited percentage of it assets in convertible bonds of such
quality. These high yield securities, also sometimes referred to as "junk
bonds," generally pay a premium above the yields of U.S. government securities
or debt securities of investment grade issuers because they are subject to
greater risks than these securities. These risks, which reflect their
speculative character, include the following:
o greater volatility;
o greater credit risk and risk of default;
o potentially greater sensitivity to general economic or
industry conditions;
o potential lack of attractive resale opportunities
(illiquidity); and
o additional expenses to seek recovery from issuers who
default.
In addition, the prices of these lower grade securities are more sensitive to
negative developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade securities. Lower grade
securities tend to be less liquid than investment grade securities. The market
value of lower grade securities may be more volatile than the market value of
investment grade 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 investment grade securities, which
primarily reflect fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time of rating.
Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition.
As a part of its investments in lower grade securities, the Fund may
invest in 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, emerge from bankruptcy protection and
the value of these securities will appreciate. By investing in the securities
of issuers in default, the Fund bears the risk that these issuers will not
continue to honor their obligations or emerge from bankruptcy protection or
that the value of these securities will not otherwise appreciate.
For a further description of lower grade securities and the risks
associated therewith, see "Investment Objective and Policies -- Certain
Investment Practices -- Lower Grade Securities". For a description of the
ratings categories of certain recognized statistical ratings agencies, see
Appendix A to this prospectus.
Special Risks of Derivative Transactions
Participation in the options or futures markets and in currency
exchange transactions involves investment risks and transaction costs to which
the Fund would not be subject absent the use of these strategies. If the
Investment Adviser's prediction of movements in the direction of the
securities, foreign currency and interest rate markets is inaccurate, the
consequences to the Fund may leave the Fund in a worse position than if it had
not used such strategies. Risks inherent in the use of options, foreign
currency, futures contracts and options on futures contracts, securities
indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict
correctly movements in the direction of interest rates,
securities prices and currency markets;
o imperfect correlation between the price of options and
futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged;
o the fact that skills needed to use these strategies are
different from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any
particular instrument at any time;
o the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences;
o the possible inability of the Fund to purchase or sell a
security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a
security at a disadvantageous time due to a need for the
Fund to maintain "cover" or to segregate securities in
connection with the hedging techniques; and
o the creditworthiness of counterparties.
Futures Transactions. The Fund may invest without limit in futures
contracts. Futures and options on futures entail certain risks, including but
not limited to the following:
o no assurance that futures contracts or options on futures
can be offset at favorable prices;
o possible reduction of the return of the Fund due to the use
of hedging;
o possible reduction in value of both the securities hedged
and the hedging instrument;
o possible lack of liquidity due to daily limits or price
fluctuations;
o imperfect correlation between the contracts and the
securities being hedged; and
o losses from investing in futures transactions that are
potentially unlimited and the segregation requirements for
such transactions.
Forward Currency Exchange Contracts. There is no independent limit on
the Fund's ability to invest in foreign 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.
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 proceeding. The Fund
may obtain only a limited recovery or may obtain no recovery in such
circumstances.
For a further description of such derivative investments, see
"Investment Objective and Policies -- Additional Investment Practices" in the
SAI.
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 earns interest on
the cash amounts deposited as collateral, which will be invested in short-term
obligations. The Fund will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which its 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 -- Additional Investment Policies -- Loans
of Portfolio Securities" in the SAI.
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
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.
Tax Risk
We cannot assure you what percentage of the distributions paid on the
common shares, if any, will consist of tax-advantaged qualified dividend income
or long-term capital gains or what the tax rates on various types of income
will be in future years. See "Taxation."
Current Developments
As a result of the terrorist attacks on the World Trade Center and
the Pentagon on September 11, 2001, some of the U.S. Securities Markets were
closed for a four-day period. These terrorists attacks, the war in Iraq and
its aftermath and other geopolitical events have led to, and may in the future
lead to, increased short-term market volatility and may have long-term effects
on U.S. and world economies and markets. Similar events in the future or other
disruptions of financial markets could affect interest rates, securities
exchanges, auctions, secondary trading, ratings, credit risk, inflation and
other factors relating to the common shares.
Anti-takeover Provisions
The Fund's Governing Documents 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 Governing Documents."
HOW THE FUND MANAGES RISK
Investment Restrictions
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding common shares and
preferred shares voting together as a single class. See "Investment
Restrictions" in the SAI for a complete list of the fundamental investment
policies of the Fund. Should the Fund decide to issue preferred shares in the
future, it may become subject to rating agency guidelines that are more
limiting than its fundamental investment restrictions in order to obtain and
maintain a desired rating on its preferred shares.
Interest Rate Transactions
If the Fund issues preferred shares whose dividends vary
periodically, it may consider entering into interest rate swap or cap
transactions in relation to all or a portion of such preferred shares in order
to manage the impact on its portfolio of changes in the dividend rate of the
preferred shares. Through these transactions the Fund may, for example, obtain
the equivalent of a fixed rate for such variable rate preferred shares that is
lower than the Fund would have to pay if it issued perpetual fixed rate
preferred shares.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party to the interest rate swap
(which is known as the "counterparty") periodically a fixed rate payment in
exchange for the counterparty agreeing to pay to the Fund periodically a
variable rate payment that is intended to approximate the Fund's variable rate
payment obligation on its auction rate preferred shares. 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 dividends on the preferred shares when due even if the
counterparty defaulted. Depending on the general state of short-term interest
rates and the returns on the Fund's portfolio securities at that point in
time, such a default could negatively affect the Fund's ability to make
dividend payments on the preferred shares. In addition, at the time an
interest rate swap or cap transaction reaches its scheduled termination date,
there is a risk that the Fund will not be able to obtain a replacement
transaction or that the terms of the replacement will not be as favorable as
on the expiring transaction. If this occurs, it could have a negative impact
on the Fund's ability to make dividend payments on the preferred shares. 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 preferred shares. A sudden and dramatic decline in interest rates may
result in a significant decline in the asset coverage. In the event the Fund
redeems the preferred shares, such redemption would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transactions.
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.
If the Fund enters into a swap transaction, it would expect to do so
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
General
The Fund's Board of Trustees (who, with its officers, are described
in the SAI) has overall responsibility for the management of the Fund. The
Board decides upon matters of general policy and reviews the actions of the
Investment Adviser, Gabelli Funds, LLC, located at One Corporate Center, Rye,
New York 10580-1422, and the Sub-Administrator (as defined below). Pursuant to
an investment advisory contract with the Fund, the Investment Adviser, under
the supervision of the Fund's Board of Trustees, provides a continuous
investment program for the Fund's portfolio; provides investment research and
makes and executes recommendations for the purchase and sale of securities;
and provides all facilities and personnel, including officers required for its
administrative management and pays the compensation of all officers and
trustees of the Fund who are its affiliates. As compensation for its services
and the related expenses borne by the Investment Adviser, the Fund pays the
Investment Adviser a fee, computed daily and payable monthly, equal, on an
annual basis, to 1.00% of the Fund's average weekly net assets. As used in
this prospectus, net assets means the aggregate net asset value of the common
shares (which includes for this purpose assets attributable to outstanding
preferred shares, if any, with no deduction for the liquidation preference of
such preferred shares). However, the Investment Adviser has voluntarily agreed
that in the event the Fund issues preferred shares, it will waive investment
management fees on assets attributable to such preferred shares for any
calendar year except to the extent the Fund's rate of total return allocable
to common shareholders, including distributions and the management fee subject
to potential waiver, is equal to or exceeds the cost of the leverage for that
year. This waiver will apply as long as any such preferred shares are
outstanding.
The Investment Adviser
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
corporation with principal offices located at One Corporate Center, Rye, New
York 10580. The Investment Adviser was organized in 1999 and is the successor
to Gabelli Funds, Inc., which was organized in 1980. As of September 30, 2003,
the Investment Adviser acted as registered investment adviser to 19 management
investment companies with aggregate net assets of $9.6 billion. The Investment
Adviser, together with other affiliated investment advisers noted below had
assets under management totaling approximately $22.5 billion as of September
30, 2003. GAMCO Investors, Inc., an affiliate of the Investment Adviser, acts
as investment adviser for individuals, pension trusts, profit sharing trusts
and endowments, and as a sub-adviser to management investment companies having
aggregate assets of $11.3 billion under management as of September 30, 2003.
Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for The Treasurer's Funds (money market funds) and separate
accounts having aggregate assets of $1.1 billion under management as of
September 30, 2003. Gabelli Advisers, Inc., an affiliate of the Investment
Adviser, acts as investment manager to the Gabelli Westwood Funds having
aggregate assets of $478 million under management as of September 30, 2003.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded
on the NYSE under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a
"controlling person" of the Investment Adviser on the basis of his ownership
of a majority of the stock of Gabelli Group Capital Partners, Inc., which owns
a majority of the capital stock of Gabelli Asset Management Inc.
Payment of Expenses
The Investment Adviser is obligated to pay expenses associated with
providing the services contemplated by the investment advisory agreement
between the Fund and the Investment Adviser (the "Advisory Agreement"),
including compensation of and office space for its officers and employees
connected with investment and economic research, trading and investment
management and administration of the Fund (but excluding costs associated with
the calculation of the net asset value), as well as the fees of all trustees
of the Fund who are affiliated with the Investment Adviser.
In addition to the fees of the Investment Adviser, the Fund is
responsible for the payment of all its other expenses incurred in the operation
of the Fund, which include, among other things, expenses for legal and
independent accountant's services, stock exchange listing fees, expenses
relating to the offering of preferred shares, rating agency fees, costs of
printing proxies, share certificates and shareholder reports, charges of State
Street Bank and Trust Company, the custodian, charges of the transfer agent,
Securities and Exchange Commission fees, fees and expenses of unaffiliated
trustees, accounting and printing costs, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, directors and officers liability policy, interest,
brokerage costs, taxes, expenses of qualifying the Fund for sale in various
states, litigation and other extraordinary or non-recurring expenses and other
expenses properly payable by the Fund.
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 Manager
Mario J. Gabelli currently leads the investment team responsible for
the day-to-day management of the Fund. Mr. Gabelli has served as Chairman,
(presently he is a member of the office of the Chairman), President and Chief
Investment Officer of the Investment Adviser since 1980. Mr. Gabelli also
serves as Portfolio Manager for several other funds in the Gabelli fund family.
Because of the diverse nature of Mr. Gabelli's responsibilities, he will devote
less than all of his time to the day-to-day management at the Fund. Over the
past five years, Mr. Gabelli has served as Chairman of the Board and Chief
Executive Officer of Gabelli Asset Management Inc.; Chief Investment Officer of
GAMCO Investors, Inc.; Vice Chairman of the Board of Lynch Corporation, a
diversified manufacturing company, and Vice Chairman of the Board and Chief
Executive Officer of Lynch Interactive Corporation, a multimedia and
communications services company.
Barbara G. Marcin will serve as a senior portfolio manager for the
Fund. Ms. Marcin joined Gabelli Asset Management Inc. in 1999 to manage larger
capitalization value style portfolios. Ms. Marcin currently serves as the
portfolio manager of the Gabelli Blue Chip Value Fund. Prior thereto, she
worked at Citibank Global Asset Management where she was head of value
investments and was a member of the Global Investment Policy Committee and
co-Chair of the U.S. Equity Policy Committee. Prior to joining Citibank, she
worked at Fiduciary Trust Company for ten years as a portfolio manager and as
an analyst in the Personal Financial Management Group at EF Hutton. Ms. Marcin
received a M.B.A. from Harvard University and a B.A. from the University of
Virginia.
Non-resident Trustees
Karl Otto Pohl and Anthonie C. van Ekris, trustees of the Fund, reside
outside the United States and all or a significant portion of their assets are
located outside the United States. Neither trustee has an authorized agent in
the United States to receive service of process. As a result, it may not be
possible for investors to effect service of process within the United States or
to enforce against either director in United States courts judgments predicated
upon civil liability provisions of United States securities laws. It may also
not be possible to enforce against either trustee in foreign courts judgments
of United States courts or liabilities in original actions predicated upon
civil liability provisions of the United States.
Sub-Administrator
The Investment Adviser has entered into a sub-administration
agreement with PFPC Inc. (the "Sub-Administrator") pursuant to which the
Sub-Administrator provides certain administrative services necessary for the
Fund's operations which do not include the investment and portfolio management
services provided by the Investment Adviser. For these services and the
related expenses borne by the Sub-Administrator, the Investment Adviser pays a
prorated monthly fee at the annual rate of .0275% of the first $10.0 billion
of the aggregate average net assets of the Fund and all other funds advised by
the Investment Adviser and administered by the Sub-Administrator, .0125% of
the aggregate average net assets exceeding $10 billion and .01% of the
aggregate average net assets in excess of $15 billion. The Sub-Administrator
has its principal office at 760 Moore Road, King of Prussia, Pennsylvania
19406.
Regulatory Matters
The Securities and Exchange Commission, the New York Attorney General
and officials of other states have been conducting inquiries into, and bringing
enforcement and other proceedings regarding, trading abuses involving open-end
investment companies. The Investment Adviser has received information requests
from the Securities and Exchange Commission and a subpoena from the New York
Attorney General in connection with these inquiries. The Investment Adviser and
its affiliates have been complying with these requests and have been
independently reviewing their mutual fund practices in a variety of areas. The
Investment Adviser has informed the Board of Trustees of the Fund that although
its review is not complete it 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 not found any evidence of facilitating trading in the Gabelli
mutual funds after the 4:00 p.m. pricing time or of improper short-term trading
in these funds by its investment professionals or senior executives. The
Investment Adviser has found that one investor, which 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 which 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. Inasmuch as both the Investment
Adviser's review of its mutual fund practices and the governmental probes of
the mutual fund industry are ongoing, no assurance can be provided that
additional facts will not come to light in the course of its review that may be
material to the Investment Adviser or that the Investment Adviser will not
become the subject of enforcement or other proceedings by the Securities and
Exchange Commission or the New York Attorney General. In light of the current
turmoil in the mutual fund industry arising from the late trading, improper
market timing and employee trading problems, there can be no assurance that any
such action could not have an adverse impact on the Investment Adviser or on
its ability to fulfill its obligations under the Advisory Agreement.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company, Inc., an affiliate of the Investment
Adviser, may execute portfolio transactions on stock exchanges and in the
over-the-counter markets on an agency basis and receive a stated commission
therefor. For a more detailed discussion of the Fund's brokerage allocation
practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund may retain for reinvestment, and pay the resulting federal
income taxes on, its net capital gain, if any, although the Fund intends to
distribute substantially all of its net capital gain each year. The Fund has a
policy, which may be modified at any time by its Board of Trustees, of paying
quarterly distributions on its common shares. The Board has initially
determined to pay distributions on each share of $.30 per quarter, which is
equal to an annual rate of 6% of the offering price per share. The Board also
determined to pay additional distributions on an annual basis equal to any
realized income in excess of the quarterly distributions as may be necessary to
distribute substantially all of the Fund's taxable income for that year.
Quarterly distributions will be paid in March, June, September and December of
each year, commencing in March, 2004. This policy permits holders of common
shares to realize a predictable, but not assured, level of cash flow and some
liquidity periodically with respect to their common shares without having to
sell shares. To avoid paying income tax at the corporate level, the Fund will
distribute substantially all of its net investment company taxable income and
net capital gains. In the event that the Fund's net investment company taxable
income and net capital gains exceed the total of the Fund's quarterly
distributions and the amount of distributions on any preferred shares issued by
the Fund, 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 shares issued by the Fund exceed net 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 shareholder's tax basis in the common
shares. Any distributions which (based upon the Fund's full year performance)
constitute tax-free return of capital will reduce a shareholder's tax basis in
the common shares, thereby increasing such shareholder's potential gain or
reducing his or her potential loss on the sale of the common shares. Any
amounts distributed to a shareholder in excess of the basis in the common
shares will generally be taxable to the shareholder as capital gain. See
"Taxation." Quarterly distribution notices provided by the Fund to its
shareholders will describe the portion of the quarterly distribution which, in
the Fund's current good faith judgment, constitutes capital gain, investment
company taxable income or a return of capital. The final determination of the
source of such distributions for federal income tax purposes will be made
shortly after year end based on the Fund's actual net investment company
taxable income and net capital gain for the year and will be communicated to
shareholders promptly.
In the event the Fund distributes amounts in excess of its investment
company taxable income and net capital gain, such distributions will decrease
the Fund's total assets and, therefore, have the likely effect of increasing
the Fund's expense ratio 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 may have to sell a portion of its investment
portfolio at a time when independent investment judgment may not dictate such
action.
The Fund, along with other closed-end registered investment companies
advised by the Investment Adviser, is coverfed by an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that any
distribution policy of the Fund with respect to its common shares 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 common share at or about the time of distribution or pay-out of a fixed
dollar amount. The Fund's current policy is to make quarterly distributions to
holders of its common shares. The exemption also permits the Fund to make such
distributions with respect to its preferred shares, if any, in accordance with
such shares' terms.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a shareholder whose common shares are registered
in his or her own name will have all distributions reinvested automatically by
the transfer agent, which is agent under the Plan, unless the shareholder
elects to receive cash. Distributions with respect to shares registered in the
name of a broker-dealer or other nominee (that is, in "street name") will be
reinvested by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee or the shareholder
elects to receive distributions in cash. Investors who own common shares
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 the
transfer agent as dividend disbursing agent.
Under the Plan, whenever the market price of the common shares is
equal to or exceeds net asset value at the time shares are valued for purposes
of determining the number of shares equivalent to the cash distribution,
participants in the Plan are issued common shares, valued at the greater of
(i) the net asset value as most recently determined or (ii) 95% of the
then-current market price of the common shares. The valuation date is the
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the net asset value of the
common shares at the time of valuation exceeds the market price of the common
shares, participants will receive shares from the Fund, valued at market
price. If the Fund should declare a distribution payable only in cash, the
Plan agent will buy the common shares for such Plan in the open market, on the
New York Stock Exchange or elsewhere, for the participants' accounts, except
that the Plan agent will endeavor to terminate purchases in the open market
and cause the Fund to issue shares at the greater of net asset value or 95% of
market value if, following the commencement of such purchases, the market
value of the common shares exceeds net asset value.
Participants in the Plan have the option of making additional cash
payments to the Plan agent, monthly, for investment in the shares as
applicable. Such payments may be made in any amount from $250 to $10,000. The
Plan agent will use all funds received from participants to purchase shares of
the Fund in the open market on or about the 1st or 15th of each month. The
Plan agent will charge each shareholder who participates $.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 the Plan agent
in a manner that ensures that the Plan agent will receive these payments
approximately 10 days before the 1st or 15th of the month. A participant may
without charge withdraw a voluntary cash payment by written notice, if the
notice is received by the Plan agent at least 48 hours before such payment is
to be invested.
The Plan agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan agent in
noncertificated form in the name of the participant. A Plan participant may
send its share certificates to the Plan agent so that the shares represented
by such certificates will be held by the Plan agent in the participant's
shareholder account under the Plan.
In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan agent will
administer the Plan on the basis of the number of shares certified from time
to time by the shareholder as representing the total amount registered in the
shareholder'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 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 distribution. The Plan also may
be amended or terminated by the Plan agent on at least 90 days written notice
to the participants in such Plan. All correspondence concerning the Plan
should be directed to the transfer agent.
DESCRIPTION OF THE SHARES
The Fund offers by this prospectus, in the aggregate, $ of common
shares. The following is a brief description of the terms of the common
shares. This description does not purport to be complete and is qualified by
reference to the Fund's Agreement and Declaration of Trust and its By-Laws.
For complete terms of the common shares, please refer to the actual terms of
such series, which are set forth in the Agreement and Declaration of Trust.
Common Shares
The Fund is an unincorporated statutory trust organized under the
laws of Delaware pursuant to a Certificate of Formation dated as of August 20,
2003. The Fund is authorized to issue an unlimited number of common shares of
beneficial interest, par value $.001 per share. Each common share has one vote
and, when issued and paid for in accordance with the terms of this offering,
will be fully paid and non-assessable. Though the Fund expects to pay
distributions quarterly on the common shares, it is not obligated to do so.
All common shares are equal as to distributions, assets and voting privileges
and have no conversion, preemptive or other subscription rights. The Fund will
send annual and semi-annual reports, including financial statements, to all
holders of its shares.
The Fund has no present intention of offering any additional common
shares. Any additional offerings of shares will require approval by the Fund's
Board of Trustees. Any additional offering of common shares will be subject to
the requirements of the 1940 Act, which provides that shares may not be issued
at a price below the then current net asset value, exclusive of sales load,
except in connection with an offering to existing holders of common shares or
with the consent of a majority of the Fund's outstanding voting securities.
The Fund's common shares are expected to be approved for listing on
the New York Stock Exchange, subject to notice of issuance, under the symbol
"GDV."
The Fund's net asset value per share will be reduced immediately
following the offering of common shares by the amount of the sales load and
organization and offering expenses paid by the Fund. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading through a broker on the New York Stock
Exchange or otherwise.
Shares of closed-end investment companies often trade on an exchange
at prices lower than net asset value. Because the market value of the common
shares may be influenced by such factors as distribution levels (which are in
turn affected by expenses), distribution stability, net asset value, relative
demand for and supply of such shares in the market, general market and
economic conditions and other factors beyond the control of the Fund, the Fund
cannot assure you that common shares will trade at a price equal to or higher
than net asset value in the future. The common shares are designed primarily
for long-term investors and you should not purchase the common shares if you
intend to sell them soon after purchase.
The Fund's common shareholders will vote as a single class to elect
the Fund's Board of Trustees (subject to the special voting rights of preferred
shares) and on additional matters with respect to which the 1940 Act, the
Fund's Declaration of Trust, By-Laws or resolutions adopted by the trustees
provide for a vote of the Fund's common shareholders. See "Anti-takeover
Provisions of the Fund's Governing Documents."
Book-Entry
The common shares 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
common shares for all purposes. In accordance with the procedures of DTC,
however, purchasers of common shares will be deemed the beneficial owners of
shares purchased for purposes of distributions, voting and liquidation rights.
Purchasers of common shares may obtain registered certificates by contacting
the Transfer Agent.
Preferred Shares
The Agreement and Declaration of Trust provides that the Fund's Board
of Trustees may authorize and issue preferred shares with rights as determined
by the Board of Trustees, by action of the Board of Trustees without the
approval of the holders of the common shares. Holders of common shares have no
preemptive right to purchase any preferred shares that might be issued.
The Fund may elect to issue preferred shares as part of its leverage
strategy. If preferred shares are issued, the Fund currently intends to issue
preferred shares representing approximately 33% of the Fund's net assets
immediately after the preferred shares are issued. The Board of Trustees also
reserves the right to change the foregoing percentage limitation and may issue
preferred shares to the extent permitted by the 1940 Act, which currently
limits the aggregate liquidation preference of all outstanding preferred shares
(plus any indebtedness represented by senior securities) to 50% of the value of
the Trust's total assets less liabilities and indebtedness of the Fund not
represented by senior securities. We cannot assure investors, however, that any
preferred shares will be issued. Although the terms of any preferred shares,
including dividend rate, liquidation preference and redemption provisions, will
be determined by the Board of Trustees, subject to applicable law and the
Agreement and Declaration of Trust, it is likely that the preferred shares will
be structured to carry a relatively short-term dividend rate reflecting
interest rates on short-term debt instruments, by providing for the periodic
redetermination of the dividend rate at relatively short intervals through an
auction, remarketing or other procedure. The Fund also believes that it is
likely that the liquidation preference, voting rights and redemption provisions
of the preferred shares will be similar to those stated below, although they
may differ.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per preferred share
plus accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common shares. After payment of
the full amount of the liquidating distribution to which they are entitled,
the holders of preferred shares will not be entitled to any further
participation in any distribution of assets by the Fund.
Voting Rights. The 1940 Act requires that the holders of any preferred
shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
common shares and preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other
class of senior securities outstanding, the holders of any preferred shares
have the right to elect a majority of the trustees of the Fund at any time two
years dividends on any preferred shares are unpaid. The 1940 Act also requires
that, in addition to any approval by shareholders that might otherwise be
required, the approval of the holders of a majority of any outstanding
preferred shares, voting separately as a class, would be required to (i) adopt
any plan of reorganization that would adversely affect the preferred shares,
and (ii) take any action requiring a vote of security holders under Section
13(a) of the 1940 Act, including, among other things, changes in the Fund's
subclassification as a closed-end investment company to an open-end investment
company or changes in its fundamental investment restrictions. As a result of
these voting rights, the Fund's ability to take any such actions may be impeded
to the extent that there are any preferred shares outstanding. The Board of
Trustees presently intends that, except as otherwise indicated in this
prospectus and except as otherwise required by applicable law, holders of
preferred shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) on general
matters such as the election of trustees, whereby they will vote together with
holders of common shares as a single class. The holders of preferred shares
will not have voting rights on matters not affecting the preferred shares.
The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of preferred
shares so as to affect materially and adversely such preferences, rights or
powers. The class vote of holders of preferred shares described above will in
each case be in addition to any other vote required to authorize the action in
question.
Redemption, Purchase and Sale of Preferred Shares By the Trust. The
terms of the preferred shares are expected to provide that (i) they are
redeemable by the Fund at any time in whole or in part at the original purchase
price per share plus accumulated dividends per share, (ii) the Fund may tender
for or purchase preferred shares and (iii) the Fund may subsequently resell any
shares so tendered for or purchased. Any redemption or purchase of preferred
shares by the Fund will reduce the leverage applicable to the common shares,
while any resale of preferred shares by the Fund will increase that leverage.
ANTI-TAKEOVER PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
The Fund presently has provisions in its Agreement and Declaration of
Trust and By-Laws (together, its "Governing Documents") which could have the
effect of limiting, in each case, (i) the ability of other entities or persons
to acquire control of the Fund, (ii) the Fund's freedom to engage in certain
transactions or (iii) the ability of the Fund's trustees or shareholders to
amend the Governing Documents or effectuate changes in the Fund's management.
These provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Trustees of the Fund is divided into
three classes, each having a term of no more than three years (except, to
ensure that the term of a class of the Fund's trustees expires each year, one
class of the Fund's trustees will serve an initial one-year term and three-year
terms thereafter and another class of its trustees will serve an initial
two-year term and three-year terms thereafter). Each year the term of one class
of trustees will expire. Accordingly, only those trustees 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 of Trustees. Such system of electing trustees may have
the effect of maintaining the continuity of management and, thus, make it more
difficult for the shareholders of the Fund to change the majority of trustees.
See "Management of the Fund -- Trustees and Officers" in the SAI. A trustee of
the Fund may be removed with or without cause by two-thirds of the remaining
trustees and, without cause, by 66 2/3% of the votes entitled to be cast for
the election of such trustees. Special voting requirements of 75% of the
outstanding voting shares (in addition to any required class votes) apply to
mergers into or a sale of all or substantially all of the Fund's assets,
liquidation, conversion of the Fund into an open-end fund or interval fund and
amendments to several provisions of the Declaration of Trust, including the
foregoing provisions. In addition, after completion of the offering, 80% of the
holders of the outstanding voting securities of the Fund voting as a class is
generally required in order to authorize any of the following transactions:
o merger or consolidation of the Fund with or into any other
entity;
o issuance of any securities of the Fund to any person or
entity for cash, other than pursuant to the Dividend and
Reinvestment Plan or any offering if such person or entity
acquires no greater percentage of the securities offered than
the percentage beneficially owned by such person or entity
immediately prior to such offering or, in the case of a class
or series not then beneficially owned by such person or
entity, the percentage of common shares beneficially owned by
such person or entity immediately prior to such offering;
o 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
$5,000,000);
o sale, lease or exchange to the Fund, in exchange for
securities of the Fund, of any assets of any entity or
person (except assets having an aggregate fair market value
of less than $5,000,000); or
o the purchase of the Fund's common shares by the Fund from
any person or entity other than pursuant to a tender
offer equally available to other shareholders in which such
person or entity tenders no greater percentage of common
shares than are tendered by all other shareholders;
if such person or entity is directly, or indirectly through affiliates, the
beneficial owner of more than 5% of the outstanding shares of the Fund.
However, such vote would not be required when, under certain conditions, the
Board of Trustees approves the transaction. In addition, shareholders have no
authority to adopt, amend or repeal By-Laws. The trustees have authority to
adopt, amend and repeal By-Laws consistent with the Declaration of Trust
(including to require majority approval for the election of trustees).
Reference is made to the Governing Documents of the Fund, on file with the
Securities and Exchange Commission, for the full text of these provisions.
The provisions of the Governing Documents described above could have
the effect of depriving the owners of shares in the Fund of opportunities to
sell their shares at a premium over prevailing market prices, by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
principal shareholder.
The Governing Documents of the Fund are on file with the Securities
and Exchange Commission. For the full text of these provisions see "Additional
Information."
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, non-diversified, closed-end management
investment company (commonly referred to as a closed-end fund). Closed-end
funds differ from open-end funds (which are generally referred to as mutual
funds) in that closed-end funds generally list their shares for trading on a
stock exchange and do not redeem their shares at the request of the
shareholder. This means that if you wish to sell your shares of a closed-end
fund you must trade them on the market like any other stock at the prevailing
market price at that time. In a mutual fund, if the shareholder wishes to sell
shares of the fund, the mutual fund will redeem or buy back the shares at "net
asset value." Also, mutual funds generally offer new shares on a continuous
basis to new investors, and closed-end funds generally do not. The continuous
inflows and outflows of assets in a mutual fund can make it difficult to
manage the fund's investments. By comparison, closed-end funds are generally
able to stay more fully invested in securities that are consistent with their
investment objective, and also have greater flexibility to make certain types
of investments, and to use certain investment strategies, such as financial
leverage and investments in illiquid securities.
Shares of closed-end funds often trade at a discount to their net
asset value. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Fund's Board of
Trustees might consider from time to time engaging in open-market repurchases,
tender offers for shares or other programs intended to reduce the discount. We
cannot guarantee or assure, however, that the Fund's Board of Trustees will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares trading
at a price equal or close to net asset value per share. The Board of Trustees
might also consider converting the Fund to an open-end mutual fund, which
would also require a supermajority vote of the shareholders of the Fund. We
cannot assure you that the Fund will not trade at a discount.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end, non-diversified, management investment
company and as such its shareholders do not, and will not, have the right to
require the Fund to repurchase their shares. The Fund, however, may repurchase
its common shares from time to time as and when it deems such a repurchase
advisable. The Board of Trustees has authorized such repurchases to be made
when the Fund's common shares are trading at a discount from net asset value
of 10% or more (or such other percentage as the Board of Trustees of the Fund
may determine from time to time). Pursuant to the 1940 Act, the Fund may
repurchase its common shares on a securities exchange (provided that the Fund
has informed its shareholders within the preceding six months of its intention
to repurchase such shares) or pursuant to tenders and may also repurchase
shares privately if the Fund meets certain conditions regarding, among other
things, distribution of net income for the preceding fiscal year, status of
the seller, price paid, brokerage commissions, prior notice to shareholders of
an intention to purchase shares and purchasing in a manner and on a basis that
does not discriminate unfairly against the other shareholders through their
interest in the Fund.
When the Fund repurchases its common shares for a price below net
asset value, the net asset value of the common shares that remain outstanding
shares will be enhanced, but this does not necessarily mean that the market
price of the outstanding common shares will be affected, either positively or
negatively. The repurchase of common shares will reduce the total assets of
the Fund available for investment and may increase the Fund's expense ratio.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. The
discussion reflects applicable tax laws of the United States as of the date of
this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Fund and its shareholders (including shareholders 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 intends to elect to be treated and to qualify as a regulated
investment company under Subchapter M of the Code. Accordingly, the Fund must,
among other things, (i) derive in each taxable year at least 90% of its gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including but not limited to gain from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (ii) diversify its holdings so that, at the end
of each quarter of each taxable year (a) at least 50% of the market value of
the Fund's total assets is represented by cash and cash items, U.S. government
securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets and
not more than 10% of the outstanding voting securities of such issuer, and (b)
not more than 25% of the market value of the Fund's total assets is invested
in the securities of any issuer (other than U.S. government securities and the
securities of other regulated investment companies) or of any two or more
issuers that the Fund controls and that are determined to be engaged in the
same business or similar or related trades or businesses.
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to shareholders, 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 gain
over net long-term capital loss and other taxable income, other than any net
long-term capital gain, reduced by deductible expenses) determined without
regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax-exempt interest over certain disallowed
deductions). The Fund intends to distribute at least annually substantially
all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount at least equal to the sum of (i) 98% of
its ordinary income (not taking into account any capital gain or loss) for the
calendar year, (ii) 98% of its capital gain in excess of its capital loss
(adjusted for certain ordinary losses) for a one-year period generally ending
on October 31of the calendar year (unless an election is made to use the
Fund's fiscal year) and (iii) certain undistributed amounts from previous
years on which the Fund paid no U.S. federal income tax. While the Fund
intends to distribute any income and capital gain 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 gain 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 shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
Taxation of Shareholders
Distributions paid to you by the Fund from its net investment income
or from an excess of net short-term capital gain over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
generally taxable to you as ordinary income to the extent of the Fund's
earning and profits. Such distributions (if designated by the Fund) may,
however, qualify (provided holding period and other requirements are met) (i)
for the dividends received deduction in the case of corporate shareholders to
the extent that the Fund's income consists of dividend income from U.S.
corporations, and (ii) under the recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003 (effective for taxable years after December 31,
2002 through December 31, 2008) ("2003 Tax Act"), as qualified dividend income
eligible for the reduced maximum rate to individuals of generally 15% (5% for
individuals in lower tax brackets) to the extent that the Fund receives
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain foreign corporations
(e.g., generally, foreign corporations incorporated in a possession of the
United States or in certain countries with a qualifying comprehensive tax
treaty with the United States, or the 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 gain over net short-term capital losses ("capital gain
distributions"), including capital gain distributions credited to you but
retained by the Fund, are taxable to you as long-term capital gain if they
have been properly designated by the Fund, regardless of the length of time
you have owned Fund shares. Under the 2003 Tax Act, the maximum tax rate on
net long-term capital gain of individuals is reduced generally from 20% to 15%
(5% for individuals in lower brackets) for such gain realized on or after May
6, 2003 and before January 1, 2009. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of your shares
and, after such adjusted tax basis is reduced to zero, will constitute capital
gain to you (assuming the shares are 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 distributions and other distributions.
The sale or other disposition of shares of the Fund will generally
result in capital gain or loss to you, and will be long-term capital gain or
loss if the shares have been held for more than one year at the time of sale.
Any loss upon the sale or exchange of Fund shares held for six months or less
will be treated as long-term capital loss to the extent of any capital gain
distributions received (including amounts credited as an undistributed capital
gain distribution) by you. A loss realized on a sale or exchange of shares of
the Fund will be disallowed if other substantially identical Fund shares are
acquired (whether through the automatic reinvestment of distributions or
otherwise) within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Present law
taxes both long-term and short-term capital gain of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, under the 2003 Tax
Act, the maximum tax rate on short-term capital gain is 35% and the maximum
tax rate on long-term capital gain is 15%.
Distributions are taxable to you even though they are reinvested in
additional shares of the Fund. If the Fund pays you a distribution in January
that was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
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 distribution was
declared.
The Fund is required in certain circumstances to backup withhold on
taxable distributions and certain other payments paid to non-corporate holders
of the Fund's shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to you may be refunded or credited against your U.S.
federal income tax liability, if any, provided that the required information
is furnished to the IRS.
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 shareholders. 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 shareholders can be found in the Statement of Additional
Information that is incorporated by reference into this Prospectus.
Shareholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, local income or other taxes.
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust (the "Custodian"), located at One
Heritage Drive, Palmer 2N,North Quincy, MA 02171, serves as the custodian of
the Fund's assets pursuant to a custody agreement. Under the custody
agreement, the custodian holds the Fund's assets in compliance with the 1940
Act. For its services, the Custodian will receive a monthly fee based upon,
among other things, the average value of the total assets of the Fund, plus
certain charges for securities transactions.
EquiServe Trust Company, N.A., located at P.O. Box 43025, Providence
RI 02940-3025, serves as the Fund's dividend disbursing agent, as agent under
the Fund's automatic dividend reinvestment and voluntary cash purchase plan
and as transfer agent and registrar for the common shares of the Fund.
UNDERWRITING
Subject to the terms and conditions stated in a purchase agreement
dated , 2003, each underwriter named below, for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated is acting as representative, has severally agreed
to purchase, and the Fund has agreed to sell to such underwriter, the number
of common shares set forth opposite the name of such underwriter.
Number of
Underwriter Common Shares
----------- -------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Citigroup Global Markets Inc............................................
A.G. Edwards & Sons, Inc................................................
Gabelli & Company, Inc..................................................
Raymond James & Associates, Inc.........................................
RBC Dain Rauscher Inc...................................................
Wells Fargo Securities, LLC.............................................
Advest, Inc.............................................................
BB&T Capital Markets, a division of Scott & Stringfellow, Inc...........
H&R Block Financial Advisors, Inc.......................................
J.J.B. Hilliard, W.L. Lyons, Inc........................................
Janney Montgomery Scott LLC.............................................
Legg Mason Wood Walker, Incorporated....................................
McDonald Investments Inc., a KeyCorp Company............................
Morgan Keegan & Company, Inc............................................
Oppenheimer & Co., Inc.................................................
Quick & Reilly, Inc.....................................................
Ryan Beck & Co..........................................................
Stifel, Nicolaus & Company, Incorporated................................
SunTrust Capital Markets, Inc...........................................
TD Waterhouse Investor Services, Inc....................................
Wedbush Morgan Securities Inc...........................................
Claymore Securities, Inc................................................
Hennion & Walsh, Inc....................................................
Total................................................... ---------------
===============
The purchase 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 the common shares
sold under the purchase agreement if any of the common shares are purchased. In
the purchase 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, or to contribute payments the
underwriters may be required to make for any of those liabilities.
Commissions and Discounts
The underwriters propose to initially offer some of the common shares
directly to the public at the public offering price set forth on the cover
page of this prospectus and some of the common shares to certain dealers at
the public offering price less a concession not in excess of $ per share. The
sales load the Fund will pay of $.90 per share is equal to 4.5% of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $ per share on sales to other dealers. After the
initial public offering, the public offering price, concession and discount
may be changed. Investors must pay for any common shares purchased on or
before , 2003.
The following table shows the public offering price, estimated
offering expenses, sales load and proceeds to the Fund. The information
assumes either no exercise or full exercise by the underwriters of their
overallotment option.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price.................... $20.00 $ $
Sales load............................... $.90 $ $
Estimated offering expenses.............. $.04 $ $
Proceeds to the Fund (after expenses).... $19.06 $ $
The expenses of the offering are estimated at approximately $2,600,000
and are payable by the Fund. The Fund has agreed to pay the underwriters $.0067
per common share as a partial reimbursement of expenses incurred in connection
with the offering. The amount paid by the Fund as this partial reimbursement to
the underwriters will not exceed .0335% of the total price to the public of the
common shares sold in this offering. The Investment Adviser has agreed to pay
the amount by which the Fund's offering costs (other than the sales load, but
including the reimbursement of expenses described in the preceding sentence)
exceed $.04 per common share (the "Reimbursement Cap").
Overallotment Option
The Fund has granted the underwriters an option to purchase up to
additional common shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common shares is complete, Securities
and Exchange Commission rules may limit underwriters and selling group members
from bidding for and purchasing the Fund's common shares. However, the
representative may engage in transactions that stabilize the price of the
common shares, such as bids or purchases to peg, fix or maintain that price.
If the underwriters create a short position in the common shares in
connection with the offering, i.e., if they sell more common shares than are
listed on the cover of this prospectus, the representative may reduce that
short position by purchasing common shares in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the overallotment option described above. The underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the common shares sold in this offering
for their account may be reclaimed by the syndicate if such common shares are
repurchased by the syndicate in stabilizing or covering transactions.
Purchases of the common shares to stabilize the price or to reduce a short
position may cause the price of the common shares to be higher than it might
be in the absence of such purchases.
Neither the Fund nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common shares. In
addition, neither the Fund nor any of the underwriters makes any
representation that the representative will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
The Fund has agreed not to offer or sell any additional common shares
for a period of 180 days after the date of the purchase agreement without the
prior written consent of the underwriters, except for the sale of the common
shares to the underwriters pursuant to the purchase agreement and certain
transactions relating to the Fund's Dividend Reinvestment Plan.
The Fund anticipates that the underwriters may from time to time act
as brokers or, after they have ceased to be underwriters, dealers in executing
the Fund's portfolio transactions. The underwriters are active underwriters
of, and dealers in, securities and act as market makers in a number of such
securities, and therefore can be expected to engage in portfolio transactions
with the Fund.
One or more of the underwriters of the common shares may also act as
an underwriter of the Fund's preferred shares.
The common shares will be sold to ensure that New York Stock Exchange
distribution standards (i.e., round lots, public shares and aggregate market
value) will be met.
Other Relationships
The Investment Adviser has also agreed to pay from its own assets
additional compensation to Merrill Lynch. This additional compensation will be
paid to Merrill Lynch quarterly in an amount equal to 15% of the Investment
Adviser's investment management fees from the Fund in respect of common shares
sold in the offering other than certain shares purchased by Gabelli & Company,
Inc. or its affiliates or shares sold through Citigroup Global Markets Inc.
along with a proportionate amount in respect of any common shares issued
pursuant to any rights offering by the Fund that closes on or before the third
anniversary of this offering of common shares and in respect of any preferred
shares issued by the Fund. The total amount of these additional compensation
payments to Merrill Lynch will not exceed [ ]% of the total price to the public
of the common shares sold in this offering. The Investment Adviser has also
reached a similar agreement with Citigroup Global Markets Inc. in respect of
shares sold in the offering by Citigroup Global Markets Inc. These arrangements
will remain in effect during the continuance of the Advisory Agreement or other
advisory agreement between the Investment Adviser and the Fund. The total
amount of these additional compensation payments to Citigroup will not exceed [
]% of the total price to the public of the common shares sold in this offering.
In consideration of these payments, each of Merrill Lynch and Citigroup Global
Markets Inc. has agreed to provide certain after-market support services to the
Investment Adviser designed to maintain the visibility of the Fund on an
ongoing basis and to provide relevant information, studies or reports regarding
the Fund and the closed-end investment company industry.
The Investment Adviser and the Fund have entered into an agreement
with Claymore Securities, Inc., one of the underwriters, pursuant to which
Claymore will provide distribution services during the offering, including
preparation and review of marketing material and assistance in presentations
to other underwriters and selected dealers. In consideration of such services,
the Investment Adviser will pay Claymore an amount equal to 15% of specified
management fees received from the Fund in respect of the common shares sold in
the offering (other than those shares sold through Gabelli & Company, Inc. or
certain other underwriters, such as Citigroup Global Markets Inc. or, in
specified specified circumstances, shares sold to the Investment Adviser or
its affiliates) for a period of five years after the offering. The Fund also
will reimburse Claymore and the Investment Adviser (or its affiliate, Gabelli
& Company, Inc., one of the underwriters, which is also providing distribution
services during the offering), on a basis subordinate to other organization
and offering expenses, for certain of their out-of-pocket offering expenses
and payments by Claymore (and the Investment Adviser) to its commissioned
sales personnel to the extent the offering costs (other than the sales load)
payable by the Fund plus such reimbursement do not exceed the Reimbursement
Cap (equal to .20% of the offering price). The amount paid to Claymore
Securities, Inc. for its distribution assistance will not exceed [ ]% of the
total price to the public of the common shares sold in this offering.
The total amount of these additional compensation payments and
reimbursements, plus the amount paid by the Fund as the $.0067 per common share
partial reimbursement to the underwriters, will not exceed 4.5% of the total
price to the public of the common shares sold in this offering. The sum total
of all compensation to underwriters in connection with the public offering of
common shares, including sales load and all forms of additional compensation to
underwriters, will be limited to 9.0% of the total price to the public of the
common shares sold in this offering.
The address of Merrill Lynch, Pierce, Fenner & Smith, Incorporated is
4 World Financial Center, New York, New York 10080.
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, counsel to the Fund in
connection with the offering of the common shares, and by Clifford Chance US
LLP, New York, New York, counsel to the underwriters. Clifford Chance US LLP
may rely on the opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to
matters of Delaware law.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in
accordance therewith files reports and other information with the Securities
and Exchange Commission. Reports, proxy statements and other information filed
by the Fund with the Securities and Exchange Commission pursuant to the
informational requirements of such Acts can be inspected and copied at the
public reference facilities maintained by the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Securities and
Exchange 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 Securities
and Exchange Commission.
The Fund expects the common shares to be listed on the New York Stock
Exchange, subject to notice of issuance, under the symbol "GDV." Reports,
proxy statements and other information concerning the Fund and filed with the
Securities and Exchange Commission by the Fund will be available for
inspection at the New York Stock Exchange, 20 Broad Street, New York, New York
10005, as the case may be.
This prospectus constitutes part of a Registration Statement filed by
the Fund with the Securities and Exchange 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 common shares 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
Securities and Exchange Commission. Each such statement is qualified in its
entirety by such reference. The complete Registration Statement may be obtained
from the Securities and Exchange Commission upon payment of the fee prescribed
by its rules and regulations or free of charge through the Security and
Exchange Commission's web site (http://www.sec.gov).
PRIVACY PRINCIPLES OF THE FUND
The Fund is committed to maintaining the privacy of its shareholders
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 shareholders, although certain non-public personal
information of its shareholders may become available to the Fund. The Fund
does not disclose any non-public personal information about its shareholders
or former shareholders to anyone, except as permitted by law or as is
necessary in order to service shareholder accounts (for example, to a transfer
agent or third party administrator).
The Fund restricts access to non-public personal information about
its shareholders 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 shareholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors and Special Considerations" and elsewhere in this
prospectus. As a result of the foregoing and other factors, no assurance can
be given as to the future results, levels of activity or achievements, and
neither the Fund nor any other person assumes responsibility for the accuracy
and completeness of such statements.
TABLE OF CONTENTS OF SAI
An SAI dated as of , 2003, has been filed with the Securities and
Exchange Commission and is incorporated by reference in this prospectus. An
SAI may be obtained without charge by writing to the Fund at its address at
One Corporate Center, Rye, New York 10580-1422 or by calling the Fund
toll-free at (800) GABELLI (422-3554). The Table of Contents of the SAI is as
follows:
Page
----
The Fund................................................................ B-7
Investment Objective and Policies....................................... B-7
Investment Restrictions.................................................B-14
Management of the Fund..................................................B-14
Portfolio Transactions..................................................B-22
Portfolio Turnover......................................................B-23
Taxation................................................................B-23
Net Asset Value.........................................................B-28
General Information.....................................................B-28
Proxy Voting Procedures.................................................B-30
Code of Ethics..........................................................B-30
Code of Conduct for Chief Executive and Senior Financial Officers.......B-30
Independent Auditor's Report............................................ F-1
Financial Statements.................................................... F-2
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser or the
underwriters. Neither the delivery of this prospectus nor any sale made
hereunder will, under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates.
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy such securities in any circumstance in which such an offer or
solicitation is unlawful.
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make
the long-term risk appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present that suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small. Moody's applies numerical modifiers
(1, 2, and 3) with respect to the bonds rated Aa through B. The
modifier 1 indicates that the company ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in
the lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
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.
===============================================================================
Until , 2003 (25 days after the date of this prospectus), all dealers
that buy, sell or trade the common shares, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
[Gabelli Logo]
$
THE GABELLI DIVIDEND & INCOME TRUST
Common Shares
Merrill Lynch & Co.
Citigroup
A.G. Edwards & Sons, Inc.
Gabelli & Company, Inc.
Raymond James
RBC Capital Markets
Wells Fargo Securities, LLC
Advest, Inc.
BB&T Capital Markets, a division of Scott & Stringfellow, Inc.
H&R Block Financial Advisors, Inc.
J.J.B. Hilliard, W.L. Lyons, Inc.
Janney Montgomery Scott LLC
Legg Mason Wood Walker
Incorporated
McDonald Investments Inc.
Morgan Keegan & Company, Inc.
Oppenheimer
Quick & Reilly, Inc
Ryan Beck & Co.
Stifel, Nicolaus & Company
Incorporated
SunTrust Robinson Humphrey
TD Waterhouse
Wedbush Morgan Securities Inc.
Claymore Securities, Inc.
Hennion & Walsh, Inc.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
------------------
PROSPECTUS
------------------
Merrill Lynch & Co.
Gabelli & Company, Inc.
____, 2003
===============================================================================
Dated [__], 2003
THE GABELLI DIVIDEND & INCOME TRUST
__________________________
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Dividend & Income Trust (the "Fund") is a
non-diversified, closed-end management investment company that seeks to
provide a high level of total return on its assets with an emphasis on
dividends and income. The Fund will attempt to achieve its investment
objective by investing, under normal market conditions, at least 80% of its
assets in dividend paying or other income producing securities. In addition,
under normal market conditions, at least 50% of its assets will consist of
dividend paying equity securities.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated [__],
2003 (the "Prospectus"). Investors should obtain and read the Prospectus prior
to purchasing shares. A copy of the Prospectus may be obtained without charge,
by calling the Fund at 800-GABELLI (800-422-3554) or (914) 921-5070. 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, Washington, D.C. The registration statement may be obtained from
the Securities and Exchange Commission (the "SEC") upon payment of the fee
prescribed, or inspected at the SEC's office or via its website (www.sec.gov)
at no charge.
This Statement of Additional Information is dated [__], 2003.
TABLE OF CONTENTS
Page
The Fund.................................................................. B-7
Investment Objective and Policies......................................... B-7
Investment Restrictions...................................................B-14
Management of the Fund....................................................B-14
Portfolio Transactions....................................................B-22
Portfolio Turnover........................................................B-23
Taxation..................................................................B-23
Net Asset Value...........................................................B-28
General Information.......................................................B-28
Proxy Voting Procedures...................................................B-30
Code of Ethics............................................................B-30
Code of Conduct for Chief Executive and Senior Financial Officers.........B-30
Independent Auditor's Report.............................................. F-1
Financial Statements...................................................... F-2
THE FUND
The Gabelli Dividend & Income Trust is a newly organized closed-end
non-diversified management investment company organized under the laws of the
State of Delaware. The Fund's common shares of beneficial interest, par value
$.001 (the "Common Shares"), are expected to be listed on the New York Stock
Exchange under the symbol "GDV."
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The objective of the Fund is to provide a high level of total return
on its assets with an emphasis on dividends and income. No assurance can be
given that the Fund will achieve its investment objective. The Fund will
attempt to achieve its investment objective by investing, under normal market
conditions, at least 80% of its assets in dividend paying or other income
producing securities. In addition, under normal market conditions, at least 50%
of the Fund's assets will consist of dividend paying equity securities. In
making stock selections, the Fund's Investment Adviser (as hereinafter defined)
looks for securities that have a superior yield, as well as capital gains
potential.
Additional Investment Policies
Options. The Fund may purchase or sell, i.e., write, options on
securities, securities indices and foreign currencies which are listed on a
national securities exchange or in the OTC market, as a means of achieving
additional return or of hedging the value of the Fund's portfolio. The Fund my
purchase call or put options as long as the aggregate initial margins and
premiums, measured at the time of such investment, do not exceed 10% of the
fair market value of the Fund's total assets.
A call option is a contract that gives the holder of the option the
right to buy from the writer of the call option, in return for a premium, the
security or currency underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying security or
currency upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the
right, in return for a premium, to sell to the seller the underlying security
at a specified price. The seller of the put option has the obligation to buy
the underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other instruments held in its portfolio. A call option is also
covered if the Fund holds a call on the same instrument as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written or (ii) greater than the exercise price of
the call written if the difference is maintained by the Fund in cash, U.S.
government securities or other 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 a call option include supply and
demand, interest rates, the current market price and price volatility of the
underlying security and the time remaining until the expiration date. Gains
and losses on investments in options depend, in part, on the ability of the
Investment Adviser to predict correctly the effect of these factors. The use
of options cannot serve as a complete hedge since the price movement of
securities underlying the options will not necessarily follow the price
movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series or in a private
transaction. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular option. In such event it might not be possible to effect
closing transactions in particular options, so that the Fund would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If the
Fund, as a covered call option writer, is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or otherwise covers the position.
Options on Securities Indices. The Fund may purchase and sell
securities index options. One effect of such transactions may be to hedge all
or part of the Fund's securities holdings against a general decline in the
securities market or a segment of the securities market. Options on securities
indices are similar to options on stocks except that, rather than the right to
take or make delivery of stock at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the index and the price
of the securities being hedged against is imperfect and the risk from
imperfect correlation increases as the composition of the Fund diverges from
the composition of the relevant index. Accordingly, a decrease in the value of
the securities being hedged against may not be wholly offset by a gain on the
exercise or sale of a securities index put option held by the Fund.
Options on Foreign Currencies. Instead of purchasing or selling
currency futures (as described below), the Fund may attempt to accomplish
similar objectives by purchasing put or call options on currencies or by
writing put options or call options on currencies either on exchanges or in
over-the-counter ("OTC") markets. A put option gives the Fund the right to
sell a currency at the exercise price until the option expires. A call option
gives the Fund the right to purchase a currency at the exercise price until
the option expires. Both types of options serve to insure against adverse
currency price movements in the underlying portfolio assets designated in a
given currency. The Fund's use of options on currencies will be subject to the
same limitations as its use of options on securities, described above and in
the Prospectus. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options.
As in the case of interest rate futures contracts and options
thereon, described below, the Fund may hedge against the risk of a decrease or
increase in the U.S. dollar value of a foreign currency denominated debt
security which the Fund owns or intends to acquire by purchasing or selling
options contracts, futures contracts or options thereon with respect to a
foreign currency other than the foreign currency in which such debt security
is denominated, where the values of such different currencies (vis-a-vis the
U.S. dollar) historically have a high degree of positive correlation.
Futures Contracts and Options on Futures. The Fund may, without
limit, enter into futures contracts or options on futures contracts. It is
anticipated that these investments, if any, will be made by the Fund primarily
for the purpose of hedging against changes in the value of its portfolio
securities and in the value of securities it intends to purchase. Such
investments will only be made if they are economically appropriate to the
reduction of risks involved in the management of the Fund. In this regard, the
Fund may enter into futures contracts or options on futures for the purchase
or sale of securities indices or other financial instruments including but not
limited to U.S. government securities.
A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities
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 securities 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 securities
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 the "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 contract fluctuates. At any time
prior to the expiration of the futures contract, the Fund may elect to 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 position 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 Investment Company Act of 1940
(the "1940 Act"), an amount of cash, U.S. government securities 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, in order for the Fund to avoid being treated as
having issued a senior security in the amount of its obligations. 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, U.S. government securities or other high grade debt
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 contracts or call options, respectively (but
are no less than the stock price of the call option or the market price at
which the short positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may
purchase or sell interest rate futures contracts to take advantage of or to
protect the Fund against fluctuations in interest rates affecting the value of
debt securities which the Fund holds or intends to acquire. For example, if
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities, the values of which historically have a high degree of
positive correlation to the values of the Fund's portfolio securities. Such a
sale would have an effect similar to selling an equivalent value of the Fund's
portfolio securities. If interest rates increase, the value of the Fund's
portfolio securities will decline, but the value of the futures contracts to
the Fund will increase at approximately an equivalent rate thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities with
longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures
market may be more liquid than the cash market, the use of futures contracts
as a risk management technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when
it is expected that interest rates may decline. The purchase of futures
contracts for this purpose constitutes a hedge against increases in the price
of debt securities (caused by declining interest rates) which the Fund intends
to acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be
purchased, the Fund can take advantage of the anticipated rise in the cost of
the debt securities without actually buying them. Subsequently, the Fund can
make its intended purchase of the debt securities in the cash market and
currently liquidate its futures position. To the extent the Fund enters into
futures contracts for this purpose, it will maintain in a segregated asset
account with the Fund's custodian, assets sufficient to cover the Fund's
obligations with respect to such futures contracts, which will consist of cash
or other liquid securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial margin deposited by the Fund with its
custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call option
on a futures contract to hedge against a market advance due to declining
interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the
value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of
the option is below the exercise price, the Fund will retain the full amount
of the option premium which provides a partial hedge against any decline that
may have occurred in the Fund's portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities that are deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the price of debt
securities that the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from options on futures it
has written may to some extent be reduced or increased by changes in the value
of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate futures
contracts and options thereon discussed previously. By entering into currency
futures and options thereon, the Fund will seek to establish the rate at which
it will be entitled to exchange U.S. dollars for another currency at a future
time. By selling currency futures, the Fund will seek to establish the number
of dollars it will receive at delivery for a certain amount of a foreign
currency. In this way, whenever the Fund anticipates a decline in the value of
a foreign currency against the U.S. dollar, the Fund can attempt to "lock in"
the U.S. dollar value of some or all of the securities held in its portfolio
that are denominated in that currency. By purchasing currency futures, the
Fund can establish the number of dollars it will be required to pay for a
specified amount of a foreign currency in a future month. Thus, if the Fund
intends to buy securities in the future and expects the U.S. dollar to decline
against the relevant foreign currency during the period before the purchase is
effected, the Fund can attempt to "lock in" the price in U.S. dollars of the
securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for
the price of the premium and related transaction costs it must pay for the
option, to decide whether or not to buy (in the case of a call option) or to
sell (in the case of a put option) a futures contract at a specified price at
any time during the period before the option expires. If the Investment
Adviser, in purchasing an option, has been correct in its judgment concerning
the direction in which the price of a foreign currency would move as against
the U.S. dollar, the Fund may exercise the option and thereby take a futures
position to hedge against the risk it had correctly anticipated or close out
the option position at a gain that will offset, to some extent, currency
exchange losses otherwise suffered by the Fund. If exchange rates move in a
way the Fund did not anticipate, however, the Fund will have incurred the
expense of the option without obtaining the expected benefit; any such
movement in exchange rates may also thereby reduce rather than enhance the
Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or
sales of securities index futures contracts are used for hedging purposes to
attempt to protect the Fund's current or intended investments from broad
fluctuations in stock or bond prices. For example, the Fund may sell
securities index futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by
gains on the futures position. When the Fund is not fully invested in the
securities market and anticipates a significant market advance, it may
purchase securities index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in securities index futures contracts will be closed
out. The Fund may write put and call options on securities index futures
contracts for hedging purposes.
Forward Foreign Currency Exchange Contracts. The Fund may enter into
forward foreign currency exchange contracts to protect the value of its
portfolio against uncertainty in the level of future currency exchange rates
between a particular foreign currency and the U.S. dollar or between foreign
currencies in which its securities are or may be denominated. 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.
Forward currency contracts (i) are traded in a market conducted directly
between currency traders (typically, commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. The
Fund, however, may enter into forward currency contracts requiring deposits or
involving the payment of commissions. To assure that its forward currency
contracts are not used to achieve investment leverage, the Fund will segregate
liquid assets consisting of cash, U.S. government securities or other liquid
securities with its custodian, or a designated sub-custodian, in an amount at
all times equal to or exceeding its commitment with respect to the contracts.
The dealings of the Fund in forward foreign exchange are limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of one forward foreign currency
for another currency with respect to specific receivables or payables of the
Fund accruing in connection with the purchase and sale of its portfolio
securities or its payment of distributions. Position hedging is the purchase
or sale of one forward foreign currency for another currency with respect to
portfolio security positions denominated or quoted in the foreign currency to
offset the effect of an anticipated substantial appreciation or depreciation,
respectively, in the value of the currency relative to the U.S. dollar. In
this situation, the Fund also may, for example, enter into a forward contract
to sell or purchase a different foreign currency for a fixed U.S. dollar
amount where it is believed that the U.S. dollar value of the currency to be
sold or bought pursuant to the forward contract will fall or rise, as the case
may be, whenever there is a decline or increase, respectively, in the U.S.
dollar value of the currency in which its portfolio securities are denominated
(this practice being referred to as a "cross-hedge").
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Investment Adviser.
The amount the Fund may invest in forward currency contracts is limited to the
amount of its aggregate investments in foreign currencies.
The use of forward currency contracts may involve certain risks,
including the failure of the counterparty to perform its obligations under the
contract, and such use 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. The Fund will only enter
into forward currency contracts with parties which it believes to be
creditworthy institutions.
Securities of Investment Companies. To the extent permitted by law,
the Fund may invest in investment company securities, including preferred
shares and the common equity of such companies. Investments in the common
equity of investment companies will cause the Fund to bear a 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 any securities of another investment
company. In these circumstances, holders of the Fund's common shares will be
subject to duplicative investment expenses.
Warrants and Rights. The Fund may invest without limit in warrants or
rights (including those acquired in units or attached to other securities)
that entitle the holder to buy equity securities at a specific price for a
specific period of time but will do so only if such equity securities are
deemed appropriate by the Investment Adviser for inclusion in the Fund's
portfolio.
Asset-Backed and Mortgage-Backed Securities. The Fund may invest in
asset-backed and mortgage-backed securities. Mortgage-backed securities
represents ownership of an undivided interest in a pool of mortgages.
Aggregate principal and interest payments received from the pool are used to
pay principal and interest on a mortgage-backed security. Asset-backed
securities are similar to mortgage-backed securities except they represent
ownership in a pool of notes or receivables on assets other than real estate,
such as loans, leases, credit card receivables or royalties. The Fund does not
currently anticipate investments in mortgage or asset-backed securities
constituting a substantial part of its investment portfolio.
The Investment Adviser is Not Registered as a Commodity Pool
Operator. The Investment Adviser has claimed an exclusion from the definition
of the term "commodity pool operator" 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.
Special Risk Considerations Relating to Futures and Options Thereon.
The Fund's ability to establish and close out positions in futures contracts
and options thereon will be subject to the development and maintenance of
liquid markets. Although the Fund generally will purchase or sell only those
futures contracts and options thereon for which there appears to be a liquid
market, there is no assurance that a liquid market on an exchange will exist
for any particular futures contract or option thereon at any particular time.
In the event no liquid market exists for a particular futures contract or
option thereon in which the Fund maintains a position, it will not be possible
to effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the
futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract
or an option thereon which the Fund has written and which the Fund is unable
to close, the Fund would be required to maintain margin deposits on the
futures contract or option thereon and to make variation margin payments until
the contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Investment Adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the Investment Adviser's expectations are not met, the Fund will be
in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will
lose part or all of the benefit of the increased value of its securities
because it will have offsetting losses in its futures positions. In addition,
in such situations, if the Fund has insufficient cash to meet daily variation
margin requirements, it may have to sell securities to meet the requirements.
These sales may be, but will not necessarily be, at increased prices which
reflect the rising market. The Fund may have to sell securities at a time when
it is disadvantageous to do so.
Additional Risks of Foreign Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts. Options, futures contracts and
options thereon and forward contracts on securities and currencies may be
traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities. The value
of such positions also could be adversely affected by (i) other complex
foreign political, legal and economic factors, (ii) lesser availability than
in the U.S. of data on which to make trading decisions, (iii) delays in the
Fund's ability to act upon economic events occurring in the foreign markets
during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded
may impose limits on the positions that the Fund may take in certain
circumstances.
Risks of Currency Transactions. Currency transactions are also
subject to risks different from those of other portfolio transactions. Because
currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency and
related instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental
action can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure
as well as incurring transaction costs.
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 below), and are at all times secured by cash or
cash equivalents, which are maintained in a segregated account pursuant to
applicable regulations and that are at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is
that the Fund continues to receive the income on the loaned securities while
at the same time earns interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale. The
Fund's loans of portfolio securities will be collateralized in accordance with
applicable regulatory requirements.
A loan may generally be terminated by the borrower on one business day
notice, or by the Fund on five business days notice. If the borrower fails to
deliver the loaned securities within five days after receipt of notice, the
Fund could use the collateral to replace the securities while holding the
borrower liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities
violate the terms of the loan or fail financially. However, these loans of
portfolio securities will only be made to firms deemed by the Fund's management
to be creditworthy and when the income which can be earned from such loans
justifies the attendant risks. The Board of Trustees will oversee the
creditworthiness of the contracting parties on an ongoing basis. Upon
termination of the loan, the borrower is required to return the securities to
the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The risks associated with loans of portfolio securities are
substantially similar to those associated with repurchase agreements. Thus, if
the counter party to the loan petitions for bankruptcy or becomes subject to
the United States Bankruptcy Code, the law regarding the rights of the Fund is
unsettled. As a result, under extreme circumstances, there may be a restriction
on the Fund's ability to sell the collateral and the Fund would suffer a loss.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment
in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that, except as otherwise noted, cannot be changed
without the affirmative vote of the holders of a majority of the outstanding
voting securities of the Fund voting together as a single class. In the event
the Fund were to issue any preferred shares, the approval of a majority of
such shares (as defined under the 1940 Act) voting as a separate class would
also be required. 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 more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of
issuers in any particular industry. This restriction does
not apply to investments in U.S. government securities;
(2) purchase commodities or commodity contracts if such purchase
would result in regulation of the Fund as a commodity pool
operator;
(3) purchase or sell real estate, provided the Fund may invest
in securities and other instruments secured by real estate
or interests therein or issued by companies that invest in
real estate or interests therein;
(4) make loans of money or other property, except that (i) the
Fund may acquire debt obligations of any type (including
through extensions of credit), enter into repurchase
agreements and lend portfolio assets and (ii) the Fund may
lend money or other property to other investment companies
advised by the Investment Adviser pursuant to a common
lending program to the extent permitted by applicable law;
(5) borrow money, except to the extent permitted by applicable
law;
(6) issue senior securities, except to the extent permitted by
applicable law; or
(7) underwrite securities of other issuers, except insofar as
the Fund may be deemed an underwriter under applicable law
in selling portfolio securities; provided, however, this
restriction shall not apply to securities of any investment
company organized by the Fund that are to be distributed pro
rata as a dividend to its shareholders.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
Overall responsibility for management and supervision of the Fund
rests with its Board of Trustees. The Board of Trustees approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Investment Adviser, the
Fund's custodian and the Fund's transfer agent. The day-to-day operations of
the Fund are delegated to the Investment Adviser.
The names and business addresses of the trustees 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 trustees, their positions with certain other organizations and
companies. Trustees who are "interested persons" of the Fund, as defined by
the 1940 Act, are indicated by a "+".
Trustees
Number of
Name (and Age), Portfolios in Other
Position with the Term of Office Principal Fund Complex Directorships
Fund and and Length of Occupation During Overseen by Held by
Business Address1 Time Served2 Past Five Years Trustee Trustee
------------------ ------------ --------------- ------- -------
INTERESTED Since 2003* Chairman of the Board, Chief 24 Director of
TRUSTEES: Executive Officer of Gabelli Morgan Group
+Mario J. Gabelli Asset Management Inc. and Holdings, Inc.
(61) Chief Investment Officer of (transportation
Trustee and Chief the Investment Adviser and services); Vice
Investment Officer GAMCO Investors, Inc; Chairman of
Director/Trustee and Chief Lynch
Investment Officer of other Corporation
registered investment (diversified
companies in the Gabelli fund manufacturing
complex. Vice Chairman and company).
CEO of Lynch Interactive
Corp.
+Karl Otto Pohl Since 2003*** Member of the Shareholder 33 Director of
(73) Committee of Sal. Oppenheim Gabelli Asset
Trustee Jr. & Cie, Zurich (private Management Inc.;
investment bank); Former Chairman,
President of the Deutsche InCentive Capital
Bundesbank and Chairman of and Incentive
its Central Bank Council from Asset
1980 through 1991; Management
Director/Trustee of other (Zurich); Director
registered investment at Sal.
companies in the Gabelli fund Oppenheim Jr. &
complex. Cie, Zurich (banking)
+Edward T. Tokar Since 2003*** Chief Executive Officer of 1 Trustee of
(56) Allied Capital Management LEVCO Series
Trustee LLC, since 1997; Vice Trust; Trustee of
President of Honeywell DB Hedge
International Inc., since 1997. Strategies Fund
LLC;
DISINTERESTED
TRUSTEES:
Anthony J. Colavita Since 2003** President and Attorney at law 35 --
(67) in the law firm of Anthony J.
Trustee Colavita, P.C. since 1961;
Director/Trustee of other
registered investment
companies in the Gabelli fund
complex.
James P. Conn (65) Since 2003*** Former Managing Director 12 Director of
Trustee and Chief Investment Officer LaQuinta Corp.
of Financial Security (hotels) and First
Assurance Holdings Ltd., Republic Bank
1992-1998; Director/Trustee
of other registered investment
companies in the Gabelli fund
complex.
Mario d'Urso Since 2003* Chairman of Mittel Capital 1 Director of SJPC,
(63) Markets S.p.A, since 2001; London (financial
Trustee Senator in the Italian services)
Parliament, 1996-2001.
Frank J. Since 2003** President and CEO of the 4 Director of First Republic
Fahrenkopf, Jr. (63) American Gaming Association Bank
Trustee since June 1995; Partner in the
law firm of Hogan & Hartson;
Co-Chairman of the Commission on
Presidential Debates; Former
Chairman of the Republican
National Committee;
Director/Trustee of other
registered investment companies
in the Gabelli fund complex.
Michael J. Since 2003* Attorney at law in the law firm 1 --
Melarkey (53) of Avansino, Melarkey,
Trustee Knobel & Mulligan.
Salvatore M. Since 2003*** Certified Public Accountant 1 Kasper A.S.L.
Salibello (58) with the accounting firm Ltd. (apparel)
Trustee Salibello & Broder, since
1978.
Anthonie C. van Since 2003** Managing Director of 19 Aurado
Ekris (68) BALMAC International, Inc. Energy
Trustee (commodity trading)
Salvatore J. Zizza Since 2003** Chairman of Hallmark 11 Director of Hollis
(57) Electrical Supplies Corp.; Eden
Trustee Former Executive Vice Pharmaceuticals
President of FMG Group (a
healthcare provider).
Officers
Name (and Age), Position Term of Office Principal
with the Fund and and Length of Occupation During
Business Address1 Time Served Past Five Years
----------------- ----------- ---------------
Bruce N. Alpert (51) Since 2003 Executive Vice President and Chief
President Operating Officer of the Investment
Adviser since 1988; Director and
President of Gabelli Advisers, Inc.;
Officer of all other registered
investment companies in the Gabelli
fund complex.
James E. McKee (40) Since 2003 Vice President, General Counsel and
Secretary Secretary of Gabelli Asset Management
Inc. (since 1999) and of GAMCO
Investors, Inc. (since 1993);
Secretary of all of the registered
investment companies in the Gabelli
fund complex.
Richard C. Sell, Jr. (53 ) Since 2003 Vice President, Controller of Gabelli &
Treasurer Company, Inc. since 1998.
Carter W. Austin (36) Since 2003 Vice President of the Gabelli Equity
Vice President Trust since 2000. Vice President of the
Investment Adviser since 1996.
Matthew A. Hultquist (24) Since 2003 Assistant Vice President of Gabelli
Vice President and Ombudsman Asset Management Company since 2001.
___________________
+ "Interested person" of the Fund, as defined in the 1940 Act. Mr.
Mario Gabelli is an "interested person" of the Fund as a result of
his employment as an officer of the Fund and the Investment Adviser.
Mr. Gabelli is also a registered representative of an affiliated
broker-dealer. Mr. Pohl is an "interested person" of the Fund as a
result of his role as a director of the parent company of the
Investment Adviser. Mr. Tokar is an "interested person" of the Fund
as a result of his son's employment by an affiliate of the Investment
Adviser.
1 Address: One Corporate Center, Rye, NY 10580-1422, unless otherwise
noted.
2 The Fund's Board of Trustees is divided into three classes, each
class having a term of three years. Each year the term of office of
one class expires and the successor or successors elected to such
class serve for a three year term. The three year term for each class
expires as follows:
* Term expires at the Fund's 2004 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
** Term expires at the Fund's 2005 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
*** Term expires at the Fund's 2006 Annual Meeting of Shareholders
and until their successors are duly elected and qualified.
The Board of Trustees of the Fund are divided into three classes,
each class having a term of three years except as described below. Each year
the term of office of one class of trustees of the Fund will expire. However,
to ensure that the term of a class of the Fund's trustees expires each year,
the initial terms of the Fund's trustees will be as follows: the terms of
Messrs. Mario J. Gabelli, Michael J. Melarkey and Mario d'Urso as trustees of
the Fund expire in 2004; the terms of Messrs. Frank J. Fahrenkopf, Jr.,
Salvatore J. Zizza, Anthonie C. van Ekris, and Anthony J. Colavita as trustees
of the Fund expire in 2005; and the terms of Messrs. James P. Conn, Karl Otto
Pohl, Edward T. Tokar, and Salvatore M. Salibello as trustees of the Fund
expire in 2006.
Name of Trustee Dollar Range of Equity Aggregate Dollar Range of Equity
Securities in the Fund Securities in all Registered
Investment Companies Overseen by
Trustees in the Fund Complex
INTERESTED TRUSTEES
Mario J. Gabelli NA Over $100,000
Karl Otto Pohl NA None
DISINTERESTED TRUSTEES
Anthony J. Colavita NA Over $100,000
James P. Conn NA Over $100,000
Mario d'Urso NA Over $100,000
Frank J. Fahrenkopf, Jr. NA $1 - $10,000
Michael J. Melarkey NA None
Salvatore M. Salibello NA None
Edward T. Tokar NA None
Anthonie C. van Ekris NA Over $100,000
Salvatore J. Zizza NA Over $100,000
All shares were valued as of December 31, 2002.
The Trustees serving on the Fund's Nominating Committee are Messrs.
Michael Melarkey, Salvatore Zizza and Anthony Colavita (Chairman). The
Nominating Committee is responsible for recommending qualified candidates to
the Board in the event that a position is vacated or created. The Nominating
Committee would consider recommendations by shareholders if a vacancy were to
exist. Such recommendations should be forwarded to the Secretary of the Fund.
The Fund does not have a standing compensation committee.
Messrs. Salvatore Zizza (Chairman), Anthonie van Ekris and Frank
Fahrenkopf, who are not "interested persons" of the Fund as defined in the
1940 Act, serve on the Fund's Audit Committee. The Audit Committee is
generally responsible for reviewing and evaluating issues related to the
accounting and financial reporting policies and internal controls of the Fund
and, as appropriate, the internal controls of certain service providers,
overseeing the quality and objectivity of the Fund's financial statements and
the audit thereof and to act as a liaison between the Board of Trustees and
the Fund's independent accountants.
The Trust also has a Proxy Voting Committee, which, if so determined
by the Board of Trustees, 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 of Trustees may determine. The Trustees serving on
the Proxy Voting Committee are Messrs. Tokar, Zizza and Conn.
REMUNERATION OF TRUSTEES AND OFFICERS
The Fund pays each trustee who is not affiliated with the Investment
Adviser or its affiliates a fee of $5,000 per year plus $1000 per board
meeting attended in person ($500 if attended telephonically) and $500 per
committee meeting attended, together with each trustee's actual out-of-pocket
expenses relating to attendance at such meetings.
The following table shows the compensation that is anticipated the
trustees will earn in their capacity as trustees during the Fund's Fiscal Year
ending December 31, 2004. The table also shows, for the year ended December 31,
2002, the compensation trustees earned in their capacity as trustees for other
funds in the Gabelli fund complex. Other than Mr. Hultquist, officers who are
employed by the Investment Adviser receive no compensation or expense
reimbursement from the Fund.
COMPENSATION TABLE
TOTAL COMPENSATION FROM
THE FUND AND FUND COMPLEX
PAID
NAME OF PERSON AND ESTIMATED COMPENSATION TO TRUSTEES*
POSITION FROM THE FUND
Mario J. Gabelli, Chairman of the $0 $0 (22)
Board
Anthony J. Colavita $9,500 $152,286 (33)
James P. Conn $9,500 $53,500 (11)
Mario d'Urso $9,000 $0 (1)
Frank J. Fahrenkopf, Jr. $9,500 $31,000 (3)
Michael J. Melarkey $9,500 $0 (1)
Karl Otto Pohl $0 $0 (31)
Salvatore M. Salibello $9,000 $0 (1)
Edward T. Tokar $0 $0 (1)
Anthonie C. van Ekris $9,500 $67,250 (18)
Salvatore J. Zizza $10,500 $73,750 (9)
---------------------------------------
TOTAL $85,000
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2002 by investment companies
(including the Fund) or portfolios thereof from which such person
receives compensation that are considered part of the same fund
complex as the Fund because they have common or affiliated investment
advisers. The total does not include, among other things, out of
pocket Trustee expenses. The number in parenthesis represents the
number of such investment companies.
For his services as Vice President of the Fund, Matthew Hultquist, will
receive compensation in an amount to be established by the Board of Trustees.
Indemnification of Officers and Trustees; Limitations on Liability
The Agreement and Declaration of Trust of the Fund provides that the
Fund will indemnify its trustees 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 positions with the
Fund to the fullest extent permitted by law. However, nothing in the Agreement
and Declaration of Trust of the Fund protects or indemnifies a trustee,
officer, employee or agent of the Fund against any liability to which such
person would otherwise be subject in the event of such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her position.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
corporation with principal offices located at One Corporate Center, Rye, New
York 10580. The Investment Adviser was organized in 1999 and is the successor
to Gabelli Funds, Inc., which was organized in 1980. As of September 30, 2003,
the Investment Adviser acted as registered investment adviser to 19 management
investment companies with aggregate net assets of $9.6 billion. The Investment
Adviser, together with other affiliated investment advisers noted below had
assets under management totaling approximately $22.5 billion as of September
30, 2003. GAMCO Investors, Inc., an affiliate of the Investment Adviser, acts
as investment adviser for individuals, pension trusts, profit sharing trusts
and endowments, and as a sub-adviser to management investment companies having
aggregate assets of $11.3 billion under management as of September 30, 2003.
Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as
investment adviser for The Treasurer's Funds (money market funds) and separate
accounts having aggregate assets of $1.1 billion under management as of
September 30, 2003. Gabelli Advisers, Inc., an affiliate of the Investment
Adviser, acts as investment manager to the Gabelli Westwood Funds having
aggregate assets of $478 million under management as of September 30, 2003.
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 in the past several years 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.
Securities purchased or sold pursuant to contemporaneous orders entered on
behalf of the investment company accounts of the Investment Adviser or the
advisory accounts managed by its affiliates for their unaffiliated clients are
allocated pursuant to principles believed to be fair and not disadvantageous
to any such accounts. In addition, all such orders are accorded priority of
execution over orders entered on behalf of accounts in which the Investment
Adviser or its affiliates have a substantial pecuniary interest. The
Investment Adviser may on occasion give advice or take action with respect to
other clients that differs from the actions taken with respect to the Fund.
The Fund may invest in the securities of companies which are investment
management clients of GAMCO Investors Inc. In addition, portfolio companies or
their officers or directors may be minority shareholders of the Investment
Adviser or its affiliates.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset
Management Inc., a New York corporation, whose Class A Common Stock is traded
on the New York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may
be deemed a "controlling person" of the Investment Adviser on the basis of his
ownership of a majority of the stock and voting power of Gabelli Group Capital
Partners, Inc., which owns a majority of the capital stock and voting power of
Gabelli Asset Management Inc.
Under the terms of the Advisory Agreement, the Investment Adviser
manages the portfolio of the Fund in accordance with its stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and manages its other
business and affairs, all subject to the supervision and direction of the
Fund's Board of Trustees. In addition, under the Advisory Agreement, the
Investment Adviser oversees the administration of all aspects of the Fund's
business and affairs and provides, or arranges for others to provide, at the
Investment Adviser's expense, certain enumerated services, including
maintaining the Fund's books and records, preparing reports to the Fund's
shareholders and supervising the calculation of the net asset value of its
shares. All expenses of computing the net asset value of the Fund, including
any equipment or services obtained solely for the purpose of pricing shares or
valuing its investment portfolio, will be an expense of the Fund under its
Advisory Agreement.
The Advisory Agreement combines investment advisory and
administrative responsibilities in one agreement. For services rendered by the
Investment Adviser on behalf of the Fund under the Advisory Agreement, the
Fund pays the Investment Adviser a fee computed daily and paid monthly at the
annual rate of 1.00% of the average weekly net assets of the Fund (which
includes for this purpose assets attributable to outstanding preferred shares,
if any, with no deduction for the liquidation preference of such preferred
shares).
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties thereunder, the Investment Adviser is not liable for
any error or judgment or mistake of law or for any loss suffered by the Fund.
As part of the Advisory Agreement, the Fund has agreed that the name "Gabelli"
is the Investment Adviser's property, and that in the event the Investment
Adviser ceases to act as an investment adviser to the Fund, the Fund will
change its name to one not including "Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in effect
with respect to the Fund until the second anniversary of sole shareholder
approval of such Agreement, and from year to year thereafter if approved
annually (i) by the Fund's Board of Trustees or by the holders of a majority of
its outstanding voting securities and (ii) by a majority of the trustees who
are not "interested persons" (as defined in the 1940 Act) of any party to the
Advisory Agreement, by vote cast in person at a meeting called for the purpose
of voting on such approval.
The Advisory Agreement was agreed to in principle by the Fund's Board
of Trustees at a telephonic meeting of the Board of Trustees held on October
23, 2003, including a majority of the trustees who are not parties to the
agreement or interested persons of any such party (as such term is defined in
the 1940 Act). The 1940 Act requires that the Advisory Agreement be approved by
a majority of the Fund's Board of Trustees, including a majority of the
trustees who are not interested persons as that term is defined in the 1940
Act, at an in person meeting of the Board of Trustees. The non-interested
members of the Board of Trustees subsequently met in person on November 19,
2003, at which time they and the entire Board approved the Advisory Agreement.
In determining whether to approve the Advisory Agreement, the Fund's
non-interested trustees considered, among other factors, (i) the services to be
provided to the Fund by the Investment Adviser and the sub-administrator (ii)
the team of investment advisory personnel assigned to the Fund, (iii) the
Gabelli organization's experience with closed-end funds, (iv) the
investment objective and policies of the Fund, (v) the terms of the Advisory
Agreement and the undertaking of the Investment Adviser in regard to advisory
fees on leverage used by the Fund, and (vi) the Fund's anticipated fee and
expense data (based in part on the terms of the Advisory Agreement) as compared
to other closed-end funds managed by the Investment Adviser and a peer group of
closed-end equity funds in various asset ranges. The non-interested Directors
indicated that the primary factors in their determination to approve the
Advisory Agreement were the experience of the Investment Adviser and the Fund's
portfolio management team, the comparability of the Fund's fee structure and
anticipated total expense ratio with the other funds reviewed and the
undertaking of the Investment Adviser not to charge an advisory fee on leverage
obtained through the issuance of preferred stock if the Fund's total return
does not at least equal the cost of such shares.
The Advisory Agreement terminates automatically on its assignment and
may be terminated without penalty on 60 days written notice at the option of
either party thereto or by a vote of a majority (as defined in the 1940 Act)
of the Fund's outstanding shares.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund,
the Investment Adviser is responsible for placing purchase and sale orders and
the allocation of brokerage on behalf of the Fund. Transactions in equity
securities are in most cases effected on U.S. stock exchanges and involve the
payment of negotiated brokerage commissions. In general, there may be no
stated commission in the case of securities traded in over-the-counter
markets, but the prices of those securities may include undisclosed
commissions or mark-ups. Principal transactions are not entered into with
affiliates of the Fund. However, Gabelli & Company, Inc. may execute
transactions in the over-the-counter markets on an agency basis and receive a
stated commission therefrom. To the extent consistent with applicable
provisions of the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, as well as other regulatory requirements, the Fund's Board of
Trustees have determined that portfolio transactions may be executed through
Gabelli & Company, Inc. and its broker-dealer affiliates if, in the judgment
of the Investment Adviser, the use of those broker-dealers is likely to result
in price and execution at least as favorable as those of other qualified
broker-dealers, and if, in particular transactions, those broker-dealers
charge the Fund a rate consistent with that charged to comparable unaffiliated
customers in similar transactions. The Fund has no obligations to deal with
any broker or group of brokers in executing transactions in portfolio
securities. In executing transactions, the Investment Adviser seeks to obtain
the best price and execution for the Fund, taking into account such factors as
price, size of order, difficulty of execution and operational facilities of
the firm involved and the firm's risk in positioning a block of securities.
While the Investment Adviser generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission available.
Subject to obtaining the best price and execution, brokers who
provide supplemental research, market and statistical information to the
Investment Adviser or its affiliates may receive orders for transactions by
the Fund. The term "research, market and statistical information" includes
advice as to the value of securities, and advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Advisory Agreement and the
expenses of the Investment Adviser will not necessarily be reduced as a result
of the receipt of such supplemental information. Such information may be
useful to the Investment Adviser and its affiliates in providing services to
clients other than the Fund, and not all such information is used by the
Investment Adviser in connection with the Fund. Conversely, such information
provided to the Investment Adviser and its affiliates by brokers and dealers
through whom other clients of the Investment Adviser and its affiliates effect
securities transactions may be useful to the Investment Adviser in providing
services to the Fund.
Although investment decisions for the Fund are made independently from
those for the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made for those
other accounts. When the same securities are purchased for or sold by the Fund
and any of such other accounts, it is the policy of the Investment Adviser and
its affiliates to allocate such purchases and sales in the manner deemed fair
and equitable to all of the accounts, including the Fund.
PORTFOLIO TURNOVER
Portfolio turnover rate is calculated by dividing the lesser of an
investment company's annual sales or purchases of portfolio securities by the
monthly average value of securities in its portfolio during the year,
excluding portfolio securities the maturities of which at the time of
acquisition were one year or less. A high rate of portfolio turnover involves
correspondingly greater brokerage commission expense than a lower rate, which
expense must be borne by the Fund and indirectly by its shareholders. A higher
rate of portfolio turnover may also result in taxable gains being passed to
shareholders sooner than would otherwise be the case. The Fund anticipates
that its annual portfolio turnover rate will be less than 100%.
TAXATION
The following discussion is a brief summary of certain U.S. federal
income tax considerations affecting the Fund and its shareholders. 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 shareholders (including
shareholders owning a large position in the Fund), and the discussions set
forth here and in the Prospectus do not constitute tax advice. Investors are
urged to consult their own tax advisers with any specific questions relating
to U.S. federal, state, local and foreign taxes. The discussion reflects
applicable tax laws of the United States as of the date of this SAI, which tax
laws may be changed or subject to new interpretations by the courts or the
Internal Revenue Service (the "IRS") retroactively or prospectively.
Taxation of the Fund
The Fund intends to elect to be treated and to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") (a "RIC"). Accordingly, the Fund must, among other
things, (i) derive in each taxable year at least 90% of its gross income
(including tax-exempt interest) from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (ii) diversify its holdings so that, at the end
of each quarter of each taxable year (a) at least 50% of the market value of
the Fund's total assets is represented by cash and cash items, U.S. government
securities, the securities of other RICs and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and not more than 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
market value of the Fund's total assets is invested in the securities of any
issuer (other than U.S. government securities and the securities of other
RICs) or of any two or more issuers that the Fund controls and that are
determined to be engaged in the same business or similar or related trades or
businesses.
As a RIC, the Fund generally is not subject to U.S. federal income
tax on income and gains that it distributes each taxable year to shareholders,
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 gain over net long-term capital loss and
other taxable income, other than any net long-term capital gain, reduced by
deductible expenses) determined without regard to the deduction for dividends
paid and (ii) its net tax-exempt interest (the excess of its gross tax-exempt
interest over certain disallowed deductions). The Fund intends to distribute
at least annually substantially all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount at least equal to the sum of (i) 98% of
its ordinary income (not taking into account any capital gain or loss) for the
calendar year, (ii) 98% of its capital gain in excess of its capital loss
(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 federal income tax. While the Fund intends to
distribute any income and capital gain 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 gain 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.
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 shareholders 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.
If the Fund were unable to satisfy the 90% distribution requirement
or otherwise were to fail to qualify as a RIC in any year, it would be taxed
in the same manner as an ordinary corporation and distributions to the Fund's
shareholders 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 shareholders its earnings and profits
attributable to non-RIC years reduced by an interest charge on 50% of such
earnings and profits payable by the Fund to the IRS. In addition, if the Fund
failed to qualify as a RIC for a period greater than one taxable year, then
the Fund would be required to recognize and pay tax on any net built-in 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, to elect to 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 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 below)
generally will be treated as ordinary income and loss.
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
shareholders. Elections may be available to the Fund to mitigate the effect of
this tax, but such elections generally accelerate the recognition of income
without the receipt of cash. Dividends paid by PFICs will not qualify for the
reduced tax rates discussed below under "Taxation of Shareholders."
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.
As a result of investing in stock of PFICs or securities purchased at
a discount or any other investment that produces income that is not matched by
a corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income
would be treated as income earned by the Fund and therefore would be subject
to the distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income as is required in order to avoid
Fund-level federal income taxation on all of its income, or might prevent the
Fund from distributing enough ordinary income and capital gain net income to
avoid completely the imposition of the excise tax. To avoid this result, the
Fund may be required to borrow money or dispose of securities to be able to
make distributions to its shareholders.
The Fund may issue preferred shares. If it does and does not meet the
asset coverage requirements of the 1940 Act and the Statements of Preferences,
the Fund will be required to suspend distributions to the holders of the
Common Shares 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.
Hedging Transactions
Certain options, futures contracts and options on futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts
are generally considered 60% long-term and 40% short-term capital gain or loss
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year are "marked-to-market" with the result that unrealized gain or
loss is treated as though it was realized and the resulting gain or loss is
treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles"
for U.S. federal income tax purposes. The straddle rules may affect the
character of gain (or loss) realized by the Fund. In addition, loss realized
by the Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
taxable income for the taxable year in which such loss is realized. Further,
the Fund may be required to capitalize, rather than deduct currently, any
interest expense on indebtedness incurred or continued to purchase or carry
any positions that are part of a straddle.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gain or loss
from the affected straddle positions may be determined under rules that vary
according to the election(s) made. The rules applicable under certain of the
elections accelerate the recognition of gain or loss from the affected
straddle positions.
Because application of the straddle rules may affect the character
and timing of the Fund's gains, losses and deductions, the amount which must
be distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
Foreign Taxes
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. The Fund 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 shareholders 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 Shareholders
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 shareholders, 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 the Fund by an
amount equal to 65% of the amount of undistributed capital gain included in
such shareholder's gross income.
Distributions paid by the Fund from its net 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
shareholder) (i) for the dividends received deduction available to
corporations, but only to the extent that the Fund's income consists of
dividends received from U.S. corporations and (ii) under the recently enacted
Jobs and Growth Tax Relief Reconciliation Act of 2003 (effective for taxable
years after December 31, 2002 through December 31, 2008) ("2003 Tax Act"), as
qualified dividend income eligible for the reduced maximum rate to individuals
of generally 15% (5% for individuals in lower tax brackets) to the extent that
the Fund receives qualified dividend income. Qualified dividend income is, in
general, dividend income from taxable domestic corporations and certain
foreign corporations (e.g., generally, foreign corporations incorporated in a
possession of the United States or in certain countries with a qualifying
comprehensive tax treaty with the United States, or the stock with respect to
which such dividend is paid is readily tradable on an established securities
market in the United States). Distributions of net capital gain designated as
capital gain distributions, if any, are taxable to shareholders at rates
applicable to long-term capital gain, whether paid in cash or in shares, and
regardless of how long the shareholder has held the Fund's shares. Capital
gain distributions are not eligible for the dividends received deduction.
Under the 2003 Tax Act, the maximum tax rate on net long-term capital gain of
individuals is reduced generally from 20% to 15% (5% for individuals in lower
brackets) for such gain realized on or after May 6, 2003 and before January 1,
2009. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gain to such holder
(assuming the shares are held as a capital asset). For non-corporate
taxpayers, under the 2003 Tax Act, investment company taxable income (other
than qualified dividend income) will currently be taxed at a maximum rate of
35%, 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%.
Shareholders may be entitled to offset their capital gain
distributions 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,
shareholders with capital loss are urged to consult their tax advisers.
The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them even though it
represents in part a return of invested capital.
Upon a sale, exchange or other disposition of shares, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. Such gain or loss will be treated as long-term capital gain or loss if
the shares have been held for more than one year. Any loss realized on a sale
or exchange will be disallowed to the extent the shares disposed of are
replaced within a 61-day period beginning 30 days before and ending 30 days
after the date that the shares are disposed of. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by
the shareholder 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 shareholder (or amounts credited to the shareholder as an
undistributed capital gain) with respect to such shares.
Ordinary income distributions and capital gain distributions also may
be subject to state and local taxes. Shareholders 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.
Ordinary income distributions (but not capital gain distributions)
paid to shareholders who are non-resident aliens or foreign entities (a
"foreign investor") will generally be subject to a 30% U.S. withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities, unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Different tax consequences may result if
the foreign investor is engaged in a trade or business in the United States
or, in the case of an individual, is present in the United States for 183 or
more days during a taxable year and certain other conditions are met. Foreign
investors are urged to consult their own tax advisers concerning the
applicability of the U.S. withholding tax.
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
shareholders 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 shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action, either prospectively or retroactively. Persons considering an
investment in common shares should consult their own tax advisers regarding
the purchase, ownership and disposition of common shares.
NET ASSET VALUE
The net asset value of the Fund's shares will be computed based on
the market value of the assets it holds and will generally be determined
daily as of the close of regular trading on the New York Stock Exchange. The
net asset value of the Fund's shares is reported to the financial press on a
weekly basis.
Portfolio instruments of the Fund which are traded in a market
subject to government regulation on which trades are reported
contemporaneously generally will be valued at the last sale price on the
principal market for such instruments as of the close of regular trading on
the day the instruments are being valued, or lacking any sales, at the average
of the bid and asked price on the principal market for such instruments on the
most recent date on which bid and asked prices are available. Initial public
offering securities are initially valued at cost, and thereafter as any other
equity security. Other readily marketable assets will be valued at the average
of quotations provided by dealers maintaining an active market in such
instruments. Short-term debt instruments that are credit impaired or mature in
more than 60 days for which market quotations are available are valued at the
latest average of the bid and asked prices obtained from a dealer maintaining
an active market in that security. Short-term investments that are not credit
impaired and mature in 60 days or fewer are valued at amortized cost from
purchase price or value on the 61st day prior to maturity. Securities and
other assets for which market quotations are not readily available will be
valued at fair value as determined in good faith by or under the direction of
the Investment Adviser in accordance with guidelines adopted by the Fund. The
Fund may employ recognized pricing services from time to time for the purpose
of pricing portfolio instruments (including non-U.S. dollar-denominated assets
and futures and options).
Trading takes place in various foreign markets on days which are not
Business Days and on which therefore the Fund's net asset value per share is
not calculated. The calculation of the Fund's net asset value may not take
place contemporaneously with the determination of the prices of portfolio
securities held by the Fund. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
close of the NYSE will not be reflected in the Fund's calculation of net asset
value unless the Investment Adviser, pursuant to procedures established by the
Board of Trustees, deems that the particular event would materially affect the
net asset value, in which case the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees.
Net asset value per Common Share is calculated by dividing the value
of the securities held plus any cash or other assets minus all liabilities,
including accrued expenses, and minus the aggregate liquidation preference of
any preferred shares by the total number of shares outstanding at such time.
GENERAL INFORMATION
Book-Entry-Only Issuance
DTC will act as securities depository for the Common Shares offered
pursuant to the Prospectus. The information in this section concerning DTC and
DTC's book-entry system is based upon information obtained from DTC. The
securities offered hereby initially will be issued only as fully-registered
securities registered in the name of Cede & Co. (as nominee for DTC). One or
more fully-registered global security certificates initially will be issued,
representing in the aggregate the total number of securities, and deposited
with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilities the settlement among participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct DTC participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with a direct participant, either directly or
indirectly through other entities.
Purchases of securities within the DTC system must be made by or
through direct participants, which will receive a credit for the securities on
DTC's records. The ownership interest of each actual purchaser of a security,
a beneficial owner, is in turn to be recorded on the direct or indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the direct or indirect
participants through which the beneficial owners purchased securities.
Transfers of ownership interests in securities are to be accomplished by
entries made on the books of participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interests in securities, except as provided herein.
DTC has no knowledge of the actual beneficial owners of the
securities being offered pursuant to this Prospectus; DTC's records reflect
only the identity of the direct participants to whose accounts such securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Payments on the securities will be made to DTC. DTC's practice is to
credit direct participants' accounts on the relevant payment date in
accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of such
participant and not of DTC or the Fund, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of 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.
Counsel and Independent Auditors
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is counsel to the Fund in connection with the issuance of
the Common Shares.
PricewaterhouseCoopers LLP serve as auditors 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 have been filed with the Securities and Exchange Commission
and can be reviewed and copied at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. and information on the operation of
the Public Reference Room may be obtained by calling the Securities and
Exchange Commission at 202-942-8090. The proxy voting procedures are also
available on the EDGAR Database on the Securities and Exchange Commission's
Internet site at http:// www.sec.gov, and copies of the proxy voting
procedures may be obtained, after paying a duplicating fee, by electronic
request at the following E-mail address: publicinfo@sec.gov, or by writing the
Securities and Exchange Commission's Public Reference Section, Washington,
D.C. 20549-0102. In addition, information on how the Fund voted proxies
relating to voting securities during the most recent twelve month period is
available, upon request, by calling 800-GABELLI (800-422-3554). The proxy
voting procedures are also available at http://www.gabelli.com and on the
Security and Exchange Commissions website at http://www.sec.gov.
CODE OF ETHICS
The Fund and the Investment Adviser have adopted a code of ethics.
This code of ethics sets forth restrictions on the trading activities of
trustees/directors, officers and employees of the Fund, the Investment Adviser
and their affiliates. For example, such persons may not purchase any security
for which the Fund has a purchase or sale order pending, or for which such
trade is under consideration. In addition, those trustees/directors, officers
and employees that are principally involved in investment decisions for client
accounts are prohibited from purchasing or selling for their own account for a
period of seven days a security that has been traded for a client's account,
unless such trade is executed on more favorable terms for the client's account
and it is determined that such trade will not adversely affect the client's
account. Short-term trading by such trustee/directors, officers and employees
for their own accounts in securities held by a Fund client's account is also
restricted. The above examples are subject to certain exceptions and they do
not represent all of the trading restrictions and policies set forth by the
code of ethics. The code of ethics is on file with the Securities and Exchange
Commission and can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C., and information on the
operation of the Public Reference Room may be obtained by calling the
Securities and Exchange Commission at 202-942-8090. The code of ethics is also
available on the EDGAR Database on the Securities and Exchange Commission's
Internet site at http:// www.sec.gov, and copies of the code of ethics may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Section, Washington, D.C. 20549-0102.
CODE OF CONDUCT FOR CHIEF EXECUTIVE AND SENIOR FINANCIAL OFFICERS
The Fund and the Investment Adviser have adopted a code of conduct.
This code of conduct sets forth policies to guide the chief executive and
senior financial officers in the performance of their duties. The code of
conduct is on file with the Securities and Exchange Commission and can be
reviewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C., and information on the operation of the
Public Reference Room may be obtained by calling the Securities and Exchange
Commission at 202-942-8090. The code of ethics is also available on the EDGAR
Database on the Securities and Exchange Commission's Internet site at http://
www.sec.gov, and copies of the code of ethics may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
publicinfo@sec.gov, or by writing the Securities and Exchange Commission's
Public Reference Section, Washington, D.C. 20549-0102.
REPORT OF INDEPENDENT AUDITORS
To the Shareholder and Board of Trustees of
The Gabelli Dividend & Income Trust
In our opinion, the accompanying statement of net assets presents fairly, in
all material respects, the financial position of The Gabelli Dividend & Income
Trust (the "Fund") at November 18, 2003, in conformity with accounting
principles generally accepted in the United States of America. This financial
statement is the responsibility of the Fund's management; our responsibility is
to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
New York, New York
November 20, 2003
THE GABELLI DIVIDEND & INCOME TRUST
STATEMENT OF NET ASSETS
November 18, 2003
ASSETS
Cash $ 137,214
NET ASSETS $ 137,214
Net Assets consist of:
Shares of beneficial interest, at par value (Note 4) $ 7
Additional paid-in-capital 137,207
NET ASSETS $ 137,214
Net asset value per share: $ 19.10
($137,214/7,184 shares outstanding)
See accompanying notes to financial statement
THE GABELLI DIVIDEND & INCOME TRUST
NOTES TO STATEMENT OF NET ASSETS
November 18, 2003
Note 1 - Organization
The Gabelli Dividend & Income Trust (the "Fund") is a closed-end
non-diversified management investment company organized under the laws of the
state of Delaware on August 20, 2003 and has had no operations to date other
than matters relating to its organization under the Investment Company Act of
1940, as amended, and the sale and issuance of 7,184 of its shares of
beneficial interest to Gabelli Funds, LLC, the Fund's investment adviser (the
"Adviser").
The Fund's investment objective is to seek a high level of total return with an
emphasis on dividends and income. The Fund will attempt to achieve its
investment objective by investing, under normal market conditions, at least 80%
of its assets in dividend paying securities (such as common and preferred
stock) or other income producing securities (such as fixed income debt
securities and securities that are convertible into equity securities).
Note 2 - Significant Accounting Policies
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies followed by the Fund in the preparation of its
financial statements.
Organization Expenses and Offering Costs: Organization expenses relating to the
Fund have been incurred by the Adviser of approximately $37,200. Upon
commencement of operations, the offering costs (other than the sales load) will
be borne by the Fund and its shareholders and will be accounted for as a
reduction to paid-in-capital up to $0.04 per share including the shares issued
in the public offering. The Adviser has agreed to pay the Fund's offering costs
(other than the sales load) that exceed $0.04 per share of beneficial interest.
Federal Taxes: The Fund intends to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended, and
distribute all its taxable income. In addition, by distributing in each
calendar year substantially all of its net investment income, capital gains and
certain other amounts, if any, the Fund will not be subject to Federal income
or excise tax.
Note 3 - Investment Adviser and Other Transactions with Affiliates
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with the Adviser which provides that the Fund will pay the Adviser
a fee, computed daily and paid monthly, at the annual rate of 1.00% of the
value of the Fund's average daily net assets. In accordance with the Advisory
Agreement, the Adviser provides a continuous investment program for the Fund's
portfolio, oversees the administration of all aspects of the Fund's business
and affairs and pays the compensation of all Officers and Directors of the Fund
who are its affiliates.
Note 4 - Fund Shares
The Fund is authorized to issue an unlimited number of common shares of
beneficial interest, par value $0.001 per share. At November 18, 2003, there
were 7,184 shares issued and outstanding.
Note 5 - Initial Public Offering
The Fund has commenced an offering of its shares in a public offering and has
entered into an underwriting agreement with several underwriters, including
Gabelli & Company, Inc., an affiliate of the Fund's Adviser.
The Adviser has agreed to pay certain fees to the underwriters and to other
parties in connection with the offering. Such offering costs will be borne by
the Fund's Adviser as described in Note 2.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Part A - None
Part B - Statement of Assets and Liabilities.
(2) Exhibits
(a) Agreement and Declaration of Trust of Registrant(1)
(b) Amended and Restated By-Laws of Registrant(1)
(c) Not applicable
(d) Form of Specimen Share Certificate (2)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan
of Registrant(2)
(f) Not applicable
(g) Form of Investment Advisory Agreement between Registrant and
Gabelli Funds, LLC(2)
(h)(1) Form of Purchase Agreement(2)
(h)(2) Form of Distribution Agreement (1)
(i) Not applicable
(j) Form of Custodian Contract between Registrant and Custodian (1)
(k) (i) Form of Registrar, Transfer Agency and Service Agreement
between Registrant and Transfer Agent(1)
(ii) Form of Additional Compensation Agreement between
Registrant and Merrill Lynch (1)
(iii) Form of Additional Compensation Agreement between
Registrant and Citigroup (1)
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP
with respect to legality(1)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(1)
(ii) Powers of Attorney(2)
(o) Not applicable
(p) Form of Initial Subscription Agreement (2)
(q) Not applicable
(r) (i) Codes of Ethics of the Fund and the Investment
Adviser(2)
(ii) Code of Conduct for Chief Executive and Senior Financial
Officers(2)
___________________
(1) Filed herewith.
(2) Incorporated by reference from Pre-Effective Amendment No.1 to the
Registrant's Registration Statement on Form N-2, filed with the
Securities and Exchange Commission on October 27, 2003.
Item 25. Marketing Arrangements
Reference is made to Exhibit 2(h) to this Registration Statement to
be filed by amendment.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration
Statement:
NYSE listing fee.................................................$40,000
SEC Registration fees............................................164,710
Printing/engraving expenses......................................300,000
Accounting fees....................................................5,000
Legal fees.......................................................320,000
NASD fee..........................................................30,500
Underwriter Reimbursement........................................435,500
Distribution Expense Reimbursement.............................1,300,000
Miscellaneous......................................................4,290
Total.................................................2,600,000
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of November 21 , 2003
Number of Record
Title of Class Holders
-------------- ----------------
Common Shares of Beneficial Interest 1
Item 29. Indemnification
Article IV of the Registrant's Agreement and Declaration of Trust
provides as follows:
4.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of
the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a private
corporation for profit incorporated under the general corporation law of the
State of Delaware. No Trustee or officer of the Trust shall be subject in such
capacity to any personal liability whatsoever to any Person, other than the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, save only liability to the Trust or its Shareholders arising from
bad faith, willful misfeasance, gross negligence or reckless disregard for his
duty to such Person; and, subject to the foregoing exception, all such Persons
shall look solely to the Trust Property for satisfaction of claims of any
nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee or officer, as such, of the Trust, is made a party to any
suit or proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal
liability.
4.2 Mandatory Indemnification. (a) The Trust shall indemnify the Trustees and
officers of the Trust (each such person being an "indemnitee") against any
liabilities and expenses, including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which he
may be or may have been involved as a party or otherwise (other than, except
as authorized by the Trustees, as the plaintiff or complainant) or with which
he may be or may have been threatened, while acting in any capacity set forth
above in this Section 4.2 by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall not have acted in good
faith in the reasonable belief that his action was in the best interest of the
Trust or, in the case of any criminal proceeding, as to which he shall have
had reasonable cause to believe that the conduct was unlawful, provided,
however, that no indemnitee shall be indemnified hereunder against any
liability to any person or any expense of such indemnitee arising by reason of
(i) willful misfeasance, (ii) bad faith, (iii) gross negligence (negligence in
the case of Affiliated Indemnitees), or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct referred to in such
clauses (i) through (iv) being sometimes referred to herein as "disabling
conduct"). Notwithstanding the foregoing, with respect to any action, suit or
other proceeding voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action,
suit or other proceeding by such indemnitee was authorized by a majority of
the Trustees.
(b) Notwithstanding the foregoing, no
indemnification shall be made hereunder unless there has been a determination
(1) by a final decision on the merits by a court or other body of competent
jurisdiction before whom the issue of entitlement to indemnification hereunder
was brought that such indemnitee is entitled to indemnification hereunder or,
(2) in the absence of such a decision, by (i) a majority vote of a quorum of
those Trustees who are neither Interested Persons of the Trust nor parties to
the proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is
entitled to indemnification hereunder, or (ii) if such quorum is not
obtainable or even if obtainable, if such majority so directs, independent
legal counsel in a written opinion conclude that the indemnitee should be
entitled to indemnification hereunder. All determinations to make advance
payments in connection with the expense of defending any proceeding shall be
authorized and made in accordance with the immediately succeeding paragraph
(c) below.
(c) The Trust shall make advance payments in
connection with the expenses of defending any action with respect to which
indemnification might be sought hereunder if the Trust receives a written
affirmation by the indemnitee of the indemnitee's good faith belief that the
standards of conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined that
he is entitled to such indemnification and if a majority of the Trustees
determine that the applicable standards of conduct necessary for
indemnification appear to have been met. In addition, at least one of the
following conditions must be met: (1) the indemnitee shall provide adequate
security for his undertaking, (2) the Trust shall be insured against losses
arising by reason of any lawful advances, or (3) a majority of a quorum of the
Disinterested Non-Party Trustees, or if a majority vote of such quorum so
direct, independent legal counsel in a written opinion, shall conclude, based
on a review of readily available facts (as opposed to a full trial-type
inquiry), that there is substantial reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
(d) The rights accruing to any indemnitee under
these provisions shall not exclude any other right to which he may be lawfully
entitled.
(e) Notwithstanding the foregoing, subject to any
limitations provided by the 1940 Act and this Declaration, the Trust shall
have the power and authority to indemnify Persons providing services to the
Trust to the full extent provided by law as if the Trust were a corporation
organized under the Delaware General Corporation Law provided that such
indemnification has been approved by a majority of the Trustees.
4.3 No Duty of Investigation; Notice in Trust Instruments, etc. No purchaser,
lender, transfer agent or other person dealing with the Trustees or with any
officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, undertaking, instrument, certificate, Share, other security of the
Trust, and every other act or thing whatsoever executed in connection with the
Trust shall be conclusively taken to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or
in their capacity as officers, employees or agents of the Trust. The Trustees
may maintain insurance for the protection of the Trust Property, its
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable or is
required by the 1940 Act.
4.4 Reliance on Experts, etc. Each Trustee and officer or employee of the
Trust shall, in the performance of its duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
the Trust's officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or
employees of the Trust, regardless of whether such counsel or other person may
also be a Trustee.
Section 9 of the Investment Advisory Agreement between the Registrant
and Gabelli Funds, LLC provides:
(a) The Fund hereby agrees to indemnify the Adviser and each of the
Adviser's trustees, officers, employees, and agents (including any individual
who serves at the Adviser's request as director, officer, partner, trustee or
the like of another corporation) and controlling persons (each such person
being an "indemnitee") against any liabilities and expenses, including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees (all as provided in accordance with applicable corporate law)
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which he may be or
may have been involved as a party or otherwise or with which he may be or may
have been threatened, while acting in any capacity set forth above in this
paragraph or thereafter by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall have been adjudicated
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe that the conduct
was unlawful, provided, however, that (1) no indemnitee shall be indemnified
hereunder against any liability to the Fund or its shareholders or any expense
of such indemnitee arising by reason of (i) willful misfeasance, (ii) bad
faith, (iii) gross negligence, (iv) reckless disregard of the duties involved
in the conduct of his position (the conduct referred to in such clauses (i)
through (v) being sometimes referred to herein as "disabling conduct"), (2) as
to any matter disposed of by settlement or a compromise payment by such
indemnitee, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless
there has been a determination that such settlement or compromise is in the
best interests of the Fund and that such indemnitee appears to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Fund and did not involve disabling conduct by such indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily prosecuted by any
indemnitee as plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such indemnitee was
authorized by a majority of the full Board of the Fund. Notwithstanding the
foregoing the Fund shall not be obligated to provide any such indemnification
to the extent such provision would waive any right which the Fund cannot
lawfully waive.
(b) The Fund shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the Fund receives a written affirmation of the indemnitee's
good faith belief that the standard of conduct necessary for indemnification
has been met and a written undertaking to reimburse the Fund unless it is
subsequently determined that he is entitled to such indemnification and if the
trustees of the Fund determine that the facts then known to them would not
preclude indemnification. In addition, at least one of the following conditions
must be met: (A) the indemnitee shall provide a security for his undertaking,
(B) the Fund shall be insured against losses arising by reason of any lawful
advances, or (C) a majority of a quorum of trustees of the Fund who are neither
"interested persons" of the Fund (as defined in Section 2(a)(19) of the Act)
nor parties to the proceeding ("Disinterested Non-Party Trustees") or an
independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the indemnitee ultimately will be found
entitled to indemnification.
(c) All determinations with respect to indemnification hereunder shall
be made (1) by a final decision on the merits by a court or other body before
whom the proceeding was brought that such indemnitee is not liable by reason of
disabling conduct or, (2) in the absence of such a decision, by (i) a majority
vote of a quorum of the Disinterested Non-party Trustees of the Fund, or (ii)
if such a quorum is not obtainable or even, if obtainable, if a majority vote
of such quorum so directs, independent legal counsel in a written opinion.
The rights accruing to any indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled.
The following subsections of Section 6 of The Underwriting Agreement
among the Registrant, Gabelli Funds, LLC and the Underwriters provide:
(a) Indemnification of Underwriters. The Fund and the Investment
Adviser, jointly and severally, agree to indemnify and hold harmless each of
you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation), joint or several,
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, the Prospectus, any
Prepricing Prospectus, any sales material (or any amendment or supplement to
any of the foregoing), or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in writing to the
Fund by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) on account of any such loss, claim, damage, liability or
expense arising from the sale of the Shares by such Underwriter to any person
if a copy of the Prospectus shall not have been delivered or sent to such
person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission
or alleged omission of a material fact contained in such preliminary prospectus
was corrected in the Prospectus, provided that the Fund has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending. The foregoing indemnity agreement shall be
in addition to any liability that the Fund or the Investment Adviser may
otherwise have.
(c) Indemnification of Fund and Investment Adviser by Underwriters.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Fund and the Investment Adviser, their trustees, their directors,
any officers who sign the Registration Statement, and any person who controls
the Fund or the Investment Adviser within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act, to the same extent as the foregoing
indemnity from the Fund and the Investment Adviser to each Underwriter, but
only with respect to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in
the Registration Statement, the Prospectus or any preliminary prospectus, or
any amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Fund or the Investment Adviser, any of their trustees,
their directors, any such officer, or any such controlling person based on the
Registration Statement, the Prospectus or any preliminary prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Underwriter pursuant to this paragraph (c), such Underwriter
shall have the rights and duties given to the Fund and the Investment Adviser
by paragraph (b) above (except that if the Fund or the Investment Adviser shall
have assumed the defense thereof such Underwriter shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Fund and the Investment Adviser, their
trustees, their directors, any such officer, and any such controlling person
shall have the rights and duties given to the Underwriters by paragraph (b)
above. The foregoing indemnity agreement shall be in addition to any liability
that the Underwriters may otherwise have.
(f) Notwithstanding any other provisions in this Section 6 or Section
7, no party shall be entitled to indemnification or contribution under this
Agreement against any loss, claim, liability, expense or damage arising by
reason of such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties in the performance of its duties hereunder.
Item 30. Business and Other Connections of Investment Adviser
The Investment Adviser, a limited liability company organized under
the laws of the State of New York, acts as investment adviser to the
Registrant. The Registrant is fulfilling the requirement of this Item 30 to
provide a list of the officers and trustees 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 trustees during the past two years, by incorporating by
reference the information contained in the Form ADV of the Investment Adviser
filed with the commission pursuant to the Investment Advisers Act of 1940
(Commission File No. 801-26202).
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at
the office of the Investment Adviser at One Corporate Center, Rye, New York
10580-1422, in part at the offices of the Custodian, State Street Bank and
Trust Company, One Heritage Drive, Palmer 2N,North Quincy, MA 02171, at the
offices of the Fund's Administrator, PFPC, Inc, 3200 Horizon Drive, King of
Prussia, Pennsylvania 19406, and in part at the offices of the transfer agent,
Equiserve Trust Company, N.A., located at P.O. Box 43025, Providence, RI
09240-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares
until the prospectus is amended, if subsequent to the
effective date of this registration statement, its net asset
value declines more than ten percent from its net asset
value, as of the effective date of the registration
statement or its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining
any liability under the 1933 Act the information omitted
from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant
pursuant to Rule 497(h) will be deemed to be a part of the
Registration Statement as of the time it was declared
effective.
Registrant undertakes that, for the purpose of determining
any liability under the 1933 Act, each post-effective
amendment that contains a form of prospectus will be deemed
to be a new Registration Statement relating to the
securities offered therein, and the offering of such
securities at that time will be deemed to be the initial
bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information constituting Part B of
this Registration Statement.
SIGNATURES
As required by the Securities Act of 1933, as amended, this
Registrant's Registration Statement has been signed on behalf of the
Registrant, in the City of Rye, State of New York, on the 21st day of
November, 2003.
THE GABELLI DIVIDEND & INCOME TRUST
By: /s/ Bruce N. Alpert
________________________________
Bruce N. Alpert
President
By: /s/ Richard C. Sell, Jr.
________________________________
Richard C. Sell, Jr.
Treasurer
As required by the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities set forth below on the 21st day of November, 2003.
Name Title
Signature Title
* Trustee, Chairman and Chief Investment Officer
-------------------------------------------------------
Mario J. Gabelli
* Trustee
-------------------------------------------------------
Anthony J. Colavita
* Trustee
-------------------------------------------------------
James P. Conn
* Trustee
-------------------------------------------------------
Mario d'Urso
* Trustee
-------------------------------------------------------
Frank J. Fahrenkopf, Jr.
* Trustee
-------------------------------------------------------
Michael J. Melarkey
Trustee
-------------------------------------------------------
Karl Otto Pohl
* Trustee
-------------------------------------------------------
Salvatore M. Salibello
* Trustee
-------------------------------------------------------
Edward T. Tokar
* Trustee
-------------------------------------------------------
Anthonie C. van Ekris
* Trustee
-------------------------------------------------------
Salvatore J. Zizza
/s/ Bruce N. Alpert
-------------------------------------------------------
Bruce N. Alpert President
Attorney-in-Fact
* Pursuant to a Power of Attorney.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99 (a) Agreement and Declaration of Trust*
EX-99 (b) Amended and Restated By-Laws*
EX-99 (d) Form of Specimen Common Share Certificate**
EX-99 (e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan**
EX-99 (g) Investment Advisory Agreement between Registrant and Gabelli Funds,
LLC**
EX-99 (h)(1) Form of Purchase Agreement**
EX-99 (h)(2) Form of Distribution Agreement*
EX-99 (j) Form of Custodian Agreement between Registrant and Custodian*
EX-99 (k)(i) Form of Registrar, Transfer Agency and Service Agreement between Registrant and
Transfer Agent*
EX-99 (k)(ii) Form of Additional Compensation Agreement between Registrant and Merrill Lynch*
EX-99 (k)(iii) Form of Additional Compensation Agreement between Registrant and Citigroup*
EX-99 (1) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP*
EX-99 (n) (i) Consent of Independent Auditors*
EX-99 (n) (ii) Powers of Attorney**
EX-99 (p) Form of Initial Subscription Agreement**
EX-99 (r)(i) Code of Ethics**
EX-99 (r)(ii) Code of Conduct for Chief Executive and Senior Financial Officers **
*Filed Herewith.
**Previously filed.