As filed with the Securities and Exchange Commission on October 7, 2004
Securities Act File No. 333-113708
Investment Company Act File No. 811-21423
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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. 8
(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.
Skadden, Arps, Slate, James E. McKee, Esq. Leonard B. Mackey, Jr., Esq.
Meagher & Flom LLP The Gabelli Dividend & Income Trust Clifford Chance US LLP
Four Times Square One Corporate Center 31 West 52nd Street
New York, New York 10036 Rye, New York 10580-1422 New York, New York 10019
(212) 735-3000 (914) 921-5100 (212) 878-8000
________________________
1
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(1) Registration Fee(2)
------------------- ---------- --------- -------- -------------------
___% Series A Preferred 6,000,000 Shares $25 $150,000,000 19,005.00
Auction Market 8,000 Shares $25,000 $200,000,000 25,340.00
Preferred Shares
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $38,010.70 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.
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2
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 Series A Preferred and the AMPS;
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 Series A
Preferred and the AMPS; Description of the Authorized
and Outstanding Shares; 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
3
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.
4
[FLAG]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated October 5, 2004
PROSPECTUS $300,000,000 [GABELLI LOGO]
The Gabelli Dividend & Income Trust
Shares, % Series A Cumulative Preferred Shares
(Liquidation Preference $25 per Share)
Shares, Series B Auction Market Preferred Shares
(Liquidation Preference $25,000 per Share)
Shares, Series C Auction Market Preferred Shares
(Liquidation Preference $25,000 per Share)
________________
The Gabelli Dividend & Income Trust, or the Fund, is a
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940. The Fund's investment objective is to seek a
high level of total return with an emphasis on dividends and income. The Fund
attempts to achieve its objective by investing at least 80% of its assets in
dividend paying or other income producing securities under normal market
conditions. 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, Gabelli Funds, LLC, which serves as investment adviser to
the Fund, looks for securities that have a superior yield, as well as capital
gains potential. The Fund commenced its investment operations on November 28,
2003. We cannot assure you that the Fund's objective will be achieved.
(continued on following page)
Investing in our Series A Preferred or AMPS involves risks that are
described in the "Risk Factors and Special Considerations" section beginning
on page 35 of this prospectus.
________________
Public Proceeds to the
Offering Fund (before
Price(1) Underwriting Discount expenses)(2)
-------- --------------------- ------------
Per Series A Cumulative Preferred $ $ $
Share..............................
Total.............................. $ $ $
Per Series B AMPS.................. $ $ $
Total.............................. $ $ $
Per Series C AMPS.................. $ $ $
Total.............................. $ $ $
(1) Plus accumulated dividends, if any, from , 2004
(2) Offering expenses payable by the Fund are estimated at $
The underwriters may also purchase up to an additional Series A
Preferred at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover overallotments.
This prospectus describes the Fund's % Series A Cumulative Preferred
Shares (the "Series A Preferred"), liquidation preference $25 per share.
Dividends on the Series A Preferred are cumulative from their original issue
date at the annual rate of % of the liquidation preference of $25 per share
and are payable quarterly on , , and in each year, commencing on , 2004.
This prospectus also describes the Fund's Series B Auction Market
Preferred Shares (the "Series B AMPS"), liquidation preference $25,000 per
share and the Fund's Series C Auction Market Preferred Shares (the "Series C
AMPS") (Series B AMPS together with the Series C AMPS, the "AMPS"). The
dividend rate for the AMPS will vary from dividend period to dividend period.
The annual dividend rate for the initial dividend period will be % for the
Series B AMPS, and % for the Series C AMPS, of the liquidation preference of
$25,000 per share. The initial dividend period for the Series B AMPS commences
on the date of issuance and continues through , 2004. The initial dividend
period for the Series C AMPS commences on the date of issuance and continues
through , 2004. For subsequent dividend periods, the AMPS will pay dividends
based on a rate set at auction, usually held weekly.
The Fund offers by this prospectus, in the aggregate, $ million of
preferred shares of either Series A Preferred, Series B AMPS or Series C AMPS,
or a combination of all series.
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 Series A Preferred and/or AMPS being offered by this prospectus
are being offered by the underwriters listed in this prospectus, subject to
prior sale, when, as and if accepted by them and subject to certain
conditions. The Fund expects that delivery of any Series A Preferred or AMPS
will be made in book-entry form through the facilities of The Depository Trust
Company on or about , 2004.
_______________
Merrill Lynch & Co. Citigroup
A.G. Edwards Gabelli & Company, Inc.
_______________
The date of this prospectus is , 2004.
6
(continued from previous page)
Application has been made to list the Series A Preferred on the New
York Stock Exchange. Subject to notice of issuance, trading of the Series A
Preferred on the New York Stock Exchange is expected to commence within 30
days of the date of this prospectus. Prior to this offering, there has been no
public market for the Series A Preferred. See "Underwriting."
The net proceeds of the offering, which are expected to be $ , will
be invested in accordance with the Fund's investment objective and policies.
See "Investment Objective and Policies" beginning on page 27.
The Fund expects that dividends paid on the Series A Preferred and
AMPS will consist of (i) long-term capital gain (gain from the sale of a
capital asset held longer than 12 months), (ii) qualified dividend income
(dividend income from certain domestic and foreign corporations) and (iii)
investment company taxable income (other than qualified dividend income),
including interest income, short-term capital gain and income from certain
hedging and interest rate transactions. For individuals, the maximum federal
income tax rate on long-term capital gain is currently 15%, on qualified
dividend income is currently 15%, and on ordinary income (such as
distributions from investment company taxable income that are not eligible for
treatment as qualified dividend income) is currently 35%. These tax rates are
scheduled to apply through 2008. We cannot assure you, however, as to what
percentage of the dividends paid on the Series A Preferred or AMPS will
consist of long-term capital gains and qualified dividend income, which are
taxed at lower rates for individuals than ordinary income. For a more detailed
discussion, see "Taxation."
Neither the Series A Preferred nor the AMPS may be issued unless each
is rated "Aaa" by Moody's Investors Service, Inc. ("Moody's"). In addition,
the AMPS may not be issued unless they are also rated "AAA" by Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P").
In order to keep these ratings, the Fund will be required to maintain a
minimum discounted asset coverage with respect to its outstanding Series A
Preferred and AMPS under guidelines established by each of Moody's and S&P.
See "Description of the Series A Preferred and the AMPS - Rating Agency
Guidelines." The Fund is also required to maintain a minimum asset coverage by
the Investment Company Act of 1940. If the Fund fails to maintain any of these
minimum asset coverage requirements, the Fund may, at its option (and in
certain circumstances must) require, in accordance with its governing
documents and the requirements of the Investment Company Act of 1940, that
some or all of its outstanding preferred shares, including the Series A
Preferred and/or AMPS, be sold back to it (redeemed). Otherwise, prior to ,
2009 the Series A Preferred will be redeemable at the option of the Fund only
to the extent necessary for the Fund to continue to qualify for tax treatment
as a regulated investment company. Subject to certain notice and other
requirements (including those set forth in Section 23(c) of the Investment
Company Act of 1940), the Fund at its option may redeem (i) the Series A
Preferred beginning on , 2009 and (ii) the AMPS following the initial dividend
period (so long as the Fund has not designated a non-call period). In the
event the Fund redeems Series A Preferred, such redemption will be for cash at
a redemption price equal to $25 per share plus accumulated but unpaid
dividends (whether or not earned or declared). In the event the Fund redeems
AMPS, such redemptions will be for cash, generally at a redemption price equal
to $25,000 per share plus accumulated but unpaid dividends (whether or not
earned or declared), although if the AMPS have a dividend period of more than
one year, the Fund's Board of Trustees may determine to provide for a
redemption premium.
7
This prospectus concisely sets forth important information about the
Fund that you should know before deciding whether to invest in Series A
Preferred or AMPS. You should read this prospectus and retain it for future
reference.
The Fund has also filed with the Securities and Exchange Commission a
Statement of Additional Information, dated , 2004, which contains additional
information about the Fund. The Statement of Additional Information is
incorporated by reference in its entirety into this prospectus. You can review
the table of contents of the Statement of Additional Information on page 75 of
this prospectus. You may request a free copy of the Statement of Additional
Information by writing to the Fund at its address at One Corporate Center,
Rye, New York 10580-1422 or calling the Fund toll-free at (800) 422-3554. You
may also obtain the Statement of Additional Information as well as reports,
proxy and information statements and other information regarding registrants,
including the Fund, that file electronically with the Securities and Exchange
Commission on the Securities and Exchange Commission's web site
(http://www.sec.gov).
The Fund's Series A Preferred and AMPS 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.
The AMPS will not be listed on an exchange. Investors may only buy or
sell AMPS through an order placed at an auction with or through a
broker-dealer in accordance with the procedures specified in this prospectus
or in a secondary market maintained by certain broker-dealers should those
broker-dealers decide to maintain a secondary market. Broker-dealers are not
required to maintain a secondary market in the AMPS, and a secondary market
may not provide you with liquidity.
8
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................1
Financial Highlights..........................................................24
Use of Proceeds...............................................................25
The Fund......................................................................25
Capitalization................................................................26
Investment Objective and Policies.............................................27
Risk Factors and Special Considerations.......................................35
How the Fund Manages Risk.....................................................44
Management of the Fund........................................................45
Portfolio Transactions........................................................48
Dividends and Distributions...................................................48
Description of The Series A Preferred And AMPS................................49
The Auction of AMPS...........................................................61
Authorized and Outstanding Shares.............................................65
Taxation......................................................................65
Anti-Takeover Provisions of the Fund's Governing Documents....................68
Custodian, Transfer Agent, Auction Agent and Dividend-Disbursing Agent.......69
Underwriting..................................................................71
Legal Matters.................................................................73
Experts .....................................................................73
Additional Information........................................................73
Privacy Principles of the Fund................................................74
Special Note Regarding Forward-Looking Statements.............................74
Table of Contents of the Statement of Additional Information..................75
You should rely only on the information contained in or incorporated
by reference into this prospectus. Neither the Fund nor the underwriters have
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. Neither the Fund nor the underwriters are making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
9
Prospectus Summary
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's Series A
Preferred and/or AMPS, especially the information set forth under the heading
"Risk Factors and Special Considerations." You should review the more detailed
information contained in this prospectus, the Statement of Additional
Information dated , 2004 (the "SAI"), the Fund's Statement of Preferences of %
Series A Cumulative Preferred Shares (the "Series A Statement of Preferences")
and each of the Fund's Statement of Preferences for each of the series of
Auction Market Preferred Shares on file with the Securities and Exchange
Commission.
The Fund................................ The Fund is a closed-end, non-diversified management investment company
organized under the laws of the State of Delaware on August 20, 2003. The
Fund's outstanding common shares, par value $.001 per share, are listed and
traded on the New York Stock Exchange ("NYSE") under the symbol "GDV." As
of June 30, 2004, the net assets of the Fund were $1,608,572,253 and the
Fund had outstanding 84,994,505 common shares. Prior to the issuance of
the Series A Preferred and/or the AMPS offered by this prospectus, the Fund
had no preferred shares outstanding.
The Offering............................ The Fund offers by this prospectus, in the aggregate, $ of preferred
shares of either Series A Preferred or AMPS, or a combination of such
series. The Series A Preferred and/or the AMPS are being offered by a group
of underwriters led by Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and including Citigroup Global Markets Inc., A.G. Edwards
& Sons, Inc. and Gabelli & Company, Inc. as underwriters. Upon issuance,
the Series A Preferred and the AMPS will have equal seniority with respect
to dividends and liquidation preference. See "Description of the Series A
Preferred and the AMPS."
Series A Preferred. The Fund is offering shares of % Series A Preferred, par
value $.001 per share, liquidation preference $25 per share, at a purchase
price of $25 per share. Dividends on the shares of Series A Preferred will
accumulate from the date on which such shares are issued. Application has
been made to list the Series A Preferred on the NYSE and it is anticipated
that trading of the Series A Preferred on the NYSE will commence within 30
days from the date of this prospectus.
AMPS. The Fund is offering shares of Series B AMPS and shares of Series C
AMPS, each par value $.001 per share, liquidation preference $25,000 per
share at a purchase price of $25,000 per share, plus dividends, if any, that
have accumulated from the commencement date of the dividend period during
which such AMPS are issued. The AMPS will not be listed on an exchange.
Instead, investors may buy or sell AMPS in an auction by submitting orders
to broker-dealers that have entered into an agreement with the auction
agent.
Generally, investors in Series A Preferred or AMPS will not receive
certificates representing ownership of their shares. The securities
1
depository (The Depository Trust Company ("DTC") or any successor) or its
nominee for the account of the investor's broker-dealer will maintain record
ownership of the preferred shares in book-entry form. An investor's
broker-dealer, in turn, will maintain records of that investor's beneficial
ownership of preferred shares.
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. 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 -- typically the Fund invests in
those securities rated "BB" by S&P or "Ba" by Moody's -- or non-rated
securities of comparable quality, all of 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.
Dividends and Distributions............. Series A Preferred. Dividends on the Series A Preferred, at the annual
rate of % of its $25 per share liquidation preference, are cumulative
from the original issue date and are payable, when, as and if declared by
the Board of Trustees of the Fund, out of funds legally available therefor,
quarterly on , , and in each year, commencing
on , 2004.
AMPS. The holders of AMPS are entitled to receive cash dividends, stated at
annual rates of its $25,000 per share liquidation preference, that will vary
from dividend period to dividend period. The table below shows the dividend
rate, the dividend payment date and the number of days for the initial
dividend period on each series of the AMPS.
2
Dividend Payment
Initial Date Number of Days of
Dividend for Initial Initial
Rate Dividend Period Dividend Period
---- --------------- ---------------
Series B
AMPS........... % , 2004
Series C
AMPS........... % , 2004
For subsequent dividend periods, each series of AMPS will pay dividends
based on a rate set at auctions, normally held weekly. In most
instances, dividends are payable weekly, on the first business day
following the end of the dividend period. If the day on which dividends
otherwise would be paid is not a business day, then dividends will be
paid on the first business day that falls after the end of the dividend
period. The Fund may, subject to certain conditions, designate special
dividend periods of more (or less) than seven days. The dividend
payment date for any such special dividend period will be set out in
the notice designating the special dividend period. Dividends on shares
of each series of AMPS will be cumulative from the date such shares are
issued and will be paid out of legally available funds.
Any designation of a special dividend period will be effective only if,
among other things, proper notice has been given, the auction
immediately preceding the special dividend period was not a failed
auction and the Fund has confirmed that it has assets with an aggregate
discounted value at least equal to the Basic Maintenance Amount (as
described under "Description of the Series A Preferred and the AMPS --
Rating Agency Guidelines"). See "Description of the Series A Preferred
and the AMPS -- Dividends on the AMPS" and "The Auction of AMPS."
There is no minimum rate with respect to any dividend period. There is
a maximum rate. The maximum rate for any dividend period other than a
default period will be the greater of (i) the applicable percentage of
the reference rate set forth in the table below or (ii) the applicable
spread set forth in the table below plus the reference rate. The
reference rate is the applicable LIBOR Rate (for a dividend period or a
special dividend period of fewer than 365 days), or the applicable
Treasury Index Rate (for a special dividend period of 365 days or
more). The applicable percentage and applicable spread will be
determined based on the lower of the credit ratings assigned to each
series of AMPS by Moody's and S&P.
3
The applicable percentages and applicable spreads are as follows:
--------------------------------------------------------------------------
Credit Ratings Applicable Percentage Applicable Spread
--------------------------- ---------------------- -------------------
Moody's S&P
---------- -------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A2 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and Lower 300% 3.00%
Assuming the Fund maintains an "Aaa" and "AAA" rating on each series of
AMPS, the practical effect of the different methods used to determine
the maximum applicable rate is shown in the table below:
Reference Rate
----------------------------------------------------------------------------
Maximum Maximum Method Used
Applicable Rate Applicable Rate to Determine
Using the Using the the Maximum
Reference Rate Applicable Percentage Applicable Spread Applicable Rate
--------------- --------------------- ----------------- ---------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
See "Description of the Series A Preferred and the AMPS -- Dividends on
the AMPS -- Maximum Rate." For example, calculated as of December 31,
2003 and June 30, 2004, respectively, the maximum rate for each series
of AMPS (assuming a rating of "Aaa" by Moody's and "AAA" by S&P) would
have been approximately 2.40% and 2.86%, for dividend periods of 90
days, and approximately 3.02% and 4.04% for dividend periods of two
years.(1) There is no minimum rate with respect to any dividend period.
Preferred Share Dividends. Under current law, all preferred shares of
the Fund must have the same seniority as to the payment of dividends.
Accordingly, no full dividend will be declared or paid on any series of
preferred shares of the Fund for any dividend period, or part thereof,
unless full cumulative dividends due through the most recent dividend
payment dates therefor for all series of outstanding preferred shares
of the Fund are declared and paid. If full cumulative dividends due
have not been declared and paid on all outstanding preferred shares of
the Fund ranking on a parity with the Series A Preferred and/or AMPS as
to the payment of dividends, any dividends being paid on such preferred
shares (including any outstanding Series A Preferred and AMPS) will be
paid as nearly pro rata as possible in proportion to the respective
amounts of dividends accumulated but unpaid on each such series of
preferred shares on the relevant dividend payment date.
___________________________
(1) Dividend periods presented for illustrative purposes only. Actual dividend periods may be of greater
or lesser duration.
4
In the event that for any calendar year the total distributions on the
Fund's preferred shares exceed the Fund's ordinary income and net
capital gain allocable to those shares, the excess distributions will
generally be treated as a tax-free return of capital (to the extent of
the shareholder's tax basis in his or her shares). The amount treated
as a tax-free return of capital will reduce a shareholder's adjusted
basis in its preferred shares, thereby increasing the shareholder's
potential gain or reducing its potential loss on the sale of the
shares.
Common Share Dividends. In order to allow its holders of common
shares to realize a predictable, but not assured, level of cash flow
and some liquidity periodically on their investment without having to
sell shares, the Fund has adopted a policy, which may be changed at any
time by the Board of Trustees, of paying distributions on its common
shares of $.30 per quarter, which is equal to an annual rate of 6% of
the offering price per common share. On September 24, 2004, the Fund
paid a dividend of $0.30 per share, a portion of which constituted a
return of capital. The composition of this dividend is based on
earnings as of the record date. The actual composition of the
distribution may change based on the Fund's investment activity through
December 31, 2004.
Auction Procedures...................... You may buy, sell or hold AMPS in the auction. The following is a brief
summary of the auction procedures, which are described in more detail
elsewhere in this prospectus and in the SAI. These auction procedures are
complicated, and there are exceptions to these procedures. Many of the
terms in this section have a special meaning as set forth in this
prospectus or the SAI.
Provided that the Fund has not defaulted on its payment obligations to
holders of each series of AMPS, the auctions determine the dividend
rate for each series of AMPS, except that no dividend rate resulting
from the auction process will be higher than the then-maximum rate. See
"Description of the Series A Preferred and the AMPS -- Dividends on the
AMPS."
If you own shares of AMPS, you may instruct your broker-dealer to enter
one of three kinds of orders in the auction with respect to your
shares: sell, bid and hold.
If you enter a sell order, you indicate that you want to sell AMPS at
$25,000 per share, no matter what the next dividend period's rate will
be.
If you enter a bid order, which must specify a dividend rate, you
indicate that you want to purchase or hold the indicated number of
shares of AMPS at $25,000 per share if the dividend rate for the AMPS
for the next dividend period is not less than the rate specified in the
bid. A bid order will be deemed an irrevocable offer to sell AMPS if
the next dividend period's rate is less than the rate you specify.
5
If you enter a hold order you indicate that you want to continue to own
AMPS, no matter what the next dividend period's rate will be.
You may enter different types of orders for different portions of your
AMPS. All orders must be for whole shares. All orders you submit are
irrevocable. There is a fixed number of AMPS, and the dividend rate
likely will vary from auction to auction depending on the number of
bidders, the number of shares the bidders seek to buy, the rating of
the AMPS and general economic conditions including current interest
rates. If you own AMPS and submit a bid order specifying a rate that is
higher than the then maximum rate, your bid order will be treated as a
sell order. If you do not enter an order, the broker-dealer will
ordinarily assume that you want to continue to hold your AMPS, but if
you fail to submit an order and the dividend period is longer than 91
days, the broker-dealer will treat your failure to submit an order as a
sell order.
If you do not then own AMPS, or want to buy more shares, you may
instruct a broker-dealer to enter a bid order to buy shares in an
auction at $25,000 per share at or above the dividend rate you specify.
If you bid for shares you do not already own at a rate higher than the
then-maximum rate, your bid will not be considered.
Broker-dealers will submit orders from existing and potential holders
of AMPS to the auction agent. Neither the Fund nor the auction agent
will be responsible for a broker-dealer's failure to submit orders from
existing or potential holders of AMPS. A broker-dealer's failure to
submit orders for AMPS held by it or its customers will be treated in
the same manner as a holder's failure to submit an order to the
broker-dealer. A broker-dealer may submit orders to the auction agent
for its own account provided that the broker-dealer is not an affiliate
of the Fund. If a broker-dealer submits an order for its own account in
any auction, it may have knowledge of orders placed though it in that
auction and therefore have an advantage over other bidders, but such
broker-dealer would not have knowledge of orders submitted by other
broker-dealers in that auction. As a result of bidding by the
broker-dealer in an auction, the auction rate may be higher or lower
than the rate that would have prevailed had the broker-dealer not bid.
The Fund may not submit an order in any auction.
The auction agent after each auction for the AMPS will pay to each
broker-dealer, from funds provided by the Fund, a service charge equal
to, in the case of any auction immediately preceding a dividend period
of less than one year, the product of (i) a fraction, the numerator of
which is the number of days in such dividend period and the denominator
of which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv)
the aggregate number of AMPS placed by such broker-dealer at such
auction. In the case of any auction immediately
6
preceding a dividend period of one year or longer, the service charge
shall be determined by mutual consent of the Fund and any such
broker-dealer and shall be based upon a selling concession that would
be applicable to an underwriting of fixed or variable rate preferred
shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the dividend period with respect
to such action. A broker-dealer may share a portion of any such fees
with non-participating broker-dealers that submit orders to the
broker-dealer for an auction that are placed by that broker-dealer in
such Auction.
There are sufficient clearing bids for shares of AMPS in an auction if
the number of AMPS subject to bid orders by broker-dealers for
potential holders with a dividend rate equal to or lower than the
then-maximum rate is at least equal to the number of AMPS subject to
sell orders and the number of shares of AMPS subject to bids specifying
rates higher than the then-maximum rate for the AMPS submitted or
deemed submitted to the auction agent by broker-dealers for existing
holders. If there are sufficient clearing bids for shares of AMPS, then
the dividend rate for the next dividend period will be the lowest rate
submitted which, taking into account that rate and all lower rate bids
submitted from existing and potential holders, would result in existing
and potential holders owning all the AMPS available for purchase in the
auction.
If there are not sufficient clearing bids for shares of AMPS, then the
auction is considered to be a failed auction, and the dividend rate
will be the maximum rate. If the Fund has declared a special dividend
period and there are not sufficient clearing bids, then the special
dividend rate will not be effective and the dividend rate for the next
period will be the same as during the current rate period. In either
event, existing holders that have submitted sell orders (or are treated
as having submitted sell orders) may not be able to sell any or all of
the AMPS for which they submitted sell orders.
The auction agent will not consider a bid above the then-maximum rate.
The purpose of the maximum rate is to place an upper limit on dividends
with respect to the AMPS and in so doing to help protect the earnings
available to pay dividends on the Fund's common shares, and to serve as
the dividend rate in the event of a failed auction (that is, an auction
where there are more shares of AMPS offered for sale than there are
buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding AMPS, the auction is considered an "all hold" auction and
the dividend rate for the next dividend period will be the "all hold
rate," which is 90% of the then-current reference rate. This rate may
be less than the rate that would have been determined if an auction had
occurred.
7
The auction procedures include a pro rata allocation of each series of
AMPS for purchase and sale. This allocation process may result in an
existing holder selling, or a potential holder buying, fewer shares
than the number of each series of AMPS in its order. If this happens,
broker-dealers that have designated themselves as existing holders or
potential holders in respect of customer orders will be required to
make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made through DTC on the next
business day after the auction date (which also is a dividend payment
date). Purchasers will pay for their AMPS through broker-dealers in
same-day funds to DTC against delivery to the broker-dealers. DTC will
make payment to the sellers' broker-dealers in accordance with its
normal procedures, which require broker-dealers to make payment against
delivery in same-day funds. As used in this prospectus, a business day
is a day on which the NYSE is open for trading, and which is not a
Saturday, Sunday or any other day on which banks in New York City are
authorized or obligated by law to close.
The first auction for each series of AMPS will be held on , 2004, the
business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during special dividend periods,
auctions for Series B AMPS normally will be held every Tuesday (or the
next preceding business day if Tuesday is a holiday), and each
subsequent dividend period for the Series B AMPS normally will begin on
the following Wedneday. Following the first auction of AMPS, except
during special dividend periods, auctions for Series C AMPS normally
will be held every Thursday (or the next preceding business day if
Thursday is a holiday), and each subsequent dividend period for the
Series C AMPS normally will begin on the following Friday
Tax Treatment of Preferred
Share Dividends..................... The Fund expects that dividends paid on the Series A Preferred and AMPS
will consist of (i) long-term capital gain (gain from the sale of a capital
asset held longer than 12 months), (ii) qualified dividend income (dividend
income from certain domestic and foreign corporations) and (iii) investment
company taxable income (other than qualified dividend income), including
interest income, short-term capital gain and income from certain hedging
and interest rate transactions. For individuals, the maximum federal
income tax rate on long-term capital gain is currently 15%, on qualified
dividend income is currently 15%, and on ordinary income (such as
distributions from investment company taxable income that are not eligible
for treatment as qualified dividend income) is currently 35%. These tax
rates are scheduled to apply through 2008. We cannot assure you, however,
as to what percentage of the dividends paid on the Series A Preferred or
AMPS will consist of long-term capital gains and qualified dividend income,
which are taxed at lower rates
8
for individuals than ordinary income. For a more detailed discussion,
see "Taxation."
Rating and Asset
Coverage Requirements............... Series A Preferred. In order to be issued, the Series A Preferred must
receive a rating of "Aaa" from Moody's. The Series A Statement of
Preferences contains certain tests that the Fund must satisfy to obtain and
maintain a rating of "Aaa" from Moody's on the Series A Preferred. See
"Description of the Series A Preferred and the AMPS -- Rating Agency
Guidelines."
AMPS. In order to be issued, each series of AMPS must receive both a
rating of "Aaa" from Moody's and a rating of "AAA" from S&P. As with
the Series A Preferred, the Statement of Preferences of each of the
series of AMPS contains certain tests that the Fund must satisfy to
obtain and maintain a rating of "Aaa" from Moody's and "AAA" from S&P.
See "Description of the Series A Preferred and the AMPS -- Rating
Agency Guidelines."
Asset Coverage Requirements. Under the asset coverage tests to which
each of the Series A Preferred and/or each series of AMPS is subject,
the Fund is required to maintain (i) assets having in the aggregate a
discounted value greater than or equal to a Basic Maintenance Amount
(as described under "Description of the Series A Preferred and the AMPS
-- Rating Agency Guidelines") for each such series calculated pursuant
to the applicable rating agency guidelines and (ii) an asset coverage
of at least 200% (or such higher or lower percentage as may be required
at the time under the Investment Company Act of 1940 (the "1940 Act"))
with respect to all outstanding preferred shares of the Fund, including
the Series A Preferred and each series of AMPS. See "Description of the
Series A Preferred and the AMPS -- Asset Maintenance Requirements."
The Fund estimates that if the shares offered hereby had been issued
and sold as of September 15, 2004, the asset coverage under the 1940
Act would have been approximately 633% immediately following such
issuance and (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of
$5,750,000). The asset coverage would have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $1,900,996,846
------------------------------------------- ----------------
Senior securities representing indebtedness = $300,000,000 = 634%
plus liquidation value of the AMPS
The Statement of Preferences for each of the Series A Preferred and
each series of the AMPS, which contain the technical provisions of the
various components of the asset coverage tests, will be filed as
exhibits to this registration statement and may be obtained through the
web site of the Securities and Exchange Commission (http://www.sec.gov).
9
Mandatory Redemption................... The Series A Preferred and each series of the AMPS may be subject to
mandatory redemption by the Fund to the extent the Fund fails to maintain
the asset coverage requirements in accordance with the rating agency
guidelines or the 1940 Act described above and does not cure such failure
by the applicable cure date. If the Fund redeems preferred shares
mandatorily, it may, but is not required to, redeem a sufficient number of
such shares so that after the redemption the Fund exceeds the asset
coverage required by the guidelines of each of the applicable rating
agencies and the 1940 Act by 10%.
With respect to the Series A Preferred, any such redemption will be
made for cash at a redemption price equal to $25 per share, plus an
amount equal to accumulated and unpaid dividends (whether or not earned
or declared) to the redemption date.
With respect to each series of the AMPS, any such redemption will be
made for cash at a redemption price equal to $25,000 per share, plus an
amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the redemption date, plus, in the case of each series
of the AMPS having a dividend period of more than one year, any
applicable redemption premium determined by the Board of Trustees. See
"Description of the Series A Preferred and the AMPS -- Redemption."
In the event of a mandatory redemption, such redemption will be made
from the Series A Preferred, each series of the AMPS or other preferred
shares of the Fund in such proportions as the Fund may determine,
subject to the limitations of the 1940 Act and Delaware law.
Optional Redemption..................... Subject to the limitations of the 1940 Act and Delaware law, the Fund may,
at its option, redeem the Series A Preferred and/or the AMPS as follows:
Series A Preferred. Commencing , 2009 and at any time thereafter,
the Fund at its option may redeem the Series A Preferred, in whole or in
part, for cash at a redemption price per share equal to $25, plus an amount
equal to accumulated and unpaid dividends (whether or not earned or
declared) to the redemption date. If fewer than all of the shares of the
Series A Preferred are to be redeemed, such redemption will be made pro
rata in accordance with the number of such shares held. Prior to ,
2009, the Series A Preferred will be subject to optional redemption by the
Fund at the redemption price only to the extent necessary for the Fund to
continue to qualify for tax treatment as a regulated investment company.
See "Description of the Series A Preferred and the AMPS -- Redemption --
Optional Redemption of the Series A Preferred."
10
AMPS. The Fund at its option generally may redeem each series of the AMPS,
in whole or in part, at any time other than during a non-call period. The
Fund may declare a non-call period during a dividend period of more than
seven days. If fewer than all of the shares of each series of the AMPS are
to be redeemed, such redemption will be made pro rata in accordance with
the number of such shares held. See "Description of the Series A Preferred
and the AMPS -- Redemption -- Optional Redemption of the AMPS."
The redemption price per share of each series of AMPS share will equal
$25,000, plus an amount equal to any accumulated but unpaid dividends
thereon (whether or not earned or declared) to the redemption date, plus, in
the case of each series of the AMPS having a dividend period of more than
one year, any redemption premium applicable during such dividend period. See
"Description of the Series A Preferred and the AMPS -- Redemption --
Optional Redemption of the AMPS."
Voting Rights........................... At all times, holders of the Fund's preferred shares outstanding (including
the Series A Preferred and/or each series of the AMPS), voting as a single
class, will be entitled to elect two members of the Fund's Board of
Trustees, and holders of the preferred shares and common shares, voting as
a single class, will elect the remaining trustees. However, upon a failure
by the Fund to pay dividends on any of its preferred shares in an amount
equal to two full years dividends, holders of the preferred shares, voting
as a single class, will have the right to elect additional trustees that
would then constitute a simple majority of the Board of Trustees until all
cumulative dividends on all preferred shares have been paid or provided
for.
Holders of outstanding Series A Preferred, each series of the AMPS and
any other preferred shares will vote separately as a class on certain
other matters as required under the applicable Statement of
Preferences, the 1940 Act and Delaware law. Except as otherwise
indicated in this prospectus and as otherwise required by applicable
law, holders of Series A Preferred and/or each series of the AMPS will
be entitled to one vote per share on each matter submitted to a vote of
shareholders and will vote together with holders of common shares and
any other preferred shares as a single class. See "Description of the
Series A Preferred and the AMPS -- Voting Rights."
Liquidation Preference.................. The liquidation preference of Series A Preferred is $25. The liquidation
preference of each series of the AMPS is $25,000 per share. Upon
liquidation, preferred shareholders will be entitled to receive the
liquidation preference with respect to their preferred shares plus an
amount equal to accumulated but unpaid dividends with respect to such
shares (whether or not earned or declared) to the date of distribution.
See "Description of the Series A Preferred and the AMPS -- Liquidation Rights."
11
Use of Proceeds......................... The Fund will use the net proceeds from the offering to purchase additional
portfolio securities in accordance with its investment objective and
policies. See "Use of Proceeds."
Listing of the
Series A Preferred.................. Prior to this offering, there has been no public market for the Series A
Preferred. Following its issuance (if issued), the Series A Preferred is
expected to be listed on the NYSE. However, during an initial period which
is not expected to exceed 30 days after the date of its initial issuance,
the Series A Preferred will not be listed on any securities exchange and
consequently may be illiquid during that period. There can be no assurance
that a secondary market will provide owners with liquidity.
Limitation on Secondary Market Trading
of the AMPS The AMPS will not be listed on an exchange. Broker-dealers may, but are
not obliged to, maintain a secondary trading market in each series of the
AMPS outside of auctions. There can be no assurance that a secondary
market will provide owners with liquidity. You may transfer each series of
the AMPS outside of auctions only to or through a broker-dealer that has
entered into an agreement with the auction agent or other persons as the
Fund permits.
Special Characteristics
and Risks........................... Risk is inherent in all investing. Therefore, before investing in the
Series A Preferred or the AMPS you should consider the risks carefully.
Series A Preferred. Primary risks specially associated with an
investment in the Series A Preferred include:
Fluctuations in Market Price. The market price for the Series A
Preferred will be influenced by changes in interest rates, the
perceived credit quality of the Series A Preferred and other factors.
See "Risk Factors and Special Considerations -- Special Risks of the
Series A Preferred -- Fluctuations in Market Price."
Illiquidity Risk. Prior to the offering, there has been no public
market for the Series A Preferred. In the event the Series A Preferred
is issued, prior application will have been made to list the Series A
Preferred on the NYSE. However, during an initial period, which is not
expected to exceed 30 days after the date of its issuance, the Series A
Preferred will not be listed on any securities exchange. During such
period, the underwriters intend to make a market in the Series A
Preferred, however, they have no obligation to do so. Consequently, the
Series A Preferred may be illiquid during such period. No assurances
can be provided that listing on any securities exchange or market
making by the underwriters will result in the market for Series A
Preferred being liquid at any time. See "Risk
12
Factors and Special Considerations -- Special Risks of the Series A
Preferred -- Illiquidity Risk."
AMPS. Primary risks specially associated with an investment in AMPS
include:
Auction Risk. You may not be able to sell your AMPS at an auction if
the auction fails, i.e., if there are more shares offered for sale than
there are buyers for those shares. Also, if you place an order at an
auction to retain AMPS only at a specified rate that exceeds the rate
set at the auction, you will not retain your shares. Additionally, if
you place a hold order without specifying a rate below which you would
not wish to continue to hold your shares and the auction sets a
below-market rate, you will receive a lower rate of return on your
shares than the market rate. Finally, the dividend period may be
changed, subject to certain conditions and with notice to the holders
of the affected series of AMPS, which could also affect the liquidity of
your investment. See "Risk Factors and Special Considerations --
Special Risks of the AMPS -- Auction Risk."
Secondary Market Sale Risk. If you try to sell your AMPS between
auctions, you may not be able to sell them for $25,000 per share or
$25,000 per share plus accumulated dividends. If the Fund has
designated a special dividend period of more than seven days, changes
in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that may maintain a
secondary trading market for AMPS are not required to maintain this
market, and the Fund is not required to redeem AMPS if either an
auction or an attempted secondary market sale fails because of a lack
of buyers. In addition, a broker-dealer may, in its own discretion,
decide to sell AMPS in the secondary market to investors at any time
and at any price, including at prices equivalent to, below or above the
par value of the AMPS. The AMPS are not listed on a stock exchange or
the NASDAQ stock market. If you sell your AMPS to a broker-dealer
between auctions, you may receive less than the price you paid for
them, especially when market interest rates have risen since the last
auction or during a special dividend period. See "Risk Factors and
Special Considerations -- Special Risks of the AMPS -- Secondary Market
Sale Risk."
Both the Series A Preferred and AMPS. An investment in either the
Series A Preferred or AMPS also includes the following primary risks:
General Risks of Preferred Shares. The market value for the Series A
Preferred and/or AMPS will be influenced by changes in interest rates,
the perceived credit quality of the Series A Preferred or the AMPS and
other factors.
The credit rating on the Series A Preferred and/or AMPS could be
reduced or withdrawn while an investor holds shares, and the credit
13
rating does not eliminate or mitigate the risks of investing in the
Series A Preferred and/or B AMPS. A reduction or withdrawal of the
credit rating would likely have an adverse effect on the market value
of the Series A Preferred and AMPS.
The Fund may not meet the asset coverage requirements or earn
sufficient income from its investments to pay dividends on the Series A
Preferred and/or the AMPS.
The value of the Fund's investment portfolio may decline, reducing the
asset coverage for the Series A Preferred and/or the AMPS. Further, if
an issuer of a common stock in which the Fund invests experiences
financial difficulties or if an issuer's preferred stock or debt
security is downgraded or defaults or if an issuer in which the Fund
invests is affected by other adverse market factors, there may be a
negative impact on the income and/or asset value of the Fund's
investment portfolio. In such circumstances, the Fund may be forced to
mandatorily redeem shares of Series A Preferred and/or AMPS.
In general, the Fund may redeem your AMPS at any time and may redeem
your Series A Preferred at any time after , 2009, and may at any time
redeem shares of either or both series to meet regulatory or rating
agency requirements. Because of historically low interest rates, the
current low cost of the AMPS to the Fund may rise dramatically, which
in turn may prompt the Fund to redeem the AMPS earlier than it
otherwise might. The Series A Preferred and/or AMPS are subject to
redemption under specified circumstances and investors may not be able
to reinvest the proceeds of any such redemption in an investment
providing the same or a better rate than that of the Series A Preferred
or each series of the AMPS. Subject to such circumstances, the Series A
Preferred and/or each series of the AMPS are perpetual.
The Series A Preferred and the AMPS are not obligations of the Fund.
The Series A Preferred and/or AMPS would be junior in respect of
dividends and liquidation preference to any indebtedness incurred by
the Fund, including any senior securities of the Fund representing
debt. Although unlikely, precipitous declines in the value of the
Fund's assets could result in the Fund having insufficient assets to
redeem all of the Series A Preferred and/or the AMPS for the full
redemption price.
Leverage Risk. The Fund intends to use financial leverage for
investment purposes by issuing preferred shares and/or senior
securities representing debt. It is currently anticipated that, taking
into account the Series A Preferred and/or the AMPS being offered in
this prospectus, the amount of leverage will represent approximately 6%
of the Fund's managed assets (as defined below). The Fund expects that
depending on interest rates and available investment opportunities it
will increase its financial leverage through the issuance of additional
senior securities up to approximately 33% of
14
the Fund's total assets including the proceeds of the Series A
Preferred and/or the AMPS. The Fund's leveraged capital structure
creates special risks not associated with unleveraged funds having a
similar investment objective and policies. These include the
possibility of greater loss and the likelihood of higher volatility of
the net asset value of the Fund and the asset coverage for the Series A
Preferred and/or the AMPS. Such volatility may increase the likelihood
of the Fund having to sell investments in order to meet its obligations
to make dividend payments on the preferred shares or principal or
interest payments on debt securities, or to redeem preferred shares or
repay debt, when it may be disadvantageous to do so. Also, if the Fund
is utilizing leverage, a decline in net asset value could affect the
ability of the Fund to make common share dividend payments and such a
failure to pay dividends or make distributions could result in the Fund
ceasing to qualify as a regulated investment company under the Code.
See "Taxation." Because the fee paid to the Investment Adviser will be
calculated on the basis of the Fund's assets, which includes for this
purpose assets attributable to the aggregate net asset value of the
common shares plus assets attributable to any outstanding senior
securities, with no deduction for the liquidation preference of any
preferred shares, the fee may be higher when leverage in the form of
preferred shares is utilized, giving the Investment Adviser an
incentive to utilize such leverage. However, the Investment Adviser has
agreed not to accept an incremental fee on any Series A Preferred or
AMPS, as the case may be, to the extent the Fund's total return
allocable to the common shares fails to meet certain hurdles described
under "Management of the Fund -- General." See "Risk Factors and
Special Considerations -- Risks Associated with both Series A Preferred
and the AMPS -- Leverage Risk."
Special Risks Related to Preferred Shares of Senior Securities
Representing Debt. As provided in the 1940 Act, and subject to
compliance with the Fund's investment limitations, the Fund may issue
senior securities representing debt. In the event the Fund were to
issue such securities, the Fund's obligations to pay dividends and,
upon liquidation of the Fund, liquidation payments in respect of its
preferred shares would be subordinate to the Fund's obligations to make
any principal and/or interest payments due and owing with respect to
its outstanding debt securities. Accordingly, the Fund's issuance of
senior securities representing debt would have the effect of creating
special risks for the Fund's preferred shareholders (including the
holders of Series A Preferred and/or AMPS) that would not be present in
a capital structure that did not include such securities. See "Risk
Factors and Special Considerations -- Risks Associated with both Series
A Preferred and AMPS -- Special Risks to Preferred Shares of Senior
Securities Representing Debt."
Restrictions on Dividends and Other Distributions. Restrictions imposed
on the declaration and payment of dividends or other
15
distributions to the holders of the Fund's common shares and preferred
shares, both by the 1940 Act and by requirements imposed by rating
agencies, might impair the Fund's ability to maintain its qualification
as a regulated investment company for federal income tax purposes.
While the Fund intends to redeem its preferred shares (including the
Series A Preferred and/or the AMPS) to the extent necessary to enable
the Fund to distribute its income as required to maintain its
qualification as a regulated investment company under the Code, there
can be no assurance that such actions can be effected in time to meet
the Code requirements. See "Taxation" in the SAI.
Securities and Exchange Commission Inquiries. Merrill Lynch and
Citigroup Global Markets Inc. have advised the Fund that they and
certain broker-dealers and other participants in the auction rate
securities markets, including both taxable and tax exempt markets, have
received letters from the Securities and Exchange Commission requesting
that each of them voluntarily conduct an investigation regarding their
respective practices and procedures in those markets. Merrill Lynch,
Citigroup Global Markets Inc. and those other broker-dealers are
cooperating and expect to continue to cooperate with the Securities and
Exchange Commission in providing the requested information. No
assurance can be given as to whether the results of this process will
affect the market for the AMPS or the auctions.
Risks of Investing in the Fund
Limited Operating History. The Fund is a non-diversified, closed-end
management investment company with a limited operating history. See
"Risk Factors and Special Considerations -- Risks of Investing in the
Fund -- Limited Operating History."
Common Stock Dividend Policy Risk. The Fund has adopted a policy, which
may be changed at any time by the Board of Trustees, of paying a
dividend on its common shares of $.30 per quarter, which is equal to an
annual rate of 6% of the original issue price of the common shares. In
the event investment returns do not provide sufficient amounts to fund
such distributions, the Fund may be required to return capital as part
of such distribution, which may have the effect of decreasing the asset
coverage per share with respect to the Fund's Series A Preferred and
each series of AMPS. The Fund made its first dividend payment on March
25, 2004, a portion of which constituted a return of capital.
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. 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
16
may present risks in addition to the general risks associated with
investing in common and preferred stocks including the risk of
misestimation 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. See "Risk
Factors and Special Considerations -- Risks of Investing in the Fund --
Value Investing Risk."
Non-Diversified Status. As a non-diversified investment company under
the 1940 Act, the Fund may invest a greater portion of its assets in a
more limited number of issuers than may a diversified fund, and
accordingly, an investment in the Fund may, under certain
circumstances, present greater risk to an investor than an investment
in a diversified company. See "Risk Factors and Special Considerations
-- Risks of Investing in the Fund -- Non-Diversified Status."
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 -- Risks of Investing in the Fund --
Industry Concentration Risk."
Special Risks Related to the Fund's Preferred Securities. Special risks
associated with the Fund's 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. Because the Fund
has no limit on its investment in non-cumulative preferred securities,
the amount of dividends the Fund pays may be adversely affected if an
issuer of a non-cumulative preferred stock held by the Fund determines
not to pay dividends on such stock. There is no assurance that
dividends or distributions on preferred stock in which the Fund invests
will be declared or otherwise made payable. See "Risk Factors and
Special Considerations -- Risks of Investing in the Fund -- Special
Risks Related to Preferred Securities."
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.
17
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 -- Risks of Investing in the Fund -- Illiquid
Securities."
Foreign Securities Risk. The Fund may invest up to 35% of its total
assets in foreign securities. Investing in securities of foreign
companies (or foreign governments), which are generally denominated in
foreign currencies, may involve certain risks and opportunities not
typically associated with investing in domestic companies and could
cause the Fund to be affected favorably or unfavorably by changes in
currency exchange rates and revaluation of currencies. See "Risk
Factors and Special Considerations -- Risks of Investing in the Fund --
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 -- Risks of Investing in the Fund -- 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 -- Risks of Investing in the Fund -- 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
18
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 -- Risks of
Investing in the Fund -- 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 or 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 -- Risks of Investing in the Fund -- Special Risks of
Derivative Transactions."
Interest Rate Transactions. The Fund may enter into an interest rate
swap or cap transaction with respect to all or a portion of the AMPS.
The use of interest rate swaps and caps is a highly specialized
activity that involves certain risks to the Fund including, among
others, counterparty risk and early termination risk. See "Risk Factors
and Special Considerations -- Risks of Investing in the Fund --
Interest Rate 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 -- Risks of
Investing in the Fund -- 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 -- Risks
of Investing in the Fund -- 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
19
-- Risks of Investing in the Fund -- Dependence on Key Personnel."
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 Series A Preferred
and/or the AMPS. See "Risk Factors and Special Considerations -- Risks
of Investing in the Fund -- 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."
Status as a Regulated Investment Company. The Fund has elected and has
qualified for, and intends to remain qualified for, federal income tax
purposes as a regulated investment company. Qualification requires,
among other things, compliance by the Fund with certain distribution
requirements. Statutory limitations on distributions on the common
shares if the Fund fails to satisfy the 1940 Act's asset coverage
requirements could jeopardize the Fund's ability to meet such
distribution requirements. The Fund presently intends, however, to
purchase or redeem preferred shares to the extent necessary in order to
maintain compliance with such asset coverage requirements. See
"Taxation" for a more complete discussion of these and other federal
income tax considerations.
Management and Fees..................... Gabelli Funds, LLC serves as the Fund's Investment Adviser and is
compensated for its services and its related expenses at an annual rate of
1.00% of the Fund's average weekly net assets. As used in this prospectus,
net assets means the aggregate net asset value of the common shares (which
for purposes of the Investment Adviser's compensation also includes assets
attributable to outstanding preferred shares, with no deduction for the
liquidation preference of any preferred shares). Notwithstanding the
foregoing, the Investment Adviser has voluntarily agreed to waive the
portion of its investment advisory fee attributable to an amount of assets
of the Fund equal to the aggregate stated value of the Fund's outstanding
Series A Preferred or AMPS, as the case may be, for any calendar year in
which the net asset value total return of the Fund allocable to the common
shares, including distributions and the advisory fee subject to potential
waiver, is less than (i) in the case of the Series A Preferred, the stated
annual dividend rate of such series and (ii) in the case of each series of
the AMPS, the net cost of capital to the Fund
20
with respect to each series of the AMPS for such year expressed as a
percentage (including, without duplication, dividends paid by the Fund
on each series of the AMPS and the net cost to the Fund of any
associated swap or cap transaction if the Fund hedges its AMPS dividend
obligations). This waiver will apply to the portion of the Fund's
assets attributable to the Series A Preferred and AMPS, respectively,
for so long as any shares of such series remain outstanding. 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."
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 and subpoenas from the New York Attorney General and
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 has authorized the Fund to repurchase its
common shares in the open market when the common shares are trading at a
discount of 7.5% or more from net asset value. Such repurchases are
subject to certain notice and other requirements under the 1940 Act. Since
the Fund commenced operations, it has repurchased 220,700 of its shares on
the open market.
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 common 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, Auction Agent
and Dividend Disbursing Agent....... State Street Bank and Trust Company (the "Custodian"), located at 150
Royall Street, Canton, Massachusetts 02021, serves as the
21
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,
Rhode Island 02940-3025, serves as the Fund's dividend disbursing
agent, as agent under the Fund's automatic dividend reinvestment and
voluntary cash purchase plan, and as transfer agent and registrar with
respect to the common shares of the Fund.
Series A Preferred. EquiServe will also serve as the transfer agent,
registrar, dividend paying agent and redemption agent with respect to
the Series A Preferred.
AMPS. The Bank of New York will serve as the auction agent, transfer
agent, registrar, dividend paying agent and redemption agent with
respect to each series of the AMPS.
Interest Rate Transactions.............. The Fund may enter into interest rate swap or cap transactions in relation
to all or a portion of each series of the AMPS in order to manage the
impact on its portfolio of changes on the dividend rate of each series of
the AMPS. Through these transactions the Fund may, for example, obtain the
equivalent of a fixed rate for each series of the AMPS that is lower than
the Fund would have to pay if it issued fixed rate preferred shares. The
use of interest rate swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated
with ordinary portfolio security transactions.
In an interest rate swap, the Fund would agree to pay to the other party to
the interest rate swap (which is known as the "counterparty") periodically
a fixed rate payment in exchange for the counterparty agreeing to pay to
the Fund periodically a variable rate payment that is intended to
approximate the Fund's variable rate payment obligation on each series of
the AMPS. In an interest rate cap, the Fund would pay a premium to the
counterparty to the interest rate cap and, to the extent that a specified
variable rate index exceeds a predetermined fixed rate, the Fund would
receive from the counterparty payments of the difference based on the
notional amount of such cap. Interest rate swap and cap transactions
introduce additional risk because the Fund would remain obligated to pay
preferred share dividends when due in accordance with the Statement of
Preferences of each of the series of AMPS 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 its preferred shares. In addition, at the time an interest
rate swap or cap transaction reaches its scheduled termination
22
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 its preferred shares.
A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. If the Fund fails to
maintain the required asset coverage on its outstanding preferred
shares or fails to comply with other covenants, the Fund may, at its
option (and in certain circumstances must require), consistent with its
Governing Documents and the requirements of the 1940 Act, that some or
all of its preferred shares (including the Series A Preferred or the
AMPS) be sold back to it (redeemed). Such redemption likely would
result in the Fund seeking to terminate early all or a portion of any
swap or cap transaction. Early termination of a swap could require the
Fund to make a termination payment to the counterparty.
The Fund intends to segregate cash or liquid securities having a value
at least equal to the value of the Fund's net payment obligations under
any swap transaction, marked to market daily. The Fund does not
presently intend to enter into interest rate swap or cap transactions
relating to each series of the AMPS in a notional amount in excess of
the outstanding amount of each series of the AMPS. 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. See "How the Fund Manages Risk -- Interest Rate
Transactions."
23
Financial Highlights
The table below sets forth selected financial data for a common share
outstanding throughout the period(s) presented. The per share operating
performance and ratios for the fiscal period ended December 31, 2003 have been
audited by PricewaterhouseCoopers LLP, the Fund's Independent Registered
Public Accounting Firm, as stated in their report which is incorporated by
reference into the SAI. The following information should be read in
conjunction with the Financial Statements and Notes thereto, which are
incorporated by reference into the SAI.
For the Period from
November 18, 2003(a)
Selected data for a Fund common share outstanding throughout Six Months Ended to
each period June 30, 2004 December 31, 2003
-------------------- -----------------------
Operating performance:
Net asset value, beginning of period...................... $ 19.26 $ 19.06(b)
--------- ---------
Net investment income (loss).............................. 0.14 -----
Net realized and unrealized gain on investments........... 0.16 0.20
--------- ---------
Total from investment operations......................... 0.30 0.20
--------- ---------
Distributions to Fund Shareholders:
Net investment income..................................... (0.14) -----
Net realized gain (loss) on investments................... (0.05) -----
Return of Capital......................................... (0.41)*** -----
--------- ---------
Total distributions to Fund shareholders.................. (0.60) -----
--------- ---------
Capital share transactions:
Decrease in net asset value from common stock
share transactions........................................ (0.02) -----
Offering costs for common shares charged to (0.01) -----
paid-in capital........................................... --------- ---------
(0.03) -----
--------- ---------
Net asset value, end of period........................... $ 18.93 $ 19.26
========= =========
Net asset value total return.............................. 1.4%** 1.0%***
========= =========
Market value, end of period............................... $ 17.39 $ 20.00
========= =========
Total investment return................................... (10.2)%** 0.0%****
========= =========
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's)...................... $1,608,572 $1,451,650
Ratio of net investment income (loss) to average net assets 1.41%(c) (0.04)%(c)
Ratio of operating expenses to average net assets......... 1.09%(c) (1.38)%(c)
Portfolio turnover rate................................... 11.3% 0.4%
___________________
(a) The Gabelli Dividend & Income Trust commenced investment operations on
November 28, 2003.
(b) The beginning NAV includes a $.04 reduction for costs
associated with the initial public offering.
(c) Annualized.
* Based on current earnings and subject to change and recharacterization at
fiscal year end.
** Total return for the period of less than one year is not annualized.
*** Based on net asset value per share at commencement of operations of $19.06
per share. Total return for the period of less than one year is not
annualized.
****Based on market value per share at initial public offering of
$20.00 per share. Total return for the period of less than one year is not
annualized.
24
Use of Proceeds
The net proceeds of the offering are estimated at approximately $ ,
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 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. The Fund commenced its
investment operations on November 28, 2003 and, accordingly, has a limited
operating history. The Fund's principal office is located at One Corporate
Center, Rye, New York 10580-1422.
The Fund has 84,994,505 common shares outstanding, 73,000,000 of
which were issued on November 28, 2003 in connection with the Fund's initial
public offering and 9,700,000 of which were issued on January 7, 2004 pursuant
to an overallotment option exercised by the Fund's underwriters. The remaining
common shares outstanding are owned by the Investment Adviser or its sole
shareholder, Gabelli Asset Management Company, Inc. The Fund currently trades
on the NYSE under the symbol "GDV."
The following table provides information about the Fund's outstanding
shares as of June 30, 2004.
Amount held by
Title of Class Amount Authorized the Fund for its Account Amount Outstanding
----------------------------- --------------------- --------------------------- ---------------------
Common Shares.............. Unlimited 0 84,994,505
Preferred Shares
Series A Preferred.... Unlimited 0 0
Series B AMPS......... Unlimited 0 0
Series C AMPS......... Unlimited 0 0
25
Capitalization
The following table sets forth the unaudited capitalization of the Fund as
of September 15, 2004, and its adjusted capitalization assuming the Series A
Preferred and/or the AMPS offered in this prospectus had been issued.
As of September 15, 2004
----------------------------
Actual As adjusted
------------ -------------
Preferred shares, $0.001 par value, unlimited shares (unaudited)
authorized.
(The "Actual" column reflects the Fund's
outstanding capitalization as of September 15,
2004; the "As Adjusted" column assumes the
issuance of 4,000,000 shares of Series A Preferred
and 8,000 shares of AMPS, $25 and $25,000
liquidation preference, respectively)................. -- $ 300,000,000
--------------- ---------------
Shareholders' equity applicable to common shares:
Common shares, $.001 par value per share; 84,842,505
shares outstanding......................................... $ 84,843 $ 84,843
Paid-in surplus*........................................... 1,617,373,217 1,611,623,217
Distributions in excess of net investment income........... (50,685,669) (50,685,669)
Net unrealized appreciation................................ 39,974,095 39,974,095
--------------- ---------------
Net assets applicable to common shares..................... 1,606,746,486 1,600,996,486
--------------- ---------------
Net assets, plus the liquidation preference of
preferred shares........................................... 1,606,746,486 1,900,996,486
============== ===============
* As adjusted paid-in surplus reflects a reduction for the sales load and
estimated offering cost of the Series A Preferred and/or the AMPS
issuance of $5,750,000.
For financial reporting purposes the Fund is required to deduct the
liquidation preference of its outstanding preferred shares as well as the
principal amount of its outstanding senior debt from "net assets," so long as
the senior securities have redemption features that are not solely within the
control of the Fund. For all regulatory purposes, the Fund's preferred shares
will be treated as equity (rather than as indebtedness).
26
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 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 shareholders 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
27
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 stocks, 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 S&P
or "Baa" or better by Moody's or 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 rated lower than "BBB" by S&P or lower
than "Baa" by Moody's (or unrated debt securities of comparable quality) 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
28
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 and unrated securities of comparable quality
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
29
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 offeror and/or the dynamics and business climate when the
offer or proposal is in process. The Investment Adviser has experience
investing in securities subject to reorganization as a secondary strategy, and
since 1993 the Investment Adviser has advised a registered open-end fund which
from time to time uses risk arbitrage as a principal investment strategy.
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")
30
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
31
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.
32
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 of Trustees, 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 -- Risks of Investing
in the Fund -- 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.
33
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 -- Risks of Investing in the Fund -- Industry
Concentration Risk."
Leveraging. As provided in the 1940 Act and subject to certain
exceptions, the Fund may issue senior securities (which may be stock, such as
preferred shares, or securities representing debt) 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 amount of preferred shares and
debt outstanding. Any such 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 use of leverage
magnifies the impact of changes in net asset value. For example, a fund that
uses 33% leverage will show a 1.5% increase or decline in net asset value for
each 1% increase or decline in the value of its total assets. In addition, if
the cost of leverage exceeds the return on the securities acquired with the
proceeds of leverage, the use of leverage will diminish rather than enhance
the return to the Fund. The use of leverage generally increases the volatility
of returns to the Fund. See "Risk Factors and Special Considerations -- Risks
Associated with both the Series A Preferred and AMPS-- Leverage Risk."
In the event the Fund had both outstanding preferred shares (such as
the Series A Preferred or the AMPS) and senior securities representing debt at
the same time, the Fund's obligations to pay dividends and, upon liquidation
of the Fund, liquidation payments in respect of its preferred shares would be
subordinate to the Fund's obligations to make any principal and/or interest
payments due and owing with respect to its outstanding senior debt securities.
Accordingly, the Fund's issuance of senior securities representing debt would
have the effect of creating special risks for the Fund's preferred
shareholders (including the holders of Series A Preferred and/or AMPS) that
would not be present in a capital structure that did not include such
securities. See "Risk Factors and Special Considerations -- Risks Associated
with both the Series A Preferred and AMPS -- Special Risks to Preferred Shares
of Senior Securities Representing Debt."
Further information on the investment objectives and policies of the
Fund are set forth in the SAI.
Investment Restrictions. The Fund has adopted certain investment
restrictions as fundamental policies of the Fund. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Fund
(voting together as a single class). In addition, pursuant to the Fund's
Series A Statement of Preferences and Statement of Preferences of each of the
series of AMPS , a majority, as defined in the 1940 Act, of the outstanding
preferred shares of the Fund (voting separately as a single class) is also
required to change a fundamental policy. The Fund's investment restrictions
are more fully discussed under "Investment Restrictions" in the SAI.
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
34
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 -- Additional Investment 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.
As of June 30, 2004, the portfolio turnover rate of the Fund since
January 1, 2004 was 11.3%. The Fund anticipates that its portfolio turnover
rate will generally not exceed 100%.
Further information on the investment objective and policies of the
Fund are set forth in the SAI.
Risk Factors and Special Considerations
Investors should consider the following risk factors and special
considerations associated with investing in the Fund.
Preferred Shares
Special Risks of the Series A Preferred
Fluctuations in Market Price. The market price for the Series A
Preferred will be influenced by changes in interest rates, the perceived
credit quality of the Series A Preferred and other factors.
Illiquidity Risk. Prior to the offering, there has been no public
market for the Series A Preferred. In the event the Series A Preferred is
issued, prior application will have been made to list the Series A Preferred
on the NYSE. However, during an initial period, which is not expected to
exceed 30 days after the date of its issuance, the Series A Preferred will not
be listed on any securities exchange. During such period, the underwriters
intend to make a market in the Series A Preferred, however, they have no
obligation to do so. Consequently, the Series A Preferred may be illiquid
during such period. No assurances can be provided that listing on any
securities exchange or market making by the underwriters will result in the
market for Series A Preferred being liquid at any time.
Special Risks of the AMPS
Auction Risk. You may not be able to sell your AMPS at an auction if
the auction fails, i.e., if there are more AMPS offered for sale than there
are buyers for those shares. Also, if you place an order at an auction to
retain AMPS only at a specified rate that exceeds the rate set at the auction,
you will not retain your AMPS. Additionally, if you place a hold order without
specifying a rate below which you would not wish to continue to hold your
shares and the auction sets a below-market rate, you will receive
35
a lower rate of return on your shares than the market rate. Finally, the
dividend period may be changed, subject to certain conditions and with notice
to the holders of the affected series of AMPS, which could also affect the
liquidity of your investment. See "Description of the Series A Preferred and
the AMPS" and "The Auction of AMPS."
Secondary Market Sale Risk. If you try to sell your AMPS between
auctions, you may not be able to sell them for $25,000 per share or $25,000
per share plus accumulated dividends. If the Fund has designated a special
dividend period of more than seven days, changes in interest rates could
affect the price you would receive if you sold your shares in the secondary
market. Broker-dealers that may maintain a secondary trading market for each
series of the AMPS are not required to maintain this market, and the Fund is
not required to redeem the AMPS if either an auction or an attempted secondary
market sale fails because of a lack of buyers. In addition, a broker-dealer
may, in its own discretion, decide to sell AMPS in the secondary market to
investors at any time and at any price, including at prices equivalent to,
below or above the par value of the AMPS. The AMPS are not listed on a
stock exchange or the NASDAQ stock market. If you sell your AMPS to a
broker-dealer between auctions, you may receive less than the price you paid
for them, especially when market interest rates have risen since the last
auction or during a special dividend period.
Risks Associated With Both the Series A Preferred and AMPS
General Risks of Preferred Shares. There are a number of risks
associated with an investment in the Series A Preferred or the AMPS.
The market value for the Series A Preferred and/or the AMPS will be
influenced by changes in interest rates, the perceived credit quality of the
Series A Preferred or the AMPS and other factors.
The credit rating on the Series A Preferred and/or the AMPS could be
reduced or withdrawn while an investor holds shares, and the credit rating
does not eliminate or mitigate the risks of investing in the Series A
Preferred and/or the AMPS. A reduction or withdrawal of the credit rating
would likely have an adverse effect on the market value of the Series A
Preferred and the AMPS.
The Fund may not meet the asset coverage requirements or earn
sufficient income from its investments to pay dividends on the Series A
Preferred and/or the AMPS.
The value of the Fund's investment portfolio may decline, reducing
the asset coverage for the Series A Preferred and/or the AMPS. Further, if an
issuer of a common stock in which the Fund invests experiences financial
difficulties or if an issuer's preferred stock or debt security is downgraded
or defaults or if an issuer in which the Fund invests is affected by other
adverse market factors, there may be a negative impact on the income and/or
asset value of the Fund's investment portfolio. In such circumstances, the
Fund may be forced to mandatorily redeem shares of Series A Preferred and/or
AMPS.
In general, the Fund may redeem your AMPS at any time and may redeem
your Series A Preferred at any time after , 2009 and may at any time redeem
shares of either or both series to meet regulatory or rating agency
requirements. Because of historically low interest rates, the current low cost
of the AMPS to the Fund may rise dramatically, which in turn may prompt the
Fund to redeem the AMPS earlier than it otherwise might. The Series A
Preferred and/or each series of AMPS are subject to redemption under specified
circumstances and investors may not be able to reinvest the proceeds of any
such redemption in an investment providing the same or a better rate than that
of the Series A Preferred or the AMPS. Subject to such circumstances, the
Series A Preferred and/or the AMPS are perpetual.
36
The Series A Preferred and the AMPS are not obligations of the Fund.
The Series A Preferred and/or the AMPS would be junior in respect of dividends
and liquidation preference to any indebtedness incurred by the Fund, including
any senior securities of the Fund representing debt. Although unlikely,
precipitous declines in the value of the Fund's assets could result in the
Fund having insufficient assets to redeem all of the Series A Preferred and/or
the AMPS for the full redemption price.
Leverage Risk. The Fund intends to use financial leverage for
investment purposes by issuing preferred shares and/or senior securities
representing debt. It is currently anticipated that, taking into account the
Series A Preferred and/or the AMPS being offered in this prospectus, the
amount of leverage initially will represent approximately 6% of the Fund's
total assets. The Fund expects that depending on interest rates and available
investment opportunities it will increase its financial leverage through the
issuance of additional senior securities up to approximately 33% of the Fund's
total assets including the proceeds of the Series A Preferred and/or the AMPS.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having a similar investment objective and policies.
These include the possibility of greater loss and the likelihood of higher
volatility of the net asset value of the Fund and the asset coverage for the
Series A Preferred and/or the AMPS. Such volatility may increase the
likelihood of the Fund having to sell investments in order to meet its
obligations to make dividend payments on the preferred shares or principal or
interest payments on debt securities, or to redeem preferred shares or repay
debt, when it may be disadvantageous to do so. Also, if the Fund is utilizing
leverage, a decline in net asset value could affect the ability of the Fund to
make common share dividend payments and such a failure to pay dividends or
make distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Code. See "Taxation."
Because the fee paid to the Investment Adviser will be calculated on
the basis of the Fund's net assets, which includes for this purpose assets
attributable to the aggregate net asset value of the common shares plus assets
attributable to any outstanding preferred shares, with no deduction for the
liquidation preference of any preferred shares, the fee may be higher when
leverage in the form of preferred shares is utilized, giving the Investment
Adviser an incentive to utilize such leverage. However, the Investment Adviser
has agreed not to accept an incremental fee on any Series A Preferred or AMPS,
as the case may be, to the extent the Fund's total return allocable to the
common shares fails to meet certain hurdles described under "Management of the
Fund - General."
Special Risks to Preferred Shares of Senior Securities Representing
Debt. As provided in the 1940 Act, and subject to compliance with the Fund's
investment limitations, the Fund may issue senior securities representing
debt. In the event the Fund were to issue such securities, the Fund's
obligations to pay dividends and, upon liquidation of the Fund, liquidation
payments in respect of its preferred shares would be subordinate to the Fund's
obligations to make any principal and/or interest payments due and owing with
respect to its outstanding senior debt securities. Accordingly, the Fund's
issuance of senior securities representing debt would have the effect of
creating special risks for the Fund's preferred shareholders (including the
holders of Series A Preferred and/or AMPS) that would not be present in a
capital structure that did not include such securities.
Restrictions on Dividends and Other Distributions. Restrictions
imposed on the declaration and payment of dividends or other distributions to
the holders of the Fund's common shares and preferred shares, both by the 1940
Act and by requirements imposed by rating agencies, might impair the Fund's
ability to maintain its qualification as a regulated investment company for
federal income tax purposes. While the Fund intends to redeem its preferred
shares (including the Series A Preferred and/or AMPS) to the extent necessary
to enable the Fund to distribute its income as required to maintain its
qualification as a regulated investment company under the Code, there can be
no assurance that such actions can be effected in time to meet the Code
requirements. See "Taxation" in the SAI.
37
Securities and Exchange Commission Inquiries. Merrill Lynch and
Citigroup Global Markets Inc. have advised the Fund that they and certain
broker-dealers and other participants in the auction rate securities markets,
including both taxable and tax exempt markets, have received letters from the
Securities and Exchange Commission requesting that each of them voluntarily
conduct an investigation regarding their respective practices and procedures
in those markets. Merrill Lynch, Citigroup Global Markets Inc. and those other
broker-dealers are cooperating and expect to continue to cooperate with the
Securities and Exchange Commission in providing the requested information. No
assurance can be given as to whether the results of this process will affect
the market for the AMPS or the auctions.
Risks of Investing in the Fund
Limited Operating History. The Fund is a non-diversified, closed-end
management investment company with a limited operating history.
Common Stock Dividend Policy Risk. The Fund has recently adopted a
policy, which may be changed at any time by the Board of Trustees, of paying a
monthly distribution on its common shares of $.10 per share, which is equal to
an annual rate of 6% of the original issue price of the common shares. In the
event investment returns do not provide sufficient amounts to fund such
distributions, the Fund may be required to return capital as part of such
distribution, which may have the effect of decreasing the asset coverage per
share with respect to the Fund's Series A Preferred and each series of AMPS.
The Fund made its third dividend payment on September 24, 2004, a portion of
which constituted a return of capital.
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. However, the Fund has in the past conducted and
intends to conduct its operations so as to qualify as a "regulated investment
company," or RIC, for purposes of the Code, which will relieve it of any
liability for federal income tax to the extent its earnings are distributed to
shareholders. To qualify as a "regulated investment company," among other
requirements, the Fund will limit its investments so that, with certain
exceptions, at the close of each quarter of the taxable year (a) not more than
25% of the market value of its total assets will be invested in the securities
(other than U.S. government securities or the securities of other RICs) of a
single issuer or any two or more issuers that the Fund controls and which are
determined to be engaged in the same, similar or related trades or businesses;
and (b) at least 50% of the market value of the Fund's assets will be
represented by cash, securities of other regulated investment companies, U.S.
government securities and other securities, with such other securities limited
in respect of any one issuer to an amount not greater than 5% of the value of
the Fund's assets and not more than 10% of the outstanding voting securities
of such issuer.
38
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.
Special Risks Related to Preferred Securities. There are special
risks associated with the Fund's investing in preferred securities, including:
Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer 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
Fund's return from that security 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 security instruments.
Liquidity. Preferred securities may be substantially less liquid than
many other securities, such as common stocks or U.S. Government securities.
Limited Voting Rights. Generally, preferred security holders (such as
the Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods, at
which time the preferred security holders may be entitled to elect a number of
trustees to the issuer's board. Generally, once all the arrearages have been
paid, the preferred security holders no longer have voting rights.
39
Special Redemption Rights. In certain varying circumstances, an
issuer of preferred securities may redeem the securities prior to a specified
date. For instance, for certain types of preferred securities, a redemption
may be triggered by a change in federal income tax or securities laws. A
redemption by the issuer may negatively impact the return of the security held
by the Fund.
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 of 1933. 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 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
40
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 nationally recognized statistical rating organizations
(i.e., rated "Ba" or lower by Moody's or "BB" or lower by S&P or Fitch) 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 fixed-income securities,
the Fund may invest in the securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Investment Adviser
believes that such issuers will honor their obligations and emerge from
bankruptcy protection and that the value of such issuers' securities will
appreciate. By investing in the securities of issuers in default, the Fund
bears the risk that these issuers will not continue to honor their obligations
or emerge from bankruptcy protection or that the value of these securities
will not 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
41
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
42
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 Policies" 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 earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations. The Fund will not lend its
portfolio securities if such loans are not permitted by the laws or
regulations of any state in which its shares are qualified for sale. The
Fund's loans of portfolio securities will be collateralized in accordance with
applicable regulatory requirements.
For a further description of such loans of portfolio securities, see
"Investment Objective and Policies -- 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.
Interest Rate Transactions. The Fund may enter into an interest rate
swap or cap transaction with respect to all or a portion of the AMPS. The
use of interest rate swaps and caps is a highly specialized activity that
involves certain risks to the Fund including, among others, counterparty risk
and early termination risk. See "How the Fund Manages Risk -- Interest Rate
Transactions."
Dependence on Key Personnel. The Investment Adviser is dependent upon
the expertise of Mr. Mario J. Gabelli in providing advisory services with
respect to the Fund's investments. If the Investment Adviser were to lose the
services of Mr. Gabelli, its ability to service the Fund could be adversely
affected. There can be no assurance that a suitable replacement could be found
for Mr. Gabelli in the event of his death, resignation, retirement or
inability to act on behalf of the Investment Adviser.
Current 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 Series A
Preferred and/or the AMPS.
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."
43
Status as a Regulated Investment Company. The Fund has elected and
has qualified, and intends to remain qualified, for federal income tax
purposes as a regulated investment company. Qualification requires, among
other things, compliance by the Fund with certain distribution requirements.
Statutory limitations on distributions on the common shares if the Fund fails
to satisfy the 1940 Act's asset coverage requirements could jeopardize the
Fund's ability to meet such distribution requirements. The Fund presently
intends, however, to purchase or redeem preferred shares to the extent
necessary in order to maintain compliance with such asset coverage
requirements. See "Taxation" for a more complete discussion of these and other
federal income tax considerations.
How the Fund Manages Risk
Investment Restrictions
The Fund has adopted certain investment limitations, some of which
are fundamental policies of the Fund, designed to limit investment risk and
maintain portfolio diversification. Under the 1940 Act, a fundamental policy
may not be changed without the vote of a majority, as defined in the 1940 Act,
of the outstanding voting securities of the Fund (voting together as a single
class). In, addition, pursuant to the Fund's Series A Statement of Preferences
and Statement of Preferences of each of the series of AMPS , a majority, as
defined in the 1940 Act, of the outstanding preferred shares of the Fund
(voting separately as a single class) is also required to change a fundamental
policy. The Fund may become subject to guidelines that are more limiting than
its current investment restrictions in order to obtain and maintain ratings
from Moody's and S&P on its preferred shares.
Interest Rate Transactions
The Fund may enter into interest rate swap or cap transactions in
relation to all or a portion of the AMPS in order to manage the impact on its
portfolio of changes in the dividend rate of each series of the AMPS. Through
these transactions the Fund may, for example, obtain the equivalent of a fixed
rate for the AMPS that is lower than the Fund would have to pay if it issued
fixed rate preferred shares.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party to the interest rate swap
(which is known as the "counterparty") periodically a fixed rate payment in
exchange for the counterparty agreeing to pay to the Fund periodically a
variable rate payment that is intended to approximate the Fund's variable rate
payment obligation on each series of the AMPS. In an interest rate cap, the
Fund would pay a premium to the counterparty to the interest rate cap and, to
the extent that a specified variable rate index exceeds a predetermined fixed
rate, would receive from the counterparty payments of the difference based on
the notional amount of such cap. Interest rate swap and cap transactions
introduce additional risk because the Fund would remain obligated to pay
preferred share dividends when due in accordance with the Statement of
Preferences of each series of the AMPS 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 each series
of the AMPS. In addition, at the time an interest rate swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund will not
be able to obtain a replacement transaction or that the terms of the
replacement will not be as favorable as on the expiring transaction. If this
occurs, it could have a negative impact on the Fund's ability to make dividend
payments on each series of the AMPS. To the extent there is a decline in
interest rates, the value of the interest rate swap or cap could decline,
resulting in a decline in the asset coverage for each series of the AMPS.
44
A sudden and dramatic decline in interest rates may result in a significant
decline in the asset coverage. Under the Series A Statement of Preferences and
Statement of Preferences for each series of the AMPS, if the Fund fails to
maintain the required asset coverage on the outstanding preferred shares
(including the AMPS) or fails to comply with other covenants, the Fund may, at
its option (and in certain circumstances will be required to), mandatorily
redeem some or all of these shares. The Fund may also choose to redeem some or
all of the AMPS at any time. Such redemption would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of a swap could result in a termination payment by the Fund
to the counterparty, while early termination of a cap could result in a
termination payment to the Fund.
The Fund will usually enter into swaps or caps on a net basis; that
is, the two payment streams will be netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. The Fund
intends to segregate cash or liquid securities having a value at least equal
to the value of the Fund's net payment obligations under any swap transaction,
marked to market daily. The Fund does not presently intend to enter into
interest rate swap or cap transactions relating to the AMPS in a notional
amount in excess of the outstanding amount of the AMPS. 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 the Fund's 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, 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 to waive the portion of its investment advisory fee
attributable to an amount of assets of the Fund equal to the aggregate stated
value of, as the case may be, its outstanding Series A Preferred and/or AMPS
for any calendar year in which the net asset value total return of the Fund
allocable to the common shares, including distributions and the advisory fee
subject to potential waiver, is less than (i) in the case of the Series A
Preferred, the stated annual dividend rate of such series and (ii) in the case
of the AMPS, the net cost of capital to the Fund with respect to each series
of the AMPS for such year expressed as a percentage (including, without
duplication, dividends paid by the Fund on each series of the AMPS and the net
cost to the Fund of any associated swap or cap transaction if the Fund hedges
its AMPS dividend obligations). This waiver will apply to the portion of the
Fund's assets attributable to the Series A Preferred and each series of the
AMPS Preferred, respectively, for so long as any shares of such series remain
outstanding.
The Investment Adviser
45
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to
an advisory agreement with the Fund. The Investment Adviser is a New York
corporation with principal offices located at One Corporate Center, Rye, New
York 10580. The Investment Adviser was organized in 1999 and is the successor
to Gabelli Funds, Inc., which was organized in 1980. As of June 30, 2004, the
Investment Adviser acted as registered investment adviser to 27 management
investment companies with aggregate net assets of $12.1 billion. The
Investment Adviser, together with other affiliated investment advisers noted
below had assets under management totaling approximately $28.2 billion as of
June 30, 2004. 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 $13.6 billion under management as of June 30, 2004.
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 $1.0 billion under management as of June
30, 2004. Gabelli Advisers, Inc., an affiliate of the Investment Adviser, acts
as investment manager to the Gabelli Westwood Funds having aggregate assets of
$438 million under management as of June 30, 2004.
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. The Fund pays all
other expenses incurred in its operation including, among other things,
offering expenses, expenses for legal and Independent Registered Public
Accounting Firm services, rating agency fees, costs of printing proxies, share
certificates and shareholder reports, charges of the custodian, any
subcustodian, auction agent, transfer agent(s) and dividend paying agent,
expenses in connection with its respective automatic dividend reinvestment and
voluntary cash purchase plan, Security and Exchange Commission fees, fees and
expenses of unaffiliated directors, accounting and pricing costs, including
costs of calculating the net asset value of the Fund, membership fees in trade
associations, fidelity bond coverage for its officers and employees,
directors' and officers' errors and omission insurance coverage, interest,
brokerage costs, taxes, stock exchange listing fees and expenses, expenses of
qualifying its shares for sale in various states, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable
by the Fund.
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
46
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,
President and Chief Investment Officer of the Investment Adviser since 1980.
Mr. Gabelli also serves as Portfolio Manager for a number of 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 serves 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, Anthonie C. van Ekris and Mario d'Urso, Trustees of
the Fund, reside outside the United States and all or a significant portion of
their assets are located outside the United States. None of these trustees 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 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.
47
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 and subpoenas from the Securities and Exchange Commission and 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 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 has a policy, which may be modified at any time by its Board
of Trustees, of paying regular distributions on its common shares. The Fund
has recently adopted a policy, which may be changed at any time by the Board
of Trustees, of paying monthly distributions of $.10 per share, which is equal
to an annual rate of 6% of the offering price per common share. 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. On September 24, 2004, the Fund
paid its third dividend of $.30 per share, a portion of which constituted a
return of capital. To avoid paying income tax at the corporate level, the Fund
will distribute substantially all of its investment company taxable income and
net capital gains.
The Fund may retain for reinvestment, and pay the resulting federal
income taxes on, its net capital gain, if any, although, as previously
mentioned, the Fund intends to distribute substantially all of its net capital
gain each year. In the event that the Fund's 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 investment company taxable income
and net capital gain, the excess will generally be treated
48
as a tax-free return of capital up to the amount of a shareholder's tax basis
in his or her shares. Any distributions to the holders of preferred shares
which constitute tax-free return of capital will reduce a shareholder's tax
basis in such preferred shares, thereby increasing such shareholder's
potential gain or reducing his or her potential loss on the sale of the
preferred shares. Any amounts distributed to a preferred shareholder in excess
of the basis in the preferred shares will generally be taxable to the
shareholder as capital gain. See "Taxation."
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 covered 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.
Description of The Series A Preferred
And THE Amps
The Fund offers by this prospectus, in the aggregate, $ million of
preferred shares of either Series A Preferred or AMPS, or a combination of
such series. The following is a brief description of the terms of each of the
Series A Preferred and each of the series of AMPS. This description does not
purport to be complete and is qualified by reference to the Fund's Declaration
of Trust and Statements of Preferences (the Fund's Governing Documents),
including the provisions of the Series A Statement of Preferences and
Statement of Preferences of each of the series of AMPS . For complete terms of
the Series A Preferred or each series of the AMPS, including definitions of
terms used in this prospectus, please refer to the actual terms of such
series, which are set forth in the applicable Statement of Preferences.
General
Under its Governing Documents, the Fund is authorized to issue an
unlimited amount of preferred shares. Under its Governing Documents, the Fund
is authorized to issue such preferred shares as Series A Preferred and AMPS in
the amounts offered by this Prospectus. No fractional shares of either series
will be issued. The Board of Trustees reserves the right to issue additional
preferred shares, including Series A Preferred or AMPS, or senior securities
representing debt from time to time, subject to the restrictions in the Fund's
Governing Documents and the 1940 Act.
If and when issued, the Series A Preferred will have a liquidation
preference of $25 per share and the AMPS will have a liquidation preference of
$25,000 per share. Upon a liquidation, each holder of Series A Preferred or
AMPS will be entitled to receive out of the assets of the Fund available for
49
distribution to shareholders (after payment of claims of the Fund's creditors
but before any distributions with respect to the Fund's common shares or any
other shares of the Fund ranking junior to the Series A Preferred and the AMPS
as to liquidation payments) an amount per share equal to such share's
liquidation preference plus any accumulated but unpaid dividends (whether or
not earned or declared, excluding interest thereon) to the date of
distribution and such shareholders shall be entitled to no further
participation in any distribution or payment in connection with such
liquidation. The Series A Preferred and the AMPS will rank on a parity with
any other series of preferred shares (including other series of AMPS) of the
Fund as to the payment of dividends and the distribution of assets upon
liquidation, and will be junior to the Fund's obligations with respect to any
outstanding senior securities representing debt. Series A Preferred and each
series of the AMPS each carry one vote per share on all matters on which such
shares are entitled to vote. The Series A Preferred and each series of the
AMPS will, upon issuance, be fully paid and nonassessable and will have no
preemptive, exchange or conversion rights. The Board of Trustees may by
resolution classify or reclassify any authorized but unissued capital shares
of the Fund from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or terms or conditions of redemption. The Fund will not issue any
class of shares senior to the Series A Preferred and/or the AMPS.
Rating Agency Guidelines
Upon issuance, both the Series A Preferred and the AMPS will be
rated "Aaa" by Moody's. In addition, the AMPS will also be rated "AAA" by S&P.
The Fund is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Basic
Maintenance Amount (as defined below) for its outstanding preferred shares,
including any outstanding Series A Preferred or AMPS, with respect to the
separate guidelines Moody's and S&P has each established for determining
discounted value. To the extent any particular portfolio holding does not
satisfy the applicable rating agency's guidelines, all or a portion of such
holding's value will not be included in the calculation of discounted value
(as defined by such rating agency). The Moody's and S&P guidelines also impose
certain diversification requirements and industry concentration limitations on
the Fund's overall portfolio, and apply specified discounts to securities held
by the Fund (except certain money market securities). The "Basic Maintenance
Amount" is equal to (i) the sum of (a) the aggregate liquidation preference of
any preferred shares then outstanding plus (to the extent not included in the
liquidation preference of such preferred shares) an amount equal to the
aggregate accumulated but unpaid dividends (whether or not earned or declared)
in respect of such preferred shares, (b) the total principal of any debt (plus
accrued and projected interest), (c) certain Fund expenses and (d) certain
other current liabilities (excluding any unpaid dividends on the Fund's common
shares) less (ii) the Fund's (a) cash and (b) assets consisting of
indebtedness which (y) to mature prior to or on the date of redemption or
repurchase of the preferred shares and are U.S. Government Securities or
evidences of indebtedness rated at least "Aaa," "P-1", "VMIG-1" or "MIG-1" by
Moody's or "AAA", "SP-1+" or "A-1+" by S&P, and (z) is held by the Fund for
the payment of dividends or distributions, the redemption or repurchase of
preferred shares or the Fund's liabilities.
If the Fund does not timely cure a failure to maintain a discounted
value of its portfolio equal to the Basic Maintenance Amount in accordance
with the requirements of the applicable rating agency or agencies then rating
the Series A Preferred or the AMPS at the request of the Fund, the Fund may,
and in certain circumstances will be required to, mandatorily redeem preferred
shares, including the Series A Preferred or the AMPS, as described below under
" -- Redemption."
The Fund may, but is not required to, adopt any modifications to the
rating agency guidelines that may hereafter be established by Moody's and S&P.
Failure to adopt any such modifications, however, may result in a change in
the relevant rating agency's ratings or a withdrawal of such ratings
altogether. In addition, any rating agency providing a rating for the
Series A Preferred or the AMPS at the request of
50
the Fund may, at any time, change or withdraw any such rating. The Board of
Trustees, without further action by the shareholders, may amend, alter, add to
or repeal certain of the definitions and related provisions that have been
adopted by the Fund pursuant to the rating agency guidelines if the Board
determines that such modification is necessary to prevent a reduction in
rating of the preferred shares by Moody's and S&P, as the case may be, is in
the best interests of the holders of common shares and is not adverse to the
holders of preferred shares in view of advice to the Fund by Moody's and S&P
(or such other rating agency then rating the Series A Preferred and/or the
AMPS at the request of the Fund) that such modification would not adversely
affect, as the case may be, its then current rating of the Series A Preferred
and/or the AMPS.
The Board of Trustees may amend either the Series A Statement of
Preferences or the Statement of Preferences of each of the series of AMPS `s
definition of "Maximum Rate" (the "maximum rate" as defined below under " --
Dividends on the AMPS -- Maximum Rate") to increase the percentage amount by
which the applicable reference rate is multiplied or to increase the
applicable spread to which the reference rate is added to determine the
maximum rate without the vote or consent of the holders of the AMPS or any
other shareholder of the Fund, but only after consultation with the
broker-dealers and with confirmation from each applicable rating agency that
the Fund could meet applicable rating agency asset coverage tests immediately
following any such increase
As described by Moody's and S&P, the ratings assigned to the Series A
Preferred and each of the series of AMPS are assessments of the capacity and
willingness of the Fund to pay the obligations of each of the Series A
Preferred and each of the series of AMPS. The ratings on the Series A
Preferred and each of the series of AMPS are not recommendations to purchase,
hold or sell shares of either series, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines also do not address the likelihood that an owner of Series A
Preferred or AMPS will be able to sell such shares on an exchange, in an
auction or otherwise. The ratings are based on current information furnished
to Moody's and S&P by the Fund and the Investment Adviser and information
obtained from other sources. The ratings may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such
information.
The rating agency guidelines will apply to the Series A Preferred or
AMPS, as the case may be, only so long as such rating agency is rating such
shares at the request of the Fund. The Fund will pay fees to Moody's and S&P
for rating the Series A Preferred and the AMPS.
Asset Maintenance Requirements
In addition to the requirements summarized under " -- Rating Agency
Guidelines" above, the Fund must also satisfy asset maintenance requirements
under the 1940 Act with respect to its preferred shares. The 1940 Act
requirements are summarized below.
The Fund will be required under the Series A Statement of Preferences
and the Statement of Preferences of each of the series of AMPS to determine
whether it has, as of the last business day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of at
least 200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of the
Fund that are stock, including any outstanding Series A Preferred and the
AMPS. If the Fund fails to maintain the asset coverage required under the 1940
Act on such dates and such failure is not cured within 60 calendar days, in
the case of the Series A Preferred, or 10 business days, in the case of each
series of AMPS, (including the Series A Preferred or the AMPS) the Fund may,
and in certain circumstances will be required to, mandatorily redeem the
number of preferred shares sufficient to satisfy such asset coverage. See " --
Redemption" below.
51
If the shares of Series A Preferred and/or AMPS offered hereby had
been issued and sold as of September 15, 2004, the asset coverage required
under the 1940 Act (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $5,750,000),
would have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $1,900,996,846
-------------------------------------------------------------- = ----------------- = 634%
Senior securities representing indebtedness $300,000,000
plus liquidation preference of each class of preferred shares
Dividends on the Series A Preferred
Upon issuance of the Series A Preferred (if issued), holders of
shares of Series A Preferred will be entitled to receive, when, as and if
declared by the Board of Trustees of the Fund out of funds legally available
therefor, cumulative cash dividends, at the annual rate of % (computed on the
basis of a 360-day year consisting of twelve 30-day months) of the liquidation
preference of $25 per share, payable quarterly on , , and each year or, if any
such day is not a business day, the immediately succeeding business day. Such
dividends will commence on , 2009 and will be payable to the persons in whose
names the shares of Series A Preferred are registered at the close of business
on the fifth preceding business day.
Dividends on the shares of Series A Preferred will accumulate from
the date on which such shares are issued.
Dividends on the AMPS
General. Upon issuance of the AMPS (if issued), the holders of each
series of AMPS will be entitled to receive cash dividends stated at annual
rates as a percentage of its $25,000 per share liquidation preference, that
will vary from dividend period to dividend period. The dividend rate for the
initial dividend period for each series of AMPS offered in this prospectus
will be the rate set out on the cover of this prospectus. For subsequent
dividend periods, each series of AMPS will pay dividends based on a rate set
at the auction, normally held weekly, but the rates set at the auction will
not exceed the maximum rate. Dividend periods generally will be seven days,
and the dividend periods generally will begin on the first business day after
an auction. In most instances, dividends are also paid weekly, on the business
day following the end of the dividend period. The Fund, subject to some
limitations, may change the length of the dividend periods, designating them
as "special dividend periods," as described below.
Dividend Payments. Except as described below, the dividend payment
date will be the first business day after the dividend period ends. The
dividend payment dates for special dividend periods of more (or less) than
seven days will be set out in the notice designating a special dividend
period. See " -- Designation of Special Dividend Periods" for a discussion of
payment dates for a special dividend period.
Dividends on each series of AMPS will be paid on the dividend payment
date to holders of record as their names appear on the Fund's share ledger or
share records on the business day next preceding the dividend payment date. If
dividends are in arrears, they may be declared and paid at any time to holders
of record as their names appear on the Fund's share ledger or share records on
a date not more than 15 days before the payment date, as the Fund's Board of
Trustees may fix.
The dividend paying agent, in accordance with its current procedures,
is expected to credit in same-day funds on each dividend payment date
dividends received from the Fund to the accounts of broker-dealers who act on
behalf of holders of each series of AMPS. Such broker-dealers, in turn, are
52
expected to distribute dividend payments to the person for whom they are
acting as agents. If a broker-dealer does not make dividends available to
holders of each series of AMPS in same-day funds, these shareholders will not
have funds available until the next business day.
Dividend Rate Set at Auction. The AMPS pay dividends based on a rate
set at auction at which each series of AMPS may be bought and sold. The
auction usually is held weekly, but may be held more or less frequently. The
Bank of New York, the auction agent, reviews orders from broker-dealers on
behalf of existing holders who wish to sell, hold at the auction rate, or hold
only at a specified dividend rate, and on behalf of potential holders who wish
to buy shares of a series of AMPS. The auction agent then determines the
lowest dividend rate that will result in all of the shares of a series of AMPS
continuing to be held. See "The Auction of AMPS."
If a dividend payment date is not a business day because the NYSE is
closed for business for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act
of terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the dividend payable on such date can not be paid
for any such reason, then:
o the dividend payment date for the affected dividend period
will be the next business day on which the Fund and its
paying agent, if any, are able to cause the dividend to be
paid using their reasonable best efforts;
o the affected dividend period will end on the day it would
have ended had such event not occurred and the dividend
payment date had remained the scheduled date; and
o the next dividend period will begin and end on the dates on
which it would have begun and ended had such event not
occurred and the dividend payment date remained the
scheduled date.
Determination of Dividend Rates. The Fund computes the dividends per
share by multiplying the applicable rate determined at the auction by a
fraction, the numerator of which normally is the number of days in such
dividend period and the denominator of which is 360. This applicable rate is
then multiplied by $25,000 to arrive at the dividend per share.
Maximum Rate. The dividend rate that results from an auction for each
of the series of AMPS will not be greater than the applicable "maximum rate."
The maximum rate for any standard dividend period will be the greater of the
applicable percentage of the Reference Rate or the Reference Rate plus the
applicable spread. The Reference Rate will be the applicable LIBOR Rate (as
defined below) for a dividend period of fewer than 365 days or the Treasury
Index Rate (as defined below) for a dividend period of 365 days or more. The
applicable percentage and the applicable spread will be determined based on
the lower of the credit ratings assigned to each series of AMPS by Moody's and
S&P on the auction date for such period (as set forth in the table on the next
page). If Moody's and/or S&P do not make such rating available, the rate shall
be determined by reference to equivalent ratings issued by a substitute rating
agency. In the case of a special dividend period, (1) the Fund will
communicate the maximum applicable rate in a notice of special rate period for
such dividend payment period, (2) the applicable percentage and applicable
spread will be determined on the date two business days before the first day
of such special dividend period and (3) the reference rate will be the
applicable LIBOR Rate for a dividend period of fewer than 365 days or the
Treasury Index Rate for a dividend period of 365 days or more.
The Fund will take all reasonable action necessary to enable Moody's
and S&P to provide ratings for each series of AMPS. If such ratings are not
made available by Moody's or S&P, the Fund, after
53
consultation with the lead Broker-Dealer, initially Merrill Lynch, Pierce,
Fenner & Smith Incorporated, will select one or more other rating agencies to
act as substitute rating agencies.
The "LIBOR Rate," as described in greater detail in the Statement of
Preferences of each of the series of AMPS, is the applicable London Inter-Bank
Offered Rate for deposits in U.S. dollars for the period most closely
approximating the applicable dividend period for each series of AMPS.
The "Treasury Index Rate," as described in greater detail in the
Statement of Preferences of each of the series of AMPS , is the average yield
to maturity for certain U.S. Treasury securities having substantially the same
length to maturity as the applicable dividend period for each series of AMPS.
--------------------------------------------------------------------------------------------------------------
Credit Ratings Applicable Percentage Applicable Spread
---------------------------------------------------- ----------------------------- --------------------
Moody's S&P
------------------------- --------------------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
Assuming the Fund maintains an "AAA" and "Aaa" rating on the AMPS,
the practical effect of the different methods used to determine the maximum
rate is shown in the table below:
Maximum Applicable Maximum Applicable Method Used to
Rate Using the Rate Using the Determine the Maximum Applicable
Reference Rate Applicable Percentage Applicable Spread Rate
-------------------- ------------------------ -------------------- ---------------------------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
There is no minimum dividend rate in respect of any dividend period.
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund
fails to pay the paying agent the full amount of any dividend or redemption
price, as applicable, for each series of AMPS in a timely manner the dividend
rate for each series of AMPS for the dividend period following such a failure
to pay (such period referred to as the default period) and any subsequent
dividend period for which such default is continuing, will be the default
rate. In the event the Fund fully pays all default amounts due during a
dividend period, the dividend rate for the remainder of that dividend period
will be, as the case may be, the applicable rate (for the first dividend
period following a dividend default) or the then maximum rate (for any
subsequent dividend period for which such default is continuing).
The default rate is 300% of the applicable LIBOR Rate for a dividend
period of 364 days or fewer and 300% of the applicable Treasury Index Rate for
a dividend period of longer than 364 days.
54
Designation of Special Dividend Periods. The Fund may instruct the
auction agent to hold auctions more or less frequently than weekly and may
designate dividend periods longer or shorter than one week. The Fund may do
this if, for example, the Fund expects that short-term rates might increase or
market conditions otherwise change, in an effort to optimize the effect of the
Fund's leverage on holders of its common shares. The Fund does not currently
expect to hold auctions and pay dividends less frequently than weekly or
establish dividend periods longer or shorter than one week. If the Fund
designates a special dividend period, changes in interest rates could affect
the price received if shares of AMPS are sold in the secondary market.
Any designation of a special dividend period will be effective only
if (i) notice thereof has been given as provided for in the Governing
Documents, (ii) any failure to pay in a timely manner to the auction agent the
full amount of any dividend on, or the redemption price of, a series of AMPS
has been cured as provided for in the Governing Documents, (iii) the auction
immediately preceding the special dividend period was not a failed auction,
(iv) if the Fund has mailed a notice of redemption with respect to the
applicable series of AMPS, the Fund has deposited with the paying agent all
funds necessary for such redemption and (v) the Fund has confirmed that as of
the auction date next preceding the first day of such special dividend period,
it has assets with an aggregate discounted value at least equal to the Basic
Maintenance Amount (as defined below), and the Fund has consulted with the
broker-dealers for each series of AMPS including the lead broker-dealer,
initially Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the Fund has
provided notice of such designation and a Basic Maintenance Report to each
rating agency then rating the AMPS at the request of the Fund.
The dividend payment date for any special dividend period will be the
first business day after the end of the special dividend period. In addition,
for special dividend periods of at least 91 days, dividend payment dates will
occur on the first business day of each calendar month within such dividend
period and on the business day following the last day of such dividend period.
Before the Fund designates a special dividend period: (i) at least
seven business days (or two business days in the event the duration of the
dividend period prior to such special dividend period is less than eight days)
and not more than 30 business days before the first day of the proposed
special dividend period, the Fund will issue a press release stating its
intention to designate a special dividend period and inform the auction agent
of the proposed special dividend period by telephonic or other means and
confirm it in writing promptly thereafter and (ii) the Fund must inform the
auction agent of the proposed special dividend period by 3:00 p.m., New York
City time on the second business day before the first day of the proposed
special dividend period.
See the SAI for more information.
Restrictions on Dividends and Other Distributions for the Series A Preferred
and the AMPS
So long as any Series A Preferred or AMPS is outstanding, the Fund
may not pay any dividend or distribution (other than a dividend or
distribution paid in common shares or in options, warrants or rights to
subscribe for or purchase common shares) in respect of the common shares or
call for redemption, redeem, purchase or otherwise acquire for consideration
any common shares (except by conversion into or exchange for shares of the
Fund ranking junior to the Series A Preferred and/or AMPS as to the payment of
dividends and the distribution of assets upon liquidation), unless:
o the Fund has declared and paid (or provided to the relevant
dividend paying agent) all cumulative dividends on the
Fund's preferred shares, including the Series A Preferred
and/or AMPS, due on or prior to the date of such common
share dividend or distribution;
55
o the Fund has redeemed the full number of shares of Series A
Preferred and/or AMPS to be redeemed pursuant to any
mandatory redemption provision in the Fund's Governing
Documents; and
o after paying the dividend, the Fund meets applicable asset
coverage requirements described under " -- Rating Agency
Guidelines" and " -- Asset Maintenance Requirements."
No full dividend will be declared or paid on the Series A Preferred
or the AMPS for any dividend period, or part thereof, unless full cumulative
dividends due through the most recent dividend payment dates therefor for all
outstanding series of preferred shares of the Fund ranking on a parity with
the Series A Preferred and AMPS as to the payment of dividends have been or
contemporaneously are declared and paid. If full cumulative dividends due have
not been paid on all outstanding preferred shares of the Fund ranking on a
parity with the Series A Preferred and/or AMPS as to the payment of dividends,
any dividends being paid on the preferred shares (including the Series A
Preferred and/or the AMPS) will be paid as nearly pro rata as possible in
proportion to the respective amounts of dividends accumulated but unpaid on
each such series of preferred shares on the relevant dividend payment date.
The Fund's obligation to pay dividends on the Series A Preferred and/or the
AMPS will be subordinate to its obligations to pay interest and principal,
when due, on any of the Fund's senior securities representing debt.
Redemption
Mandatory Redemption Relating to Asset Coverage Requirements. The
Fund may, at its option, consistent with its Governing Documents and the 1940
Act, and in certain circumstances will be required to, mandatorily redeem
preferred shares (including, at its discretion, the Series A Preferred or
AMPS) in the event that:
o the Fund fails to maintain the asset coverage requirements
specified under the 1940 Act on a quarterly valuation date
and such failure is not cured on or before 60 days, in the
case of the Series A Preferred, or 10 business days in the
case of the AMPS following such failure; or
o the Fund fails to maintain the asset coverage requirements
as calculated in accordance with the applicable rating
agency guidelines as of any monthly valuation date, and such
failure is not cured on or before 10 business days after
such valuation date.
The redemption price for shares of each of the Series A Preferred and
each series of AMPS subject to mandatory redemption will be, respectively, $25
per share and $25,000 per share, in each case plus an amount equal to any
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption, plus (in the case of a series of AMPS having a
dividend period of more than one year) any applicable redemption premium
determined by the Board of Trustees.
The number of preferred shares that will be redeemed in the case of a
mandatory redemption will equal the minimum number of outstanding preferred
shares, the redemption of which, if such redemption had occurred immediately
prior to the opening of business on the applicable cure date, would have
resulted in the relevant asset coverage requirement having been met or, if the
required asset coverage cannot be so restored, all of the preferred shares. In
the event that preferred shares are redeemed due to a failure to satisfy the
1940 Act asset coverage requirements, the Fund may, but is not required to,
redeem a sufficient number of preferred shares so that the Fund's assets
exceed the asset coverage requirements under the 1940 Act after the redemption
by 10% (that is, 220% asset coverage). In the event that preferred shares are
redeemed due to a failure to satisfy applicable rating agency guidelines, the
Fund
56
may, but is not required to, redeem a sufficient number of preferred shares so
that the Fund's discounted portfolio value (as determined in accordance with
the applicable rating agency guidelines) after redemption exceeds the asset
coverage requirements of each applicable rating agency by up to 10% (that is,
110% rating agency asset coverage). In addition, as discussed under " --
Optional Redemption of the AMPS" below, the Fund generally may exercise its
optional redemption rights with respect to the AMPS at any time.
If the Fund does not have funds legally available for the redemption
of, or is otherwise unable to redeem, all the preferred shares to be redeemed
on any redemption date, the Fund will redeem on such redemption date that
number of shares for which it has legally available funds, or is otherwise
able to redeem, from the holders whose shares are to be redeemed ratably on
the basis of the redemption price of such shares, and the remainder of those
shares to be redeemed will be redeemed on the earliest practicable date on
which the Fund will have funds legally available for the redemption of, or is
otherwise able to redeem, such shares upon written notice of redemption.
If fewer than all of the Fund's outstanding preferred shares are to
be redeemed, the Fund, at its discretion and subject to the limitations of the
1940 Act and Delaware law, will select the one or more series of preferred
shares from which shares will be redeemed and the amount of preferred shares
to be redeemed from each such series. If less than all preferred shares of a
series are to be redeemed, such redemption will be made as among the holders
of that series pro rata in accordance with the respective number of shares of
such series held by each such holder on the record date for such redemption
(or by such other equitable method as the Fund may determine). If fewer than
all the preferred shares held by any holder are to be redeemed, the notice of
redemption mailed to such holder will specify the number of shares to be
redeemed from such holder, which may be expressed as a percentage of shares
held on the applicable record date.
Optional Redemption of the Series A Preferred. Prior to , 2009 the
shares of Series A Preferred are not subject to optional redemption by the
Fund unless such redemption is necessary, in the judgment of the Fund, to
maintain the Fund's status as a regulated investment company under the Code.
Commencing on , and thereafter, the Fund may at any time redeem shares of
Series A Preferred in whole or in part for cash at a redemption price per
share equal to $25 per share plus accumulated and unpaid dividends (whether or
not earned or declared) to the redemption date. Such redemptions are subject
to the notice requirements set forth under " -- Redemption Procedures" and the
limitations of the 1940 Act and Delaware law.
Optional Redemption of the AMPS. The Fund may, at its option, redeem
each series of AMPS, in whole or in part, at any time following the initial
dividend period so long as the Fund has not designated a non-call period. The
Fund may designate a non-call period during a dividend period of more than
seven days. In the case of a series of AMPS having a dividend period of one
year or less, the redemption price per share will equal $25,000 plus an amount
equal to any accumulated but unpaid dividends thereon (whether or not earned
or declared) to the redemption date, and in the case of a series of AMPS
having a dividend period of more than one year, for the redemption price plus
any redemption premium applicable during such dividend period. Such
redemptions are subject to the notice requirements set forth under " --
Redemption Procedures" and the limitations of the 1940 Act and Delaware law.
Redemption Procedures. A notice of redemption with respect to an
optional redemption will be given to the holders of record of preferred shares
selected for redemption not less than 15 days (subject to NYSE requirements),
in the case of the Series A Preferred, and not less than seven days in the
case of the AMPS, nor, in both cases, more than 40 days prior to the date
fixed for redemption. Preferred shareholders may receive shorter notice in the
event of a mandatory redemption. Each notice of redemption will state (i) the
redemption date, (ii) the number or percentage of preferred shares to be
57
redeemed (which may be expressed as a percentage of such shares outstanding),
(iii) the CUSIP number(s) of such shares, (iv) the redemption price
(specifying the amount of accumulated dividends to be included therein), (v)
the place or places where such shares are to be redeemed, (vi) that dividends
on the shares to be redeemed will cease to accumulate on such redemption date,
(vii) the provision of the Series A Statement of Preferences or Statement of
Preferences of each of the series of AMPS , as applicable, under which the
redemption is being made and (viii) any conditions precedent to such
redemption. No defect in the notice of redemption or in the mailing thereof
will affect the validity of the redemption proceedings, except as required by
applicable law.
The holders of Series A Preferred or AMPS will not have the right to
redeem any of their shares at their option.
Liquidation Rights
Upon a liquidation, dissolution or winding up of the affairs of the
Fund (whether voluntary or involuntary), holders of Series A Preferred or AMPS
then outstanding will be entitled to receive out of the assets of the Fund
available for distribution to shareholders, after satisfying claims of
creditors but before any distribution or payment of assets is made to holders
of the common shares or any other class of shares of the Fund ranking junior
to the Series A Preferred or the AMPS as to liquidation payments, a
liquidation distribution in the amount of $25 per share, in the case of the
Series A Preferred, or $25,000 per share, in the case of the AMPS, in either
case plus an amount equal to all unpaid dividends accumulated to and including
the date fixed for such distribution or payment (whether or not earned or
declared by the Fund but excluding interest thereon), and such holders will be
entitled to no further participation in any distribution or payment in
connection with any such liquidation, dissolution or winding up. If, upon any
liquidation, dissolution or winding up of the affairs of the Fund, whether
voluntary or involuntary, the assets of the Fund available for distribution
among the holders of all outstanding preferred shares of the Fund ranking on a
parity with the Series A Preferred and/or the AMPS as to payment upon
liquidation will be insufficient to permit the payment in full to such holders
of the Series A Preferred and/or the AMPS and other parity preferred shares of
the amounts due upon liquidation with respect to such shares, then such
available assets will be distributed among the holders of the Series A
Preferred, the AMPS and such other parity preferred shares ratably in
proportion to the respective preferential amounts to which they are entitled.
Unless and until the liquidation payments due to holders of the Series A
Preferred and/or the AMPS and such other parity preferred shares have been
paid in full, no dividends or distributions will be made to holders of the
common shares or any other shares of the Fund ranking junior to the Series A
Preferred and/or the AMPS and other parity preferred shares as to liquidation
and junior to any senior securities representing debt.
Voting Rights
Except as otherwise stated in this prospectus, specified in the
Fund's Governing Documents or resolved by the Board of Trustees or as
otherwise required by applicable law, holders of the Series A Preferred
and/or the AMPS shall be entitled to one vote per share held on each matter
submitted to a vote of the shareholders of the Fund and will vote together
with holders of common shares and of any other preferred shares then
outstanding as a single class.
In connection with the election of the Fund's trustees, holders of
the outstanding Series A Preferred, AMPS and the other series of preferred
shares, voting together as a single class, will be entitled at all times to
elect two of the Fund's trustees, and the remaining trustees will be
elected by holders of common shares and holders of the Series A Preferred,
AMPS and other series of preferred shares, voting together as a single
class. In addition, if (i) at any time dividends on the outstanding Series
A Preferred, AMPS and/or any other preferred shares are unpaid in an amount
equal to at least two full years dividends
58
thereon and sufficient cash or specified securities have not been deposited
with the applicable paying agent for the payment of such accumulated dividends
or (ii) at any time holders of any other series of preferred shares are
entitled to elect a majority of the trustees of the Fund under the 1940 Act or
the Statements of Preferences creating such shares, then the number of
trustees constituting the Board of Trustees will be increased such that, when
added to the two trustees elected exclusively by the holders of the Series A
Preferred, AMPS and other series of preferred shares as described above, would
then constitute a simple majority of the Board as so adjusted. Such additional
trustees will be elected by the holders of the Series A Preferred, AMPS and
the other series of preferred shares, voting together as a single class, at a
special meeting of shareholders which will be called as soon as practicable
and will be held not less than 10 nor more than 20 days after the mailing date
of the meeting notice. If the Fund fails to send such meeting notice or to
call such a special meeting, the meeting may be called by any preferred
shareholder on like notice. The terms of office of the persons who are
trustees at the time of that election will continue. If the Fund thereafter
pays or declares and sets apart for payment in full all dividends payable on
all outstanding preferred shares for all past dividend periods or the holders
of other series of preferred shares are no longer entitled to elect such
additional trustees, the additional voting rights of the holders of the
preferred shares as described above will cease, and the terms of office of all
of the additional trustees elected by the holders of the preferred shares (but
not of the trustees with respect to whose election the holders of common
shares were entitled to vote or the two trustees the holders of preferred
shares have the right to elect as a separate class in any event) will
terminate.
In the event the Fund issues senior securities representing debt,
preferred shareholders may not be able to exercise certain of their special
voting rights under certain circumstances when they would otherwise be
entitled to do so. Under the 1940 Act, the holders of senior securities
representing debt are entitled to special voting rights under certain
circumstances and these special voting rights would take precedence over the
special voting rights of the preferred shares. Specifically, under the 1940
Act the terms of any senior securities representing debt that is not privately
placed must provide either (i) for an event of default to be deemed to have
occurred with respect to such senior debt in the event the issuer has had
asset coverage of less than 100% for 24 consecutive months or (ii) for the
senior debt holders to be entitled to elect a majority of the issuer's board
in the event such senior debt has had asset coverage of less than 100% for 12
consecutive calendar months, with such voting right to continue until the
senior debt has had asset coverage of 110% or more for three consecutive
calendar months.
In the event the Fund were to issue senior securities representing
debt with the special voting rights described in (ii) above, it is possible
that preferred shareholders would not be entitled to exercise their right to
elect a majority of the board despite all predicate events for such rights
having occurred.
So long as shares of Series A Preferred or AMPS are outstanding, the
Fund will not, without the affirmative vote of the holders of a majority (as
defined in the 1940 Act) of the preferred shares outstanding at the time
(including the Series A Preferred or AMPS, as applicable) and present and
voting on such matter, voting separately as one class, amend, alter or repeal
the provisions of the Fund's Governing Documents, whether by merger,
consolidation or otherwise, so as to materially adversely affect in the
aggregate the contract rights expressly set forth in the Governing Documents
with respect to such preferred shares. Also, to the extent permitted under the
1940 Act, in the event preferred shares of more than one series are
outstanding, the Fund will not approve any of the actions set forth in the
preceding sentence which materially adversely affect the contract rights
expressly set forth in the Governing Documents with respect to such shares of a
series of preferred shares (such as the Series A Preferred or AMPS) differently
than those of a holder of any other series of preferred shares without the
affirmative vote of the holders of at least a majority of the preferred shares
of each series materially adversely affected and outstanding at such time (each
such adversely affected series voting separately as a class to the extent its
rights are affected differently). The Fund's issuance of senior securities
59
representing debt or additional shares of preferred stock will not be deemed to
materially adversely affect the contract rights of any series of preferred
shares.
Under the Governing Documents, and applicable provisions of the
Delaware Statutory Trust Act or the 1940 Act, the affirmative vote of a
majority of the votes entitled to be cast by holders of outstanding preferred
shares (including the Series A Preferred and/or the AMPS), voting together as
a single class, will be required to approve any plan of reorganization
adversely affecting the preferred shares. The approval of 75% of all classes
voting together and a majority (as that term is defined in the 1940 Act) of
each class, voting separately, of the Fund's outstanding voting shares must
approve the conversion of the Fund from a closed-end to an open-end investment
company. The approval of a majority (as that term is defined in the 1940 Act)
of the Fund's outstanding preferred shares and a majority (as that term is
defined in the 1940 Act) of the Fund's outstanding voting securities are
required to approve any action requiring a vote of security holders under
Section 13(a) of the 1940 Act, including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions
described as fundamental policies under "Investment Objective and Policies" in
this prospectus and "Investment Restrictions" in the SAI.
The calculation of the elements and definitions of certain terms of
the rating agency guidelines may be modified by action of the Board of
Trustees without further action by the shareholders if the Board determines
that such modification is necessary to prevent a reduction in rating of the
preferred shares by Moody's and S&P (or any other rating agency then rating
the Series A Preferred or the AMPS at the request of the Fund), as the case
may be, or is in the best interests of the holders of common shares and is not
adverse to the holders of preferred shares in view of advice to the Fund by
the relevant rating agencies that such modification would not adversely affect
its then-current rating of the preferred shares.
The foregoing voting provisions will not apply to any Series A
Preferred or series of AMPS if, at or prior to the time when the act with
respect to which such vote otherwise would be required will be effected, such
shares have been redeemed or called for redemption and sufficient cash or cash
equivalents provided to the applicable paying agent to effect such redemption.
The holders of Series A Preferred and/or AMPS will have no preemptive rights
or rights to cumulative voting.
Limitation on Issuance of Preferred Shares
So long as the Fund has preferred shares outstanding, subject to
receipt of approval from the rating agencies of each series of preferred
shares outstanding, and subject to compliance with the Fund's investment
objective, policies and restrictions, the Fund may issue and sell shares of
one or more other series of preferred shares or senior debt, provided that the
Fund will, immediately after giving effect to the issuance of such additional
preferred shares or senior debt and to its receipt and application of the
proceeds thereof (including, without limitation, to the redemption of
preferred shares to be redeemed out of such proceeds) have an "asset coverage"
for all senior debt outstanding of at least 300% and an "asset coverage" for
senior securities of the Fund which are stock and debt, as defined in the 1940
Act, of at least 200% of the sum of the liquidation preference of the
preferred shares of the Fund then outstanding and all indebtedness of the Fund
constituting senior securities and no such additional preferred shares will
have any preference or priority over any other preferred shares of the Fund
upon the distribution of the assets of the Fund or in respect of the payment
of dividends. Any issued senior securities representing debt, however, may
have certain voting preferences and dividend and liquidation priority over any
preferred shares outstanding.
The Fund anticipates that, depending on interest rates and available
investment opportunities, it will offer additional preferred shares or senior
securities representing indebtedness. However, the Fund will monitor market
conditions, including, among other things, interest rates and the asset levels
of the
60
Fund, and will consider from time to time whether to offer additional
preferred shares or securities representing indebtedness and may issue such
additional securities if the Board of Trustees concludes that such an offering
would be consistent with the Fund's Governing Documents and applicable law and
in the best interest of existing common shareholders.
Repurchase of Series A Preferred and the AMPS
The Fund is a closed-end investment company and, as such, holders of
the Series A Preferred or AMPS do not and will not have the right to require
the Fund to repurchase their shares. The Fund, however, may repurchase Series
A Preferred or, outside of an auction, AMPS when it is deemed advisable by the
Board of Trustees in compliance with the requirements of the 1940 Act and
regulations thereunder and other applicable requirements. Unlike a redemption
of the Series A Preferred and/or the AMPS, where shareholders are subject to
the redemption terms, in a repurchase offer the Fund is purchasing shares on
an exchange (with respect to the Series A Preferred only) or otherwise
(through private transactions or tender offers ) soliciting repurchases, and
shareholders may choose whether or not to sell. The Fund will not repurchase
AMPS at Auction. See "The Auction of AMPS."
This Prospectus will serve as notice that the Fund may from time to
time purchase Series A Preferred shares when such shares are trading below the
$25 per share liquidation preference.
Book-Entry
Shares of Series A Preferred will initially be held in the name of
Cede & Co. as nominee for DTC. The Fund will treat Cede & Co. as the holder of
record of the Series A Preferred for all purposes. In accordance with the
procedures of DTC, however, purchasers of Series A Preferred will be deemed
the beneficial owners of shares purchased for purposes of dividends, voting
and liquidation rights. Purchasers of Series A Preferred may obtain registered
certificates by contacting the Transfer Agent.
Shares of each series of AMPS will initially be held by the auction
agent as custodian for Cede & Co., in whose name the shares of each series of
AMPS shall be registered. The Fund will treat Cede & Co. as the holder of
record of each of the series of AMPS for all purposes.
The Auction of THE Amps
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the
AMPS, which are described in more detail in the SAI. These auction procedures
are complicated, and there are exceptions to these procedures. Many of the
terms in this section have a special meaning. Accordingly, this description
does not purport to be complete and is qualified, in its entirety, by
reference to the Fund's Governing Documents, including the provisions of the
Statement of Preferences of each of the series of AMPS .
The auctions determine the dividend rate for each series of AMPS, but
each dividend rate will not be higher than the maximum rate. See "Description
of the Series A Preferred and the AMPS -- Dividends on the AMPS." If you own
shares of AMPS, you may instruct your broker-dealer to enter one of three
kinds of order in the auction with respect to your shares: sell, bid and hold.
o If you enter a sell order, you indicate that you want to
sell AMPS at $25,000 per share, no matter what the next
dividend period's rate will be.
o If you enter a bid order, which must specify a dividend
rate, you indicate that you want to purchase or hold the
indicated number of AMPS at $25,000 per share if the
dividend rate
61
for the AMPS for the next dividend period is not less than
the rate specified on the bid. A bid order will be deemed an
irrevocable offer to sell AMPS only if the next dividend
period's rate is less than the rate you specify.
o If you enter a hold order you indicate that you want to
continue to own AMPS, no matter what the next dividend
period's rate will be.
You may enter different types of orders for different portions of
your AMPS. You may also enter an order to buy additional AMPS. All orders must
be for whole shares. All orders you submit are irrevocable. There is a fixed
number of each series of AMPS, and the dividend rate likely will vary from
auction to auction depending on the number of bidders, the number of shares
the bidders seek to buy, the rating of the AMPS and general economic
conditions including current interest rates. If you own AMPS and submit a bid
for them higher than the then-maximum rate, your bid will be treated as a sell
order. If you do not enter an order, the broker-dealer will assume that you
want to continue to hold AMPS, but if you fail to submit an order and the
dividend period is longer than 28 days, the broker-dealer will treat your
failure to submit a bid as a sell order.
If you do not then own AMPS, or want to buy more shares, you may
instruct a broker-dealer to enter a bid order to buy shares in an auction at
$25,000 per share at or above the dividend rate you specify. If your bid for
shares you do not own specifies a rate higher than the then-maximum rate, your
bid will not be considered.
Broker-dealers will submit orders from existing and potential holders
of AMPS to the auction agent. Neither the Fund nor the auction agent will be
responsible for a broker-dealer's failure to submit orders from existing or
potential holders of AMPS. A broker-dealer's failure to submit orders for AMPS
held by it or its customers will be treated in the same manner as a holder's
failure to submit an order to the broker-dealer. A broker-dealer may submit
orders to the auction agent for its own account provided that the
broker-dealer is not an affiliate of the Fund. If a broker-dealer submits an
order for its own account in any auction, it may have knowledge of orders
placed though it in that auction and therefore have an advantage over other
bidders, but such broker-dealer would not have knowledge of orders submitted
by other broker-dealers in that auction. As a result of bidding by the
broker-dealer in an auction, the Auction Rate may be higher or lower than the
rate that would have prevailed had the broker-dealer not bid. The Fund may not
submit an order in any auction.
The auction agent after each auction for a series of AMPS will pay to
each broker-dealer, from funds provided by the Fund, a service charge equal
to, in the case of any auction immediately preceding a dividend period of less
than 365 days, the product of (i) a fraction, the numerator of which is the
number of days in such dividend period and the denominator of which is 360,
times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the aggregate number of
AMPS placed by such broker-dealer at such auction. In the case of any auction
immediately preceding a dividend period of one year or longer, the service
charge shall be determined by mutual consent of the Fund and any such
broker-dealer and shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with
a similar final maturity or variable rate dividend period, respectively, at
the commencement of the dividend period with respect to such action. A
broker-dealer may share a portion of any such fees with non-participating
broker-dealers that submit orders to the broker-dealer for an auction that are
placed by that broker-dealer in such auction.
There are sufficient clearing bids for shares of a series of AMPS in
an auction if the number of AMPS subject to bid orders by broker-dealers for
potential holders with a dividend rate equal to or lower than the then-maximum
rate is at least equal to the number of AMPS subject to sell orders and the
number of AMPS subject to bids specifying rates higher than the then-maximum
rate for the AMPS submitted or deemed submitted to the auction agent by
broker-dealers for existing holders, then the dividend rate for
62
the next dividend period will be the lowest rate submitted which, taking into
account that rate and all lower rate bids submitted from existing and
potential holders, would result in existing and potential holders owning all
the AMPS available for purchase in the auction.
If there are not sufficient clearing bids for AMPS, then the auction
is considered to be a failed auction, and the dividend rate will be the
maximum rate. If the Fund has declared a special dividend period and there are
not sufficient clearing bids, then the special dividend rate will not be
effective and the dividend rate for the next period will be the same as during
the current rate period. In that event, existing holders that have submitted
sell orders (or are treated as having submitted sell orders) may not be able
to sell any or all of the AMPS for which they submitted sell orders.
The auction agent will not consider a bid above the then-maximum
rate. The purpose of the maximum rate is to place an upper limit on dividends
with respect to the AMPS and in so doing to help protect the earnings
available to pay dividends on common shares, and to serve as the dividend rate
in the event of a failed auction (that is, an auction where there are more
AMPS offered for sale than there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all
outstanding AMPS, the auction is considered an "all hold" auction and the
dividend rate for the next dividend period will be the "all hold rate," which
is 90% of the reference rate, as determined in accordance with procedures set
forth in the Statement of Preferences of each of the series of AMPS . This
rate may be less than the rate that would have been determined if an auction
had occurred. See "Description of the Series A Preferred and the AMPS --
Dividends on the AMPS -- Maximum Rate."
A broker-dealer may bid in an auction in order to prevent what would
otherwise be (i) a failed auction, (ii) an "all-hold" auction, or (iii) a
dividend rate that the broker-dealer believes, in its sole discretion, does
not reflect the market for the AMPS at the time of the auction. A
broker-dealer may, but is not obligated to, advise owners of AMPS that the
dividend rate that would apply in an "all-hold" auction may be lower than
would apply if owners of AMPS submit bids, and such advice, if given, may
facilitate the submission of bids by such owners that would avoid the
occurrence of an "all-hold" auction.
The auction procedures include a pro rata allocation of AMPS for
purchase and sale. This allocation process may result in an existing holder
continuing to hold or selling, or a potential holder buying, fewer shares than
the number of AMPS in its order. If this happens, broker-dealers will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business
day (which also is a dividend payment date) after the auction date through
DTC. Purchasers will pay for their AMPS through broker-dealers in same-day
funds to DTC against delivery to the broker-dealers. DTC will make payment to
the sellers' broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day funds. As
used in this prospectus, a business day is a day on which the NYSE is open for
trading, and which is not a Saturday, Sunday or any other day on which banks
in New York City are authorized or obligated by law to close.
The first auction each series of AMPS will be held on the business
day preceding the dividend payment date for the initial dividend period.
Thereafter, except during special dividend periods, auctions for the Series B
AMPS normally will be held every Tuesday (or the next preceding business day
if Tuesday is a holiday), and each subsequent dividend period for the Series B
AMPS normally will begin on the following Wednesday. Following the initial
dividend period, auctions for the Series C AMPS normally will be held every
Thursday (or the next preceding business day if Thursday is a holiday), and
each subsequent dividend period for the Series C AMPS normally will begin on
the following Friday.
63
If an auction is not held because an unforeseen event or unforeseen
events cause a day that otherwise would have been an auction date not to be a
business day, then the length of the then-current dividend period will be
extended by seven days (or a multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for such period will be the
applicable rate for the then-current dividend period so extended and the
dividend payment date for such dividend period will be the first business day
immediately succeeding the end of such period.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding AMPS and three current holders. The
three current holders and three potential holders submit orders through
broker-dealers at the auction:
Current Holder A Owns 500 shares, wants to sell all Bid order at 1.6% rate for all 500
500 shares if auction rate is less shares
than 1.6%
Current Holder B Owns 300 shares, wants to hold Hold order - will take the auction
rate
Current Holder C Owns 200 shares, wants to sell all Bid order at 1.4% rate for all 200
200 shares if auction rate is less shares
than 1.4%
Potential Holder D Wants to buy 200 shares Places order to buy at or above 1.5%
Potential Holder E Wants to buy 300 shares Places order to buy at or above 1.4%
Potential Holder F Wants to buy 200 shares Places order to buy at or above 1.6%
The lowest dividend rate that will result in all 1,000 AMPS
continuing to be held is 1.5% (the offer by D). Therefore, the dividend rate
will be 1.5%. Current holders B and C will continue to own their shares.
Current holder A will sell its shares because A's dividend rate bid was higher
than the dividend rate. Potential holder D will buy 200 shares and potential
holder E will buy 300 shares because their bid rates were at or below the
dividend rate. Potential holder F will not buy any shares because its bid rate
was above the dividend rate.
Secondary Market Trading and Transfer of AMPS
The underwriters are not required to make a market in the AMPS. The
broker-dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can
be no assurance that a secondary trading market for the AMPS will develop or,
if it does develop, that it will provide owners with liquidity of investment.
The AMPS will not be registered on any stock exchange or on the NASDAQ market.
Investors who purchase AMPS in an auction for a special dividend period should
note that because the dividend rate on such shares will be fixed for the
length of that dividend period, the value of such shares may fluctuate in
response to the changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next auction
thereof, depending on market conditions. In addition, a broker-dealer may, in
its own discretion, decide to sell AMPS in the secondary market to investors
at any time and at any price, including at prices equivalent to, below or
above the par value of the AMPS.
You may sell, transfer, or otherwise dispose of the AMPS only in
whole shares and only pursuant to a bid or sell order placed with the auction
agent in accordance with the auction procedures, to the Fund or its affiliates
or to or through a broker-dealer that has been selected by the Fund or to such
other persons as may be permitted by the Fund. However, if you hold your AMPS
in the name of a broker-dealer, a sale
64
or transfer of your AMPS to that broker-dealer, or to another customer of that
broker-dealer, will not be considered a sale or transfer for purposes of the
foregoing if the shares remain in the name of the broker-dealer immediately
after your transaction. In addition, in the case of all transfers other than
through an auction, the broker-dealer (or other person, if the Fund permits)
receiving the transfer must advise the auction agent of the transfer.
Further description of the auction procedures can be found in the
SAI.
AUTHORIZED AND OUTSTANDING SHARES
Common Shares
The Funds is a statutory trust organized under the laws of Delaware
pursuant to a Certificate of Trust dated as of August 20, 2003. The Fund is
authorized to issue an unlimited number of shares of beneficial interest, par
value $.001 per share, in multiple classes and series thereof as determined
from time to time by the Board of Trustees. The Board of Trustees of the Fund
has authorized the issuance of an unlimited number of shares of two classes,
the common shares and preferred shares. Each share within a particular class
or series thereof has equal voting, dividend, distribution and liquidation
rights. Common shares are not redeemable and have no preemptive, conversion or
cumulative voting rights.
The common shares are listed and traded on the NYSE under the symbol
"GDV." The average weekly trading volume of the common shares on the NYSE for
the period commencing November 25, 2003 and ending December 31, 2003 was
174,284 shares. The average weekly trading volume of the common shares on the
NYSE for the period commencing January 1, 2004 and ending September 20, 2004
was 157,157 shares. The Fund's common shares have traded in the market at both
a premium to and a discount from net asset value.
The Fund is authorized, subject to maintaining required asset
coverage on its preferred shares, to repurchase its common shares in the open
market when the common shares are trading at a discount of 7.5% or more (or
such other percentage as the Fund's Board of Trustees may determine from time
to time) from net asset value.
Shareholders whose common shares are registered in their own name
will have all distributions reinvested pursuant to the Automatic Dividend
Reinvestment and Voluntary Cash Purchase Plan. For a more detailed discussion
of the Fund's reinvestment plan, see "Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan" in the SAI.
Preferred Shares
Currently, an unlimited amount of the Fund's shares have been
classified by the Board of Trustees as preferred shares, par value $.001 per
share. The terms of such preferred shares may be fixed by the Board and would
materially limit and/or qualify the rights of the holders of the Fund's common
shares. For a description of these terms and limitations, with respect to
liquidation rights, dividends, the rights of holders of the Fund's preferred
shares to receive distributions, and selection of trustees to the Fund's Board
of Trustees, see "Description of the Series A Preferred and the AMPS." As of
June 30, 2004, the Fund had no preferred shares outstanding.
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
65
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 has elected to be treated and has qualified as, and intends
to continue to qualify as, a regulated investment company under Subchapter M
of the Code. Accordingly, the Fund must, among other things, (i) derive in
each taxable year at least 90% of its gross income (including tax-exempt
interest) from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited
to gain from options, futures and forward contracts) derived with respect to
its business of investing in such stock, securities or currencies; and (ii)
diversify its holdings so that, at the end of each quarter of each taxable
year (a) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, U.S. government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and not more than 10% of the
outstanding voting securities of such issuer and (b) not more than 25% of the
market value of the Fund's total assets is invested in the securities of any
issuer (other than U.S. government securities and the securities of other
regulated investment companies) or of any two or more issuers that the Fund
controls and that are determined to be engaged in the same business or similar
or related trades or businesses.
As a regulated investment company, the Fund generally is not subject
to U.S. federal income tax on income and gains that it distributes each
taxable year to 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 gains
over net long-term capital losses and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax-exempt interest over certain disallowed
deductions). The Fund intends to distribute at least annually substantially
all of such income.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount at least equal to the sum of (i) 98% of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year (unless an election is made to use
the Fund's fiscal year), and (iii) certain undistributed amounts from previous
years on which the Fund paid no U.S. federal income tax. While the Fund
intends to distribute any income and capital gains in the manner necessary to
minimize imposition of the 4% excise tax, there can be no assurance that
sufficient amounts of the Fund's taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that event, the
Fund will be liable for the tax only on the amount by which it does not meet
the foregoing distribution requirement.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders.
66
Taxation of Shareholders
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the AMPS at any time in the future and the Fund's
inability to voluntarily redeem the Series A Preferred until 2009, the Fund
intends to take the position that under present law both the Series A
Preferred and the AMPS will constitute equity, rather than debt of the Fund
for Federal income tax purposes. It is possible, however, that the Internal
Revenue Service (the "IRS") could take a contrary position asserting, for
example, that the Series A Preferred and the AMPS constitute debt of the Fund.
The Fund believes this position, if asserted, would be unlikely to prevail. If
that position were upheld, distributions on the Series A Preferred and the
AMPS would be considered interest, taxable as ordinary income regardless of
the taxable income of the Fund. The following discussion assumes the Series A
Preferred and the AMPS are treated as equity.
Distributions paid to you by the Fund from its investment company
taxable income which includes the excess of net short-term capital gains over
net long-term capital losses (together referred to hereinafter as "ordinary
income dividends") are generally taxable to you as ordinary income to the
extent of the Fund's earning and profits. Such distributions (if designated by
the Fund) may, however, qualify (provided holding periods 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 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 qualified
comprehensive tax treaty with the United States, or whose stock with respect
to which such dividend is paid is readily tradable on an established
securities market in the United States). Distributions made to you from an
excess of net long-term capital gains over net short-term capital losses
("capital gain dividends"), including capital gain dividends credited to you
but retained by the Fund, are taxable to you as long-term capital gains if
they have been properly designated by the Fund, regardless of the length of
time you have owned Fund 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
gains 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 dividends 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
dividends received (including amounts credited as an undistributed capital
gain dividend) by you. A loss realized on a sale or exchange of shares of the
Fund will be disallowed if other substantially identical shares are acquired
(whether through the automatic reinvestment of dividends or otherwise) within
a 61-day period beginning 30 days before and ending 30 days after the date
that the 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 gains of corporations at the rates
applicable to ordinary income.
67
If the Fund pays you a dividend 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 dividend will be treated for
tax purposes as being paid by the Fund and received by you on December 31 of
the year in which the dividend was declared.
The Fund is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's 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.
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:
o the ability of other entities or persons to acquire control
of the Fund;
o the Fund's freedom to engage in certain transactions; or
o the ability of the Fund's 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. 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 cause by a majority of the remaining
trustees and, without cause, by two-thirds of the remaining trustees or by
two-thirds of the votes entitled to be cast for the election of such trustees.
In addition, the affirmative vote of the holders 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, 80% of the
68
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 approval by the holders of a majority of the outstanding
shares 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."
Custodian, Transfer Agent, Auction Agent and
Dividend-Disbursing Agent
State Street Bank and Trust Company (the "Custodian"), located at 150
Royall Street, Canton, Massachusetts 02021, serves as the custodian of the
Fund's assets pursuant to a custody agreement. Under the custody agreement,
the Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon, among other
things, the average value of the total assets of the Fund, plus certain
charges for securities transactions.
EquiServe Trust Company, N.A., located at P.O. Box 43025, Providence,
Rhode Island 02940-3025, serves as the Fund's dividend disbursing agent, as
agent under the Fund's automatic dividend
69
reinvestment and voluntary cash purchase plan and as transfer agent and
registrar for the common shares of the Fund.
Series A Preferred. EquiServe will also serve as the Fund's transfer
agent, registrar, dividend paying agent and redemption agent with respect to
the Series A Preferred.
AMPS. The Bank of New York, located at 100 Church Street, New York,
New York 10286, will serve as the Fund's auction agent, transfer agent,
registrar, dividend paying agent and redemption agent with respect to each of
the series of AMPS.
70
Underwriting
Subject to the terms and conditions of a purchase agreement dated ,
2004, 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 underwriters, the number of
preferred shares set forth opposite the name of such underwriter.
Number of Series A Number of Number of
Underwriter Preferred Shares Series B AMPS Series C AMPS
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................
Citigroup Global Markets Inc.......................
A.G. Edwards & Sons, Inc...........................
Gabelli & Company, 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 of the Series A
Preferred and the AMPS, as applicable, if they purchase any such shares. 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, as amended, or to contribute to
payments the underwriters may be required to make for any of those
liabilities.
Offering of the Series A Preferred
If offered, the underwriters propose to initially offer some of the
Series A Preferred shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the Series A
Preferred shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriting discount the Fund
will pay of $ per share of the Series A Preferred is equal to % of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $ per share on sales to other dealers. After the
initial public offering, the underwriters may change the public offering
price, concession and discount. Investors must pay for any Series A Preferred
Shares purchased in the initial public offering on or before , 2004.
The Fund has granted the underwriters an option to purchase up to
additional shares of the Series A Preferred at the public offering price, less
the underwriting load, within 30 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 of Series A Preferred proportionate
to that underwriter's initial amount affected in the above table.
Prior to the offering, there has been no public market for the Series
A Preferred. Application has been made to list the Series A Preferred on the
New York Stock Exchange. However, during an initial period that is not
expected to exceed 30 days after the date of this prospectus, the Series A
Preferred will not be listed on any securities exchange. During such period,
the underwriters intend to make a market in the Series A Preferred; however,
they have no obligation to do so. Consequently, an investment in the Series A
Preferred may be illiquid during such period.
The underwriters may purchase and sell the Series A Preferred in the
open market. These transactions may include short sales and stabilizing
transactions. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing
71
transactions consist of various bids for or purchases of shares made by the
underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the underwriters have repurchased
shares sold by or for the account of such underwriter in stabilizing or short
covering transactions.
Similar to other purchase transactions, the underwriters' purchases
to cover the syndicate short sales may have the effect of raising or
maintaining the market price of the shares or preventing or retarding a
decline in the market price of the Series A Preferred. As a result, the price
of the Series A Preferred may be higher than the price that might otherwise
exist in the open market.
Neither the Fund nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Series A Preferred.
The underwriters do not make any representation that they will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
Offering of the AMPS
The underwriters propose to initially offer some of each series of
the AMPS directly to the public at the public offering price set forth on the
cover page of this prospectus and some of each series of the AMPS 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 $ per share of the Series B AMPS is
equal to % of the initial offering price. After the initial public offering,
the underwriters may change the public offering price and concession.
Investors must pay for any AMPS purchased in the initial public offering on or
before , 2004.
Merrill Lynch and Citigroup Global Markets Inc. have advised the Fund
that they and certain Broker-Dealers and other participants in the auction
rate securities markets, including both taxable and tax exempt markets, have
received letters from the Securities and Exchange Commission requesting that
each of them voluntarily conduct an investigation regarding their respective
practices and procedures in those markets. Merrill Lynch and Citigroup Global
Markets Inc. are cooperating fully with the Securities and Exchange Commission
in this process. No assurance can be given as to whether the results of this
process will affect the market for the AMPS or the auctions.
Provisions of Other Services to the Fund
The Fund anticipates that the underwriters may from time to time act
as brokers or, after they have ceased to be underwriters, dealers in executing
the Fund's portfolio transactions and that the underwriters, or their
affiliates, may act as a counterparty in connection with the interest rate
transactions described under "How the Fund Manages Risk - Interest Rate
Transactions" after they have ceased to be underwriters. The underwriters are
active underwriters of, and dealers in, securities and act as market markers
in a number of such securities, and therefore can be expected to engage in
portfolio transactions with, and perform services for, the Fund. The Fund
anticipates that the underwriters or their respective affiliates may, from
time to time, act in auctions as broker-dealers and receive fees as set forth
under "The Auction of AMPS" and in the SAI.
The principal business address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated is 4 World Financial Center, New York, New York 10080. The
principal address of Citigroup Global Markets Inc. is 388 Greenwich Street,
New York, New York 10013. The principal business address of A.G. Edwards &
72
Sons, Inc. is One North Jefferson Avenue, St. Louis, Missouri 63103. The
principal business address of Gabelli & Company, Inc. is One Corporate Center,
Rye, New York 10580.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli
Securities, Inc., which is a majority-owned subsidiary of the parent company
of the Investment Adviser which is, in turn, indirectly majority-owned by
Mario J. Gabelli. As a result of these relationships, Mr. Gabelli, the Fund's
Chief Investment Officer, may be deemed to be a "controlling person" of
Gabelli & Company, Inc.
The settlement date for the purchase of the Series A Preferred and
the AMPS will be , 2004 as agreed upon by the underwriters, the Fund and the
Investment Advisor pursuant to Rule 15cb-1 under the Securities Exchange Act
of 1934.
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.
Experts
The audited financial statements of the Fund as of December 31, 2003
have been incorporated by reference into the SAI in reliance on the report of
PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm,
given on the authority of that firm as experts in accounting and auditing. The
report of PricewaterhouseCoopers LLP is incorporated by reference into the
SAI. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas, New
York, New York 10036.
Additional Information
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in
accordance therewith files reports and other information with the 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's common shares are listed on the New York Stock Exchange
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
73
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.
74
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
Page
The Fund......................................................................3
Investment Objective and Policies.............................................3
Investment Restrictions......................................................11
Management of the Fund.......................................................12
Portfolio Transactions.......................................................18
Portfolio Turnover...........................................................19
Taxation.....................................................................19
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan.............24
Additional Information concerning auctions for the AMPS......................26
Additional Information concerning the Series A Preferred and the AMPS........33
Moody's and S&P Guidelines...................................................38
Net Asset Value..............................................................53
Beneficial Owners............................................................53
General Information..........................................................54
Financial Statements.........................................................56
Glossary.....................................................................58
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.
75
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
-------------------------------------------------------------------------------
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
-------------------------------------------------------------------------------
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present that
make the long-term risk appear somewhat larger than in Aaa
Securities.
-------------------------------------------------------------------------------
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present that suggest
a susceptibility to impairment some time in the future.
-------------------------------------------------------------------------------
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking
or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
-------------------------------------------------------------------------------
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
-------------------------------------------------------------------------------
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small. Moody's applies numerical
modifiers (1, 2, and 3) with respect to the bonds rated Aa
through B. The modifier 1 indicates that the company ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the company ranks in the lower end of its generic rating
category.
-------------------------------------------------------------------------------
Caa Bonds that are rated Caa are of poor standing. These issues may
be in default or there may be present elements of danger with
respect to principal or interest.
-------------------------------------------------------------------------------
Ca Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
-------------------------------------------------------------------------------
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
-------------------------------------------------------------------------------
A-1
STANDARD & POOR'S RATINGS SERVICES
-------------------------------------------------------------------------------
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
-------------------------------------------------------------------------------
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
-------------------------------------------------------------------------------
A Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
-------------------------------------------------------------------------------
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
-------------------------------------------------------------------------------
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation, and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse
conditions. Debt rated C 1 is reserved for income bonds on which no interest
is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations that
S&P believes may experience high variability in expected returns due to
noncredit risks created by the terms of the obligations.
AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there
is insufficient information on which to base a rating, or that S&P does not
rate a particular type of obligation as a matter of policy.
A-2
[Gabelli Logo]
The Gabelli Dividend & Income Trust
Shares, % Series A Cumulative Preferred Shares
(Liquidation Preference $25 per Share)
Shares, Series B Auction Market Preferred Shares ("Series B AMPS")
(Liquidation Preference $25,000 per Share)
Shares, Series C Auction Market Preferred Shares ("Series C AMPS")
(Liquidation Preference $25,000 per Share)
-----------------------
PROSPECTUS
-----------------------
Merrill Lynch & Co.
Citigroup
A.G. Edwards
Gabelli & Company, Inc.
, 2004
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 , 2004 (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 (the "SEC"), Washington, D.C. The registration statement may be
obtained from the SEC upon payment of the fee prescribed, or inspected at the
SEC's office or via its website (www.sec.gov) at no charge.
This Statement of Additional Information is dated , 2004.
[FLAG]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
1
TABLE OF CONTENTS
Page
Fund..........................................................................3
Investment Objective and Policies.............................................3
Investment Restrictions......................................................11
Management of the Fund.......................................................12
Portfolio Transactions.......................................................18
Portfolio Turnover...........................................................19
Taxation.....................................................................19
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan.............24
Additional Information Concerning Auctions for AMPS..........................26
Additional Information Concerning the Series A Preferred and AMPS............33
Moody's and S&P Guidelines...................................................38
Net Asset Value..............................................................53
Beneficial Owners............................................................53
General Information..........................................................54
Financial Statements.........................................................56
Glossary.....................................................................58
The Prospectus and this SAI omit certain information contained in the
registration statement filed with the SEC, Washington D.C. The registration
statement may be obtained from the SEC upon payment of the fee prescribed, or
inspected at the SEC's office at no charge. This Statement of Additional
Information is dated , 2004.
2
The Fund
The Gabelli Dividend & Income Trust is a recently organized
closed-end non-diversified management investment company organized under the
laws of the State of Delaware. The Fund's investment operations commenced on
November 28, 2003. The Fund's common shares are 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 over-the-counter ("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
3
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
Gabelli Funds, LLC (the "Investment Advisor") 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
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.
4
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.
5
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, as amended (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
6
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
7
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.
8
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.
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
9
Fund will pay
reasonable finder's, administrative and custodial fees in connection with a
loan of its securities.
Additional Risks Relating to Derivative Investments
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 United States, 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 United States 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 United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States 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
10
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.
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.
11
Management of the Fund
TRUSTEES AND OFFICERS
Overall responsibility for management and supervision of the Fund
rests with its Board of Trustees. The Board 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 "+".
Number of
Name (and Age), Portfolios in
Position with the Term of Office Fund Complex Other
Fund and and Length of Principal Occupation During Past Overseen by Directorships Held
Business Address1 Time Served2 Five Years Trustee by Trustee
---------------------- --------------- --------------------------------- -------------- -------------------
INTERESTED TRUSTEES:
+Mario J. Gabelli (62) Since 2003* Chairman of the Board, Chief 24 Director of Morgan
Trustee and Chief Executive Officer of Gabelli Group Holdings,
Investment Officer Asset Management Inc. and Chief Inc. (holding
Investment Officer of the company); Vice
Investment Adviser and GAMCO Chairman of Lynch
Investors, Inc; Director/Trustee Corporation
and Chief Investment Officer of (diversified
other registered investment manufacturing
companies in the Gabelli fund company)
complex; Vice Chairman and CEO
of Lynch Interactive Corporation
(multimedia and services).
+Karl Otto Pohl (74) Since 2003*** Member of the Shareholder 33 Director of
Trustee Committee of Sal. Oppenheim Jr. Gabelli Asset
& Cie, Zurich (private Management Inc.;
investment bank); former Chairman,
President of the Deutsche InCentive Capital
Bundesbank and Chairman of its and Incentive
Central Bank Council from 1980 Asset Management
through 1991; Director/Trustee (Zurich); Director
of other registered investment at Sal Oppenheim
companies in the Gabelli fund Jr. & Cie, Zurich
complex. (banking)
+Edward T. Tokar (57) Since 2003*** Chief Executive Officer of 1 Trustee of LEVCO
Trustee Allied Capital Management LLC, Series Trust;
1997 through 2004; Vice Trustee of DB
President of Honeywell Hedge Strategies
International Inc., 1997 through Fund LLC;
2004; Senior Managing Director Director, the
of Beacon Trust Company., since Topiary Benefit
2004. Plan Investor Fund
LLC
12
DISINTERESTED TRUSTEES:
Anthony J. Colavita Since 2003** President and Attorney at law in 35 --
(68) Trustee the law firm of Anthony J.
Colavita, P.C. since 1961;
Director/Trustee of other
registered investment companies
in the Gabelli fund complex.
James P. Conn (66) Since 2003*** Former Managing Director and 12 Director of
Trustee Chief Investment Officer of LaQuinta Corp.
Financial Security Assurance (hotels) and First
Holdings Ltd., 1992-1998; Republic Bank
Director/Trustee of other
registered investment companies
in the Gabelli fund complex.
Mario d'Urso (64) Since 2003* Chairman of Mittel Capital 1
Trustee Markets S.p.A, since 2001;
Senator in the Italian
Parliament, 1996-2001.
Frank J. Fahrenkopf, Since 2003** President and CEO of the 4 Director of First
Jr. (65) Trustee American Gaming Association Republic Bank
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. Melarkey Since 2003* Attorney at law in the law firm 1 __
(54) Trustee of Avansino, Melarkey, Knobel &
Mulligan.
Salvatore M. Salibello Since 2003*** Certified Public Accountant with 1 __
(59) Trustee the accounting firm Salibello &
Broder, since 1978.
Anthonie C. van Ekris Since 2003** Managing Director of BALMAC 20 Director of Aurado
(70) Trustee International, Inc. Energy (oil and
(commodities). gas operations)
Salvatore J. Zizza (58) Since 2003** Chairman of Hallmark Electrical 11 Director of Hollis
Trustee Supplies Corp.; Former Executive Eden
Vice President of FMG Group (a Pharmaceuticals
healthcare provider). and Earl Scheib,
Inc.
Officers
Name (and Age), Position with the Term of Office and Length of
Fund and Business Address1 Time Served Principal Occupation During Past Five Years
--------------------------------- ---------------------------- -------------------------------------------
Bruce N. Alpert (52) 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 (41) Since 2003 Vice President, General Counsel and
Secretary Secretary of Gabelli Asset Management Inc.
(since 1999) and of GAMCO Investors, Inc.
(since 1993); Secretary
13
of all of the registered investment companies
in the Gabelli fund complex.
Richard C. Sell, Jr. (54 ) Since 2003 Vice President, Controller of Gabelli &
Treasurer Company, Inc. since 1998.
Carter W. Austin (37) Since 2003 Vice President of the Gabelli Equity Trust
Vice President since 2000. Vice President of the
Investment Adviser since 1996.
Matthew A. Hultquist (25) Since 2003 Vice President of Gabelli Asset Management
Vice President and Ombudsman Company since 2001 and Vice President of The
Gabelli Equity Trust since 2004.
_____________________
+ "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, New York 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 2007 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 were as follows: the terms of Messrs.
Mario J. Gabelli, Michael J. Melarkey and Mario d'Urso as trustees of the Fund
expired in 2004 and they were elected to three year terms expiring in 2007;
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 Securities in Aggregate Dollar Range of Equity
the Fund Securities in all Registered
Investment Companies Overseen by
Trustees in the Fund Complex
--------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Mario J. Gabelli Over $100,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
Karl Otto Pohl None None
--------------------------------------------------------------------------------------------------------------------
Edward T. Tokar None None
--------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
--------------------------------------------------------------------------------------------------------------------
Anthony J. Colavita $1 - $10,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
James P. Conn $50,000 - $100,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
Mario d'Urso None None
--------------------------------------------------------------------------------------------------------------------
Frank J. Fahrenkopf, Jr. None $1 - $10,000
--------------------------------------------------------------------------------------------------------------------
Michael J. Melarkey $10,001 - $50,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
Salvatore M. Salibello None Over $100,000
--------------------------------------------------------------------------------------------------------------------
Anthonie C. van Ekris Over $100,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
Salvatore J. Zizza $50,001 - $100,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
14
All shares were valued as of September 15, 2004.
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 Nominating Committee did not meet during the year ended December 31, 2003.
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 Registered Public Accounting Firm. The Audit Committee
met once during the year ended December 31, 2003.
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 $12,000 per year plus $1,500 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 it 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, 2003, the compensation trustees earned in their capacity as trustees for
the Fund and other funds in the Gabelli fund complex.
COMPENSATION TABLE
NAME OF PERSON AND POSITION ESTIMATED COMPENSATION FROM THE FUND TOTAL COMPENSATION FROM THE FUND AND
FUND COMPLEX PAID TO TRUSTEES*
Mario J. Gabelli, Chairman of the Board $0 $0 (24)
Anthony J. Colavita $19,500 $160,542.76 (35)
James P. Conn $19,500 $58,451.09 (12)
Mario d'Urso $19,500 $2,951.09 (1)
Frank J. Fahrenkopf, Jr. $20,500 $34,951.09 (4)
Michael J. Melarkey $19,500 $2,951.09 (1)
15
Karl Otto Pohl $0 $0 (33)
Salvatore M. Salibello $19,500 $2,951.09 (1)
Edward T. Tokar $19,500 $2,951.09 (1)
Anthonie C. van Ekris $20,500 $73,292.76 (20)
Salvatore J. Zizza $20,500 $82,042.76 (11)
----------------------------------------------------------------------------
TOTAL $178,500 $421,084.82
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2003 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.
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 "Advisory Agreement"). The Investment
Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580. The Investment Adviser was organized in
1999 and is the successor to Gabelli Funds, Inc., which was organized in 1980.
As of June 30, 2004, the Investment Adviser acted as registered investment
adviser to 27 management investment companies with aggregate net assets of
$12.1 billion. The Investment Adviser, together with other affiliated
investment advisers noted below had assets under management totaling
approximately $28.2 billion as of June 30, 2004. 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
subadviser to management investment companies having aggregate assets of $13.6
billion under management as of June 30, 2004. 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 $1.0 billion under management as of June 30, 2004. Gabelli Advisers,
Inc., an affiliate of the Investment Adviser, acts as investment manager to
the Gabelli Westwood Funds having aggregate assets of $438 million under
management as of June 30, 2004.
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
16
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.
17
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 shares to the extent 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.
For the period ended December 31, 2003, the Investment Adviser earned
$1,342,197 for advisory and administrative services rendered to the Fund from
its commencement of operation on November 28, 2003.
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 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
18
Investment Adviser generally seeks reasonably competitive commission rates,
the Fund does not necessarily pay the lowest commission available.
Subject to obtaining the best price and execution, brokers who
provide supplemental research, market and statistical information, or other
services (e.g., wire services) to the Investment Adviser or its affiliates may
receive orders for transactions by the Fund. The term "research, market and
statistical information" includes advice as to the value of securities, and
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under the
Advisory Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Investment Adviser and its
affiliates in providing services to clients other than the Fund, and not all
such information is used by the Investment Adviser in connection with the
Fund. Conversely, such information provided to the Investment Adviser and its
affiliates by brokers and dealers through whom other clients of the Investment
Adviser and its affiliates effect securities transactions may be useful to the
Investment Adviser in providing services to the Fund.
Although investment decisions for the Fund are made independently
from those 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.
For the fiscal year ended December 31, 2003, the Fund paid a total of
$715,256 in brokerage commissions, of which Gabelli & Company, Inc. and its
affiliates received $684,983. The amount received by Gabelli & Company, Inc.
and its affiliates from the Fund in respect of brokerage commissions from
November 28, 2003, the date of the Fund's commencement of operations to
December 31, 2003 represented approximately 96% of the aggregate dollar amount
of brokerage commissions paid by the Fund for such period and approximately
90% of the aggregate dollar amount of transactions by the Fund for such
period. The variance between the percentage of brokerage commissions received
by Gabelli & Company, Inc. and the percentage of transactions executed by
Gabelli & Company, Inc. reflects the Fund's practice of generally directing
bulk trades to unaffiliated broker-dealers.
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. As of June 30, 2004, the
Fund's portfolio turnover rate since January 1, 2004 is 11.3%. The Fund
anticipates that its annual portfolio turnover rate will not exceed 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.
19
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 has elected to be treated and has qualified, and intends to
continue to qualify, as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code") (a "RIC").
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.
20
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 generally be
long-term capital gain or loss if the securities have been held by the Fund
for more than one year. Gain or loss on the sale of securities held for one
year or less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar-denominated
securities and on any non-U.S. dollar-denominated futures contracts, options
and forward contracts that are not section 1256 contracts (as defined 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 provided that the PFIC complies with certain reporting requirements,
but such elections generally accelerate the recognition of income without the
receipt of cash. Dividends paid by PFICs will not qualify for the reduced tax
rates discussed below under "Taxation of 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 investment company taxable income as is required in
order to avoid Fund-level federal income taxation on all of its income, or
might prevent the Fund from distributing enough ordinary income and capital
gain net income to avoid completely the imposition of the excise tax. To avoid
this result, the Fund may be required to borrow money or dispose of securities
to be able to make distributions to its shareholders.
If the Fund 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.
21
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gains into higher taxed
short-term capital or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
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
Based in part on a lack of present intention on the part of the Fund
to voluntarily redeem the AMPS at any time in the future and the Fund's
inability to voluntarily redeem the Series A Preferred until , 2009, the Fund
intends to take the position that under present law both the Series A
Preferred and the AMPS will constitute equity, rather than debt of the Fund
for Federal income tax purposes. It is possible, however, that the IRS could
take a contrary position asserting, for example, that the Series A Preferred
and the AMPS constitute debt of the Fund. The Fund believes this position, if
asserted, would be unlikely to prevail. If that position were upheld,
distributions on the Series A Preferred and the AMPS would be considered
interest, taxable as ordinary income regardless of the taxable income of the
Fund. The following discussion assumes the Series A Preferred and the AMPS are
treated as equity.
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 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 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
qualified foreign corporations (e.g., generally, foreign corporations
incorporated in a possession of the
22
United States or in certain countries with a qualifying comprehensive tax
treaty with the United States, or whose stock with respect to which such
dividend is paid is readily tradable on an established securities market in
the United States). A qualified foreign corporation does not include a foreign
corporation which for the taxable year of the corporation in which the
dividend was paid, or the preceding taxable year, is a "foreign personal
holding company," a "foreign investment company," or a "passive foreign
investment company," as defined in the Code. If the Fund lends portfolio
securities, the amount received by the Fund that is the equivalent of the
dividends paid by the issuer on the securities loaned will not be eligible for
qualified dividend income treatment. Distributions of net capital gain
designated as capital gain distributions, if any, are taxable to 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. Unrecaptured Section 1250 gain distributions, if
any, will be subject to a 25% tax. 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%.
The IRS currently requires that a registered investment company that
has two or more classes of stock allocate to each such class proportionate
amounts of each type of its income (such as ordinary income, capital gains,
dividends qualifying for the dividends received deduction ("DRD") and
qualified dividend income) based upon the percentage of total dividends paid
out of current or accumulated earnings and profits to each class for the tax
year. Accordingly, the Fund intends each year to allocate capital gain
dividends, dividends qualifying for the DRD and dividends that constitute
qualified dividend income, if any, between its Common Shares, the Series A
Preferred and the AMPS in proportion to the total dividends paid out of
current or accumulated earnings and profits to each class with respect to such
tax year. Distributions in excess of the Fund's current and accumulated
earnings and profits, if any, however, will not be allocated proportionately
among the Common Shares, the Series A Preferred and the AMPS. Since the Fund's
current and accumulated earnings and profits will first be used to pay
dividends on its preferred shares (including the Series A Preferred and the
AMPS), distributions in excess of such earnings and profits, if any, will be
made disproportionately to holders of Common Shares.
Shareholders may be entitled to offset their capital gain
distributions (but not distributions eligible for qualified dividend income
treatment) with capital loss. There are a number of statutory provisions
affecting when capital loss may be offset against capital gain, and limiting
the use of loss from certain investments and activities. Accordingly,
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 generally realize a taxable gain or loss equal to the difference between
the amount of cash and the fair market value of other property received and
the shareholder's adjusted tax 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 by substantially identical
23
shares 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.
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
EquiServe, 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
24
participate in the Plan will be paid by check mailed directly to the record
holder by EquiServe as dividend disbursing agent.
Under the Plan, whenever the market price of the Common 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 dividend or capital
gains 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 dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next preceding trading day. If the net
asset value of the Common 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 dividend or capital gains
distribution payable only in cash, EquiServe 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 EquiServe will endeavor to terminate
purchases in the open market and cause the Fund to issue shares at the greater
of net asset value or 95% 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 EquiServe, monthly, for investment in the shares as applicable.
Such payments may be made in any amount from $250 to $10,000. EquiServe will
use all funds received from participants to purchase shares of the Fund in the
open market on or about the 15th of each month. EquiServe will charge each
shareholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that
participants send voluntary cash payments to EquiServe in a manner that
ensures that EquiServe will receive these payments approximately 10 days
before the 15th of the month. A participant may without charge withdraw a
voluntary cash payment by written notice, if the notice is received by
EquiServe at least 48 hours before such payment is to be invested.
EquiServe maintains all 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 EquiServe in noncertificated
form in the name of the participant. A Plan participant may send its share
certificates to EquiServe so that the shares represented by such certificates
will be held by EquiServe in the participant's 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, EquiServe 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 dividend or distribution
paid subsequent to written notice of the change sent to the members of such
Plan at least 90 days before the record date for such dividend or
distribution. The Plan also may be amended or terminated by EquiServe on at
least 90 days written notice to the participants in such Plan. All
correspondence concerning the Plan should be directed to EquiServe at P.O. Box
43025, Providence, RI 02940-3025.
25
Additional Information concerning auctions
for the AMPS
General
The Statement of Preferences of each series of AMPS provides that the
Applicable Rate for each Dividend Period of each of the series of AMPS will be
equal to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of a Dividend Period (an "Auction Date")
from implementation of the Auction Procedures set forth in the Statement of
Preferences, and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell
shares of such Series. Each periodic implementation of the Auction Procedures
is referred to herein as an "Auction." The following summary is qualified by
reference to the Auction Procedures set forth in the Statements of
Preferences.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
The Bank of New York), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for the AMPS so long as the Applicable Rate is to be based on
the results of the Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for the AMPS. See "-- Broker-Dealers" below.
Securities Depository. DTC will act as the Securities Depository for
the Agent Members with respect to the AMPS. One certificate for each series of
the AMPS will be registered in the name of Cede & Co., as nominee of the
Securities Depository.
Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of each
series of AMPS contained in the Statement of Preferences of each series of
AMPS. The Fund will also issue stop-transfer instructions to the transfer
agent for each series of AMPS. Prior to the commencement of the right of
Holders of the Preferred Shares to elect a majority of the Fund's trustees, as
described under "Description of the Series A Preferred and the AMPS -- Voting
Rights" in the Prospectus, Cede & Co. will be the Holder of all the shares of
each series of AMPS and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York chartered limited purpose trust company, performs
services for its participants (including Agent Members), some of whom (and/or
their representatives) own DTC. DTC maintains lists of its participants and
will maintain the positions (ownership interests) held by each such Agent
Member in AMPS, whether for its own account or as a nominee for another
person.
Orders by Existing Holders and Potential Holders
On or prior to the Submission Deadline on each Auction Date for each
series of AMPS:
(i) each Beneficial Owner of AMPS may submit to its Broker-Dealer
by telephone or otherwise a:
26
(a) "Hold Order" - indicating the number of Outstanding
AMPS, if any, that such Beneficial Owner desires to
continue to hold without regard to the Applicable
Rate for such shares for the next succeeding
Dividend Period of such shares;
(b) "Bid" - indicating the number of Outstanding AMPS,
if any, that such Beneficial Owner offers to (i)
purchase or chooses to hold if the Applicable Rate
for such AMPS for the next succeeding Dividend
Period is not less than the rate specified on the
bid or (ii) sell if the Applicable Rate for such
AMPS for the next succeeding Dividend Period is
less than the rate per annum specified by such
Beneficial Owner in such Bid; and/or
(c) "Sell Order" - indicating the number of Outstanding
AMPS, if any, that such Beneficial Owner offers to
sell without regard to the Applicable Rate for such
AMPS for the next succeeding Dividend Period; and
(ii) Broker-Dealers will contact customers who are Potential
Beneficial Owners by telephone or otherwise to determine
whether such customers desire to submit Bids, in which case
they will indicate the number of AMPS that they offer to
purchase if the Applicable Rate for AMPS for the next
succeeding Dividend Period is not less than the rate per
annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is
herein referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer
is herein referred to as a "Bidder" and collectively as "Bidders." The
submission by a Broker-Dealer of an Order to the Auction Agent is referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent is referred to herein as a "Bidder"
and collectively as "Bidders."
A Bid placed by a Beneficial Owner specifying a rate higher than the
Applicable Rate determined in the Auction will constitute an irrevocable offer
to sell the shares subject thereto. A Beneficial Owner that submits a Bid to
its Broker-Dealer having a rate higher than the Maximum Rate on the Auction
Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Sell Order will constitute an irrevocable offer to sell AMPS
subject thereto at a price per share equal to $25,000.
A Beneficial Owner that fails to submit to its Broker-Dealer prior to
the Submission Deadline for the AMPS an Order or Orders covering all the
Outstanding AMPS held by such Beneficial Owner will be deemed to have
submitted a Hold Order to its Broker-Dealer covering the number of Outstanding
AMPS held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit
to its Broker-Dealer prior to the Submission Deadline for the AMPS an Order or
Orders covering all of the Outstanding AMPS held by such Beneficial Owner for
an Auction relating to a Special Dividend Period consisting of more than 28
Dividend Period days, such Beneficial Owner will be deemed to have submitted a
Sell Order to its Broker-Dealer covering the number of Outstanding AMPS held
by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer.
A Potential Beneficial Owner of AMPS may submit to its Broker-Dealer
Bids in which it offers to purchase AMPS if the Applicable Rate for the next
Dividend Period is not less than the rate specified in such Bid. A Bid placed
by a Potential Beneficial Owner specifying a rate not higher than the Maximum
Rate will constitute an irrevocable offer to purchase the number of AMPS
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid. A
27
Beneficial Owner of AMPS that offers to become the Beneficial Owner of
additional AMPS is, for purposes of such offer, a Potential Beneficial Owner.
As described more fully below under "-- Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise
permitted by the Fund) as Existing Holders in respect of AMPS subject to
Orders submitted or deemed submitted to them by Beneficial Owners and as
Potential Holders in respect of AMPS subject to Orders submitted to them by
Potential Beneficial Owners. However, neither the Fund nor the Auction Agent
will be responsible for a Broker-Dealer's failure to comply with the
foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or on
behalf of an Existing Holder or a Potential Holder will be treated in the same
manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner, as described above. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any AMPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of AMPS held by it, as described in the second preceding
paragraph. For information concerning the priority given to different types of
Orders placed by Existing Holders, see "-- Submission of Orders by
Broker-Dealers to Auction Agent" below.
The Fund may not submit an Order in any Auction.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold
or selling, or a Potential Holder purchasing, a number of AMPS that is fewer
than the number of AMPS specified in its Order. See "-- Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares" below. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. Each
purchase or sale will be made for settlement on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See "--
Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum
Rate will (i) be treated as a Sell Order if submitted by a Beneficial Owner or
an Existing Holder and (ii) not be accepted if submitted by a Potential
Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures
establish the Maximum Rate as a maximum rate per annum that can result from an
Auction up to the Maximum Rate. See "-- Determination of Sufficient Clearing
Bids, Winning Bid Rate and Applicable Rate" and "-- Acceptance and Rejection
of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
Concerning the Auction Agent
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its
part, the Auction Agent will not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its
duties under the Auction Agency Agreement and will not be liable for any error
of judgment resulting from the use or reliance on a source of information used
in good faith unless the Auction Agent has been grossly negligent in the
determination, calculation or declaration thereunder.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of AMPS, the Auction Agent's registry of Existing Holders,
the results of Auctions and notices from any Broker-Dealer (or other person,
if permitted by the Fund) with respect to transfers described under "The
Auction
28
of AMPS -- Secondary Market Trading and Transfer of AMPS" in the Prospectus
and notices from the Fund. The Auction Agent is not required to accept any
such notice for an Auction unless it is received by the Auction Agent by 3:00
p.m., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
written notice to the Fund on a date no earlier than 30 days after the date of
delivery of such notice. If the Auction Agent should resign or for any reason
its appointment is terminated during any period when the AMPS are outstanding,
the Fund will use its best efforts promptly thereafter to enter into an
agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. The Fund may remove the
Auction Agent, provided that prior to such removal, the Fund has entered into
such an agreement in substantially the form of the Auction Agency Agreement
with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for each of the series of AMPS
will pay to each Broker-Dealer, from funds provided by the Fund, a service
charge equal to, in the case of any auction immediately preceding a dividend
period of less than 365 days the product of (i) a fraction, the numerator of
which is the number of days in such dividend period and the denominator of
which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the
aggregate number of AMPS placed by such broker-dealer at such auction. In the
case of any auction immediately preceding a dividend period of one year or
longer, the service charge shall be determined by mutual consent of the Fund
and any such broker-dealer and shall be based upon a selling concession that
would be applicable to an underwriting of fixed or variable rate preferred
shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the dividend period with respect to such
auction. For the purposes of the preceding sentence, AMPS will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to
have been submitted to the Auction Agent by the Broker-Dealer and were
acquired by such Broker-Dealer for its customers who are Beneficial Owners or
(ii) the subject of an Order submitted by such Broker-Dealer that is (a) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction, (b) a Submitted Bid
of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (c) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer that is not
an affiliate of the Fund may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders
for their own accounts. If a Broker-Dealer submits an Order for its own
account in any Auction, it might have an advantage over other Bidders because
it would have knowledge of all Orders submitted by it in that Auction. Such
Broker-Dealer, however, would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:30 p.m., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (i.e., the
Submission Deadline), each Broker-Dealer will submit to the Auction Agent in
writing all Orders obtained by it for the Auction to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as
the Existing Holder or Potential Holder, as the case may be, in respect of
AMPS subject to such Orders. Any Order submitted by a
29
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, will be irrevocable.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to the
next highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
AMPS subject to an Auction held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(i) all Hold Orders for AMPS will be considered valid,
but only up to and including in the aggregate the
number of Outstanding shares of AMPS held by such
Existing Holder, and, if the number of AMPS subject
to such Hold Orders exceeds the number of shares of
Outstanding AMPS held by such Existing Holder, the
number of shares subject to each such Hold Order
will be reduced pro rata to cover the number of
Outstanding shares held by such Existing Holder;
(ii) (a) any Bid for AMPS will be considered valid up to
and including the excess of the number of
Outstanding shares of AMPS held by such Existing
Holder over the number of AMPS subject to any Hold
Orders referred to in clause (i) above;
(b) subject to subclause (a), if more than one Bid of
an Existing Holder for AMPS is submitted to the
Auction Agent with the same rate and the number of
Outstanding shares of AMPS subject to such Bids is
greater than such excess, such Bids will be
considered valid up to and including the amount of
such excess, and the number of shares of AMPS
subject to each Bid with the same rate will be
reduced pro rata to cover the number of shares of
AMPS equal to such excess;
(c) subject to subclauses (a) and (b), if more than one
Bid of an Existing Holder for AMPS is submitted to
the Auction Agent with different rates, such Bids
will be considered valid in the ascending order of
their respective rates up to and including the
amount of such excess; and
(d) in any such event, the number, if any, of such
Outstanding shares of AMPS subject to any portion
of Bids considered not valid in whole or in part
under this clause (ii) will be treated as the
subject of a Bid for AMPS by or on behalf of a
Potential Holder at the rate specified therein; and
(iii) all Sell Orders for AMPS will be considered valid up to and
including the excess of the number of Outstanding shares of
AMPS held by such Existing Holder over the sum of shares
subject to valid Hold Orders referred to in clause (i) above
and valid Bids referred to in clause (ii) above.
If more than one Bid of a Potential Holder for AMPS is submitted to the
Auction Agent by or on behalf of any Potential Holder, each such Bid submitted
will be a separate Bid with the rate and number of AMPS specified therein.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date for
each of the series of AMPS, the Auction Agent will assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers
30
(each such Hold Order, Bid or Sell Order as submitted or deemed submitted by a
Broker-Dealer being herein referred to as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
will determine the excess of the number of Outstanding shares of AMPS over the
number of Outstanding shares of AMPS subject to Submitted Hold Orders (such
excess being herein referred to as the "Available AMPS") and whether Sufficient
Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will
have been made if the number of Outstanding shares of AMPS that are the subject
of Submitted Bids of Potential Holders specifying rates not higher than the
Maximum Rate equals or exceeds the number of Outstanding shares of AMPS that
are the subject of Submitted Sell Orders (including the number of AMPS subject
to Bids of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for AMPS have been made, the Auction
Agent will determine the lowest rate specified in such Submitted Bids (the
Winning Bid Rate for shares of such Series) which, taking into account the
rates in the Submitted Bids of Existing Holders, would result in Existing
Holders continuing to hold an aggregate number of Outstanding AMPS which, when
added to the number of Outstanding AMPS to be purchased by Potential Holders,
based on the rates in their Submitted Bids, would equal not less than the
Available AMPS. In such event, the Winning Bid Rate will be the Applicable
Rate for the next Dividend Period for all shares of such Series.
If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding AMPS is subject to Submitted Hold Orders), the
Applicable Rate for the next Dividend Period for all AMPS will be equal to the
Maximum Rate. In such a case, Beneficial Owners that have submitted or that
are deemed to have submitted Sell Orders may not be able to sell in the
Auction all AMPS subject to such Sell Orders but will continue to own AMPS for
the next Dividend Period. See "-- Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.
If all of the Outstanding shares of a series of AMPS are subject to
Submitted Hold Orders, the Applicable Rate for all such AMPS for the next
succeeding Dividend Period will be the All Hold Rate.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares
Based on the determinations made under "-- Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above and,
subject to the discretion of the Auction Agent to round and allocate certain
shares as described below, Submitted Bids and Submitted Sell Orders will be
accepted or rejected in the order of priority set forth in the Auction
Procedures, with the result that Existing Holders and Potential Holders of
AMPS will sell, continue to hold and/or purchase such shares as set forth
below. Existing Holders that submitted or were deemed to have submitted Hold
Orders (or on whose behalf Hold Orders were submitted or deemed to have been
submitted) will continue to hold the AMPS subject to such Hold Orders.
If Sufficient Clearing Bids for AMPS have been made:
(i) Each Existing Holder that placed or on whose behalf was
placed a Submitted Sell Order or Submitted Bid specifying
any rate higher than the Winning Bid Rate will sell the
Outstanding AMPS subject to such Submitted Sell Order or
Submitted Bid;
(ii) Each Existing Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate lower than the
Winning Bid Rate will continue to hold the Outstanding AMPS
subject to such Submitted Bid;
31
(iii) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate lower than the
Winning Bid Rate will purchase the number of Outstanding
AMPS subject to such Submitted Bid;
(iv) Each Existing Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to the
Winning Bid Rate will continue to hold AMPS subject to such
Submitted Bid, unless the number of Outstanding AMPS subject
to all such Submitted Bids is greater than the number of
AMPS ("remaining shares") in excess of the Available AMPS
over the number of AMPS accounted for in clauses (ii) and
(iii) above, in which event each Existing Holder with such a
Submitted Bid will continue to hold AMPS subject to such
Submitted Bid determined on a pro rata basis based on the
number of Outstanding AMPS subject to all such Submitted
Bids of such Existing Holders; and
(v) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to the
Winning Bid Rate for AMPS will purchase any Available AMPS
not accounted for in clauses (ii) through (iv) above on a
pro rata basis based on the Outstanding AMPS subject to all
such Submitted Bids.
If Sufficient Clearing Bids for AMPS have not been made (unless this
results because all Outstanding AMPS are subject to Submitted Hold Orders):
(i) Each Existing Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to or lower
than the Maximum Rate will continue to hold the AMPS subject
to such Submitted Bid;
(ii) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to or lower
than the Maximum Rate will purchase the number of AMPS
subject to such Submitted Bid; and
(iii) Each Existing Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate higher than the
Maximum Rate or a Submitted Sell Order will sell a number of
AMPS subject to such Submitted Bid or Submitted Sell Order
determined on a pro rata basis based on the number of
Outstanding AMPS subject to all such Submitted Bids and
Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (iv)
or (v) of the second preceding paragraph or clause (iii) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
AMPS share, the Auction Agent will, in such manner as, in its sole discretion,
it determines, round up or down to the nearest whole share the number of AMPS
being sold or purchased on such Auction Date so that the number of AMPS sold
or purchased by each Existing Holder or Potential Holder will be whole shares
of such Series. If as a result of the pro rata allocation described in clause
(v) of the second preceding paragraph, any Potential Holder would be entitled
or required to purchase less than a whole AMPS share, the Auction Agent will,
in such manner as, in its sole discretion, it will determine, allocate AMPS
for purchase among Potential Holders so that only whole AMPS are purchased by
any such Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing shares of such Series.
32
Notification of Results; Settlement
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 p.m., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an
Order for the account of a customer will then be required to advise such
customer of the Applicable Rate for the next Dividend Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, will be required to confirm purchases and
sales with each customer purchasing or selling AMPS as a result of the Auction
and will be required to advise each customer purchasing or selling AMPS as a
result of the Auction to give instructions to its Agent Member of the
Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor, as appropriate. The
Auction Agent will be required to record each transfer of AMPS on the registry
of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited and shares delivered as necessary to effect the purchases and sales
of AMPS as determined in the Auction. Purchasers will make payment through
their Agent Members in same-day funds to the Securities Depository against
delivery through their Agent Members; the Securities Depository will make
payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds.
If any Existing Holder selling AMPS in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased such
shares in such Auction may deliver to such person a number of whole AMPS that
is less than the number of AMPS that otherwise was to be purchased by such
person. In such event, the number of AMPS to be so delivered will be
determined by the Broker-Dealer. Delivery of such lesser number of AMPS will
constitute good delivery.
Additional Information concerning the Series A Preferred
and AMPS
The additional information concerning the Series A Preferred and each
series of AMPS contained in this SAI does not purport to be complete a
complete description of those series and should be read in conjunction with
the description of the Series A Preferred and the AMPS contained in the
Prospectus under "Description of the Series A Preferred and the AMPS." This
description is subject to and qualified in its entirety by reference to the
Fund's Governing Documents, including the provisions of the Statements of
Preferences establishing, respectively, the Series A Preferred and the AMPS.
Copies of these Statements of Preferences are filed as exhibits to the
registration statement of which the Prospectus and this SAI are a part and may
be inspected, and a copy thereof may be obtained, as described under
"Additional Information" in the Prospectus.
Dividends and Dividend Periods For the AMPS
Holders of each series of AMPS will be entitled to receive, when, as
and if declared by the Board of Trustees, out of funds legally available
therefor, cumulative cash dividends on their shares, at the Applicable Rate
determined as described under " -- Determination of Dividend Rate," payable as
and when set forth below. Dividends so declared and payable will be paid to
the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the
Fund's Common Shares.
33
By 12:00 noon, New York City time, on the Business Day immediately
preceding each Dividend Payment Date, the Fund is required to deposit with the
Paying Agent sufficient same-day funds for the payment of declared dividends.
The Fund does not intend to establish any reserves for the payment of
dividends.
Each dividend will be paid by the Paying Agent to the Holder, which
Holder is expected to be the nominee of the Securities Depository. The
Securities Depository will credit the accounts of the Agent Members of the
beneficial owners in accordance with the Securities Depository's normal
procedures. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to Agent Members who are in turn
expected to distribute such dividends to the persons for whom they are acting
as agents. The Agent Member of a beneficial owner will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such beneficial owner in accordance with the instructions of such beneficial
owner.
Holders of AMPS will not be entitled to any dividends, whether
payable in cash, property or shares, in excess of full cumulative dividends.
No interest will be payable in respect of any dividend payment or payments
that may be in arrears. See "-- Default Period."
The amount of dividends per Outstanding AMPS share payable (if
declared) on each Dividend Payment Date of each Dividend Period of less than
one year (or in respect of dividends on another date in connection with a
redemption during such Dividend Period) will be computed by multiplying the
Applicable Rate (or the Default Rate) for such Dividend Period (or a portion
thereof) by a fraction, the numerator of which will be the number of days in
such Dividend Period (or portion thereof) such share was Outstanding and for
which the Applicable Rate or the Default Rate was applicable (but in no event
will the numerator exceed 360) and the denominator of which will be 360,
multiplying the amount so obtained by the $25,000, and rounding the amount so
obtained to the nearest cent. During any Dividend Period of one year or more,
the amount of dividends per AMPS share payable on any Dividend Payment Date
(or in respect of dividends on another date in connection with a redemption
during such Dividend Period) will be computed as described in the preceding
sentence except that the numerator, with respect to any full twelve month
period, will be 360.
Determination of Dividend Rate. The dividend rate for the initial
Dividend Period (i.e., the period from and including the Date of Original
Issue to and including the initial Auction Date) and the initial Auction Date
for each of the series of AMPS is set forth in the Prospectus. See "The
Auction of AMPS -- Summary of Auction Procedures" in the Prospectus. For each
subsequent Dividend Period, subject to certain exceptions, the dividend rate
will be the Applicable Rate that the Auction Agent advises the Fund has
resulted from an Auction.
Dividend Periods after the initial Dividend Period will either be
Standard Dividend Periods (generally seven days) or, subject to certain
conditions and with notice to Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient
Clearing Bids exist at the Auction in respect of such Special Dividend Period
(that is, in general, the number of shares subject to Bids by Potential
Beneficial Owners is at least equal to the number of shares subject to Sell
Orders by Existing Holders). If Sufficient Clearing Bids do not exist at any
Auction in respect of a Special Dividend Period, the Dividend Period
commencing on the Business Day succeeding such Auction will be the Standard
Dividend Period, and the Holders of the AMPS will be required to continue to
hold such shares for such Standard Dividend Period. The designation of a
Special Dividend Period is also subject to additional conditions. See "--
Notification of Dividend Period" below.
34
Dividends will accumulate at the Applicable Rate from the Date of
Original Issue and will be payable on each Dividend Payment Date thereafter.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Applicable Rate resulting from an Auction will not be
greater than the Maximum Rate. The Maximum Rate is subject to upward, but not
downward, adjustment in the discretion of the Board of Trustees after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the AMPS Basic Maintenance
Amount.
The Maximum Rate will apply automatically following an Auction for
each of the series of AMPS in which Sufficient Clearing Bids have not been
made (other than because all AMPS were subject to Submitted Hold Orders) or
following the failure to hold an Auction for any reason on the Auction Date
scheduled to occur (except for (i) circumstances in which the Dividend Rate is
the Default Rate, as described below or (ii) in the event an auction is not
held because an unforeseen event or unforeseen events cause a day that
otherwise would have been an Auction Date not to be a Business Day, in which
case the length of the then-current dividend period will be extended by seven
days, or a multiple thereof if necessary because of such unforeseen event or
events, the applicable rate for such period will be the applicable rate for
the then-current dividend period so extended and the dividend payment date for
such dividend period will be the first business day next succeeding the end of
such period). The All Hold Rate will apply automatically following an Auction
in which all of the Outstanding AMPS are subject (or are deemed to be subject)
to Hold Orders.
Prior to each Auction, Broker-Dealers will notify Holders of the term
of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for
the next succeeding Dividend Period and of the Auction Date of the next
succeeding Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods of the each of the series of AMPS; provided, however, that
no such designation is necessary for a Standard Dividend Period and that any
designation of a Special Dividend Period will be effective only if (i) notice
thereof has been given as provided herein, (ii) any failure to pay in the
timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, the AMPS has been cured as set forth under "-- Default
Period," (iii) Sufficient Clearing Orders existed in an Auction held on the
Auction Date immediately preceding the first day of such proposed Special
Dividend Period, (iv) if the Fund mailed a notice of redemption with respect
to any shares, the Redemption Price with respect to such shares has been
deposited with the Paying Agent and (v) the Fund has confirmed that, as of the
Auction Date next preceding the first day of such Special Dividend Period, it
has Eligible Assets with an aggregate Discounted Value at least equal to the
AMPS Basic Maintenance Amount and has consulted with the Broker-Dealers
including the lead broker-dealer, initially Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and the Fund has provided notice and a AMPS Basic
Maintenance Report to each Rating Agency which is then rating the AMPS and so
requires.
If the Fund proposes to designate any Special Dividend Period, not
fewer than seven Business Days (or two Business Days in the event the duration
of the Special Dividend Period is fewer than ten days) nor more than 30 Business
Days prior to the first day of such Special Dividend Period, notice will be made
by press release and communicated by the Fund by telephonic or other means to
the Auction Agent and confirmed in writing promptly thereafter. Each such notice
will state (x) that the Fund proposes to exercise its option to designate a
succeeding Special Dividend Period, specifying the first and last days thereof
and (y) that the Fund will, by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such Special Dividend Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
its determination, subject to certain conditions, to proceed with such Special
Dividend Period, in which case the Fund may specify the terms of any Specific
35
Redemption Provisions, or its determination not to proceed with such Special
Dividend Period, in which case the succeeding Dividend Period will be a
Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of any proposed Special Dividend Period, the
Fund will deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(a) a notice stating (i) that the Fund has determined
to designate the immediately succeeding Dividend
Period as a Special Dividend Period, specifying the
first and last days thereof and (ii) the terms of
the Specific Redemption Provisions, if any; or
(b) a notice stating that the Fund has determined not
to exercise its option to designate a Special
Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Dividend Period, the Fund will be deemed to have delivered a notice to
the Auction Agent with respect to such Dividend Period to the effect set forth
in clause (b) above, thereby resulting in a Standard Dividend Period.
Default Period. A "Default Period" with respect to the Outstanding
AMPS will commence on any date upon which the Fund fails to deposit
irrevocably in trust in same-day funds with the Paying Agent by 12:00 noon,
New York City time, on the Business Day immediately preceding the relevant
Dividend Payment Date or Redemption Date (or such later date as the Paying
Agent may authorize), as the case may be, (i) the full amount of any declared
dividend on the Outstanding AMPS payable on such Dividend Payment Date (a
"Dividend Default") or (ii) the full amount of any redemption price (the
"Redemption Price") payable on the AMPS being redeemed on such Redemption Date
(a "Redemption Default" and, together with a Dividend Default, a "Default").
The Fund will pay a late charge to those holders of the AMPS to which
a dividend or redemption payment was not made in respect of the preceding
period. Such late charge will be equal to 200% of the reference rate for each
day (up to a maximum of three days) following the dividend or redemption
payment date for which the Fund has not cured its failure to make such
dividend or redemption payment.
A Default Period with respect to a Dividend Default or a Redemption
Default will end by 12:00 noon, New York City time, on the Business Day on
which all unpaid dividends and any unpaid Redemption Price will have been
deposited irrevocably in trust in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a
Default Period applicable to the AMPS, and the dividend rate for each Dividend
Period commencing during a Default Period will be equal to the Default Rate.
Each subsequent Dividend Period commencing after the beginning of a
Default Period will be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of
a new Dividend Period. No Auction will be held during a Default Period
applicable to such Series; provided, however, that if a Default Period shall
end prior to the end of Standard Dividend Period that had commenced during the
Default Period, an Auction shall be held on the last day of such Standard
Dividend Period.
36
In the event the Fund fully pays all default amounts due during a
Dividend Period, the dividend rate for the remainder of that Dividend Period
will be the Maximum Rate.
No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such Default is not solely due to the willful failure
of the Fund) is deposited irrevocably in trust, in same-day funds with the
Paying Agent by 12:00 noon, New York City time, within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with
an amount equal to the Default Rate applied to the amount of such non-payment
based on the actual number of days comprising such period divided by 360. The
Default Rate will be equal to the Reference Rate multiplied by three.
Restrictions on Dividends, Redemption and Other Payments
Under the 1940 Act, the Fund may not (i) declare any dividend (except
a dividend payable in shares of the issuer) or other distributions upon any of
its outstanding Common Shares, or purchase any such Common Shares, if at the
time of the declaration, distribution or purchase, as applicable (and after
giving effect thereto), asset coverage with respect to the Fund's outstanding
senior securities representing stock, including the Series A Preferred or the
AMPS, would be less than 200% (or such higher percentage as may in the future
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing indebtedness of a closed-end investment company as a
condition of declaring distributions, purchases or redemptions of its capital
shares), or (ii) declare any dividend (except a dividend payable in shares of
the issuer) or other distributions upon any of its outstanding capital shares,
including the Series A Preferred or the AMPS, or purchase any such capital
shares if, at the time of such declaration, distribution or purchase, as
applicable (and after giving effect thereto), asset coverage with respect to
the senior securities representing indebtedness would be less than 300% (or
such other percentage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities representing stock of
a closed-end investment company as a condition of declaring dividends on its
Preferred Shares), except that dividends may be declared upon any Preferred
Shares, including the Series A Preferred or the AMPS, if, at the time of such
declaration (and after giving effect thereto), asset coverage with respect to
the senior securities representing indebtedness would be equal to or greater
than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its Preferred Shares). A declaration of a dividend or
other distribution on or purchase or redemption of Series A Preferred or AMPS
is prohibited, unless there is no event of default under indebtedness senior
to the Series A Preferred and/or the AMPS and, immediately after such
transaction, the Fund would have Eligible Assets with an aggregated Discounted
Value at least equal to the asset coverage requirements under indebtedness
senior to its Preferred Shares (including the Series A Preferred and/or the
AMPS).
For so long as the Series A Preferred or any of the series of AMPS
are Outstanding, except as otherwise provided in the Statement of Preferences,
the Fund will not pay any dividend or other distribution (other than a
dividend or distribution paid in shares of, or options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking
junior to the Series A Preferred and/or the AMPS as to dividends or upon
liquidation) with respect to Common Shares or any other shares of the Fund
ranking junior to the Series A Preferred and/or the AMPS as to dividends or
upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or other shares ranking junior to
the Series A Preferred and/or the AMPS (except by conversion into or exchange
for shares of the Fund ranking junior to the Series A Preferred and/or the
AMPS as to dividends and upon liquidation), unless, in each case, (x)
immediately after such transaction, the Fund would have Eligible Assets with
an aggregate Discounted Value at least equal to the Basic Maintenance Amount
applicable to, as the case may be, the Series A Preferred or the AMPS and the
1940 Act Asset Coverage
37
with respect to the Fund's Outstanding Preferred Shares, including the Series
A Preferred and/or the AMPS, would be achieved, (y) all cumulative and unpaid
dividends due on or prior to the date of the transaction have been declared
and paid in full with respect to the Preferred Shares, including the Series A
Preferred and/or the AMPS (or will have been declared and sufficient funds for
the full payment thereof will have been deposited with the Paying Agent or the
dividend-disbursement agent, as applicable) and (z) the Fund has redeemed the
full number of Preferred Shares to be redeemed pursuant to any provision for
mandatory redemption contained in the Statements of Preferences, including any
Series A Preferred and/or AMPS required or determined to be redeemed pursuant
to any such provision.
No full dividend will be declared or paid on the Series A Preferred
or each of the series of AMPS for any Dividend Period or part thereof, unless
full cumulative dividends due through the most recent Dividend Payment Dates
of the Outstanding Preferred Shares (including the Series A Preferred and/or
the AMPS) have been or contemporaneously are declared and paid. If full
cumulative dividends due have not been paid on all such Preferred Shares, any
dividends being paid on such Preferred Shares (including the Series A
Preferred and/or the AMPS) will be paid as nearly pro rata as possible in
proportion to the respective amounts of dividends accumulated but unpaid on
each such series of Preferred Shares on the relevant Dividend Payment Date.
Moody's and S&P Guidelines
The descriptions of the Moody's and S&P Guidelines contained in this
SAI do not purport to be complete and are subject to and qualified in their
entireties by reference to the applicable Statement of Preferences. Copies of
the Statements of Preferences are filed as an exhibit to the registration
statement of which the Prospectus and this SAI are a part and may be
inspected, and copies thereof may be obtained, as described under "Additional
Information" in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by Moody's and S&P,
each a Rating Agency, in connection with the Fund's receipt of a rating of
"Aaa" from Moody's and "AAA" from S&P, respectively, for the AMPS and a rating
of "Aaa" from Moody's for the Series A Preferred. These Rating Agency
Guidelines relate, among other things, to industry and credit quality
characteristics of issuers and diversification requirements and specify
various Discount Factors for different types of securities (with the level of
discount greater as the rating of a security becomes lower). Under the Rating
Agency Guidelines, certain types of securities in which the Fund may otherwise
invest consistent with its investment strategy are not eligible for inclusion
in the calculation of the Discounted Value of the Fund's portfolio. Such
instruments include, for example, private placements (other than Rule 144A
Securities) and other securities not within the Rating Agency Guidelines.
Accordingly, although the Fund reserves the right to invest in such securities
to the extent set forth herein, such securities have not and it is anticipated
that they will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of such
guidelines, greater than the aggregate liquidation preference of the
Outstanding Series A Preferred, AMPS and other Preferred Shares plus specified
liabilities, payment obligations and other amounts, as of periodic Valuation
Dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the Outstanding Series A Preferred, AMPS and other Preferred
Shares on a non-discounted basis of at least 200% as of the end of each month,
and the 1940 Act requires this asset coverage as a condition to paying
dividends or other distributions on its Common Shares. See "Description of the
Series A Preferred and the AMPS --Requirements" in the Prospectus. The effect
of compliance with the Rating Agency Guidelines may be to cause the Fund to
invest in higher quality assets and/or to maintain relatively substantial
balances of highly liquid assets or to restrict the Fund's ability to make
certain investments that would otherwise be deemed potentially
38
desirable by the Investment Adviser, including private placements of other
than Rule 144A Securities (as defined herein). The Rating Agency Guidelines
are subject to change from time to time with the consent of the relevant
Rating Agency and will apply to the Series A Preferred or the AMPS only so
long as the relevant Rating Agency is rating such shares at the request of the
Fund. If in the future the Fund elected to issue senior securities rated by a
rating agency other than Moody's or S&P, other similar arrangements might
apply with respect to those securities.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each Rating Agency
(the "Basic Maintenance Amount"), the determination of which is as set forth
under "Description of the Series A Preferred and the AMPS --Requirements" in
the Prospectus. Moody's and S&P have each established separate guidelines for
determining Discounted Value. To the extent any particular portfolio holding
does not satisfy the applicable Rating Agency's Guidelines, all or a portion
of such holding's value will not be included in the calculation of Discounted
Value (as defined by such Rating Agency). Upon any failure to maintain the
required Discounted Value, the Fund may seek to alter the composition of its
portfolio to reestablish required asset coverage within the specified ten
Business Day cure period, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
A rating of preferred shares as "Aaa" (as described by Moody's) or
"AAA" (as described by S&P) indicates strong asset protection, conservative
balance sheet ratios and positive indications of continued protection of
preferred dividend requirements. A Moody's or S&P credit rating of preferred
shares does not address the likelihood that a resale mechanism (such as the
Auction) will be successful. As described respectively by Moody's and S&P, an
issue of preferred shares which is rated "Aaa" or "AAA" is considered to be
top-quality preferred shares with good asset protection and the least risk of
dividend impairment within the universe of preferred shares.
The Fund will pay certain fees to Moody's and S&P for rating, as the
case may be, the Series A Preferred and/or the AMPS. Such ratings may be
subject to revision or withdrawal by the assigning Rating Agency at any time.
Any rating of the Series A Preferred or the AMPS should be evaluated
independently of any other rating. Ratings are not recommendations to
purchase, hold or sell Series A Preferred or AMPS, inasmuch as the rating does
not comment as to market price or suitability for a particular investor. The
rating is based on current information furnished to Moody's and S&P by the
Fund and obtained by Moody's and S&P from other sources. The rating may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information. The Fund has no current intention to file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee
becoming insolvent.
Moody's Guidelines
Under the Moody's guidelines, the Fund is required to maintain
specified discounted asset values for its portfolio representing the Preferred
Basic Maintenance Amount. To the extent any particular portfolio holding does
not meet the applicable guidelines, it is not included for purposes of
calculating the Discounted Value of the Fund's portfolio.
39
The following Discount Factors apply to portfolio holdings as
described below, subject to diversification, issuer size and other
requirements, in order to constitute Moody's Eligible Assets includable within
the calculation of Discounted Value:
Moody's
Type of Moody's Eligible Asset*: Discount
Factor:
U.S. Treasury Securities with final maturities that are less than or equal to 60 days... 1.00
Demand or time deposits, certificates of deposit and bankers' acceptances
includible in Short Term Money Market Instruments....................................... 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days or less....................... 1.00
Commercial paper rated P-1 by Moody's maturing in more than 30 days but in 270
days or less......................................................................... 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or less......................... 1.25
Repurchase obligations includible in Short Term Money Market Instruments if
term is less than 30 days and counterparty is rated at least A2...................... 1.00
Other repurchase obligations............................................................ Discount Factor
applicable to
underlying assets
U.S. Common Stocks and Common Stocks of foreign issuers for which ADR's are
traded:
Large Cap Stocks (Market Capitalization in excess of $10 billion) ...................... 2.00
Mid Cap Stocks (Market Capitalization in between $2 billion and $10 billion) ........... 2.05
Small Cap Stocks (Market Capitalization less than $2 billion) .......................... 2.20
Common Stocks of foreign issuers (in existence for at least five years) for which no
ADR'sare traded......................................................................... 4.00
Common Stocks of foreign issuers (in existence for at least five years) for
which no ADR's are traded............................................................ 4.00
Convertible Preferred Stocks and Convertible Corporate Debt Securities
having a delta range of:.............................................................
.8-.4 (investment grade)........................................................... 1.92
.8-.4 (below investment grade)..................................................... 2.26
1-.8 (investment grade)............................................................ 1.95
1-.8 (below investment grade)...................................................... 2.29
Convertible Preferred Stocks and Convertible Corporate Debt Securities
that are unrated..................................................................... 2.50
Preferred stocks:.......................................................................
Auction rate preferred stocks...................................................... 3.50
Other preferred stock rated:.......................................................
Aaa.......................................................................... 1.50
Aa........................................................................... 1.55
A............................................................................ 1.60
Baa.......................................................................... 1.65
40
Ba........................................................................... 1.96
B............................................................................ 2.16
Less than B or not rated..................................................... 2.40
DRD preferred (investment grade)................................................... 1.65
DRD Preferred (below investment grade)............................................. 2.16
U.S. Government Obligations (other than U.S. Treasury Securities Strips set
forth below) with remaining terms to maturity of:
1 year or less..................................................................... 1.04
2 years or less.................................................................... 1.09
3 years or less.................................................................... 1.12
4 years or less.................................................................... 1.15
5 years or less.................................................................... 1.18
7 years of less.................................................................... 1.21
10 years or less................................................................... 1.24
15 years or less................................................................... 1.25
20 years or less................................................................... 1.26
30 years or less................................................................... 1.26
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less..................................................................... 1.04
2 years or less.................................................................... 1.10
3 years or less.................................................................... 1.14
4 years or less.................................................................... 1.18
5 years or less.................................................................... 1.21
7 years or less.................................................................... 1.27
10 years or less................................................................... 1.34
15 years or less................................................................... 1.45
20 years or less................................................................... 1.54
30 years or less................................................................... 1.66
Corporate Debt:....................................................................
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Aa1 with remaining terms to maturity of:
1 year or less..................................................................... 1.09
2 years or less.................................................................... 1.15
3 years or less.................................................................... 1.20
4 years or less.................................................................... 1.26
5 years or less.................................................................... 1.32
7 years or less.................................................................... 1.39
10 years or less................................................................... 1.45
15 years or less................................................................... 1.50
20 years or less................................................................... 1.50
30 years or less................................................................... 1.50
Greater than 30 years 1.65
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least Aa3 with remaining terms to maturity of:
1 year or less..................................................................... 1.12
2 years of less.................................................................... 1.18
3 years or less.................................................................... 1.23
4 years or less.................................................................... 1.29
5 years or less.................................................................... 1.35
7 years or less.................................................................... 1.43
10 years or less................................................................... 1.50
15 years or less................................................................... 1.55
20 years or less................................................................... 1.55
41
30 years or less................................................................... 1.55
Greater than 30 years.............................................................. 1.73
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least A3 with remaining terms to maturity of:
1 year or less..................................................................... 1.15
2 years or less.................................................................... 1.22
3 years or less.................................................................... 1.27
4 years or less.................................................................... 1.33
5 years or less.................................................................... 1.39
7 years or less.................................................................... 1.47
10 years or less................................................................... 1.55
15 years or less................................................................... 1.60
20 years or less................................................................... 1.60
30 years or less................................................................... 1.60
Greater than 30 years ............................................................. 1.81
Convertible corporate debt having a delta range of .4-0, and Non-convertible
corporate debt, rated at least Baa3 with remaining terms of maturity of:
1 year or less 1.18
2 years or less 1.25
3 years or less 1.31
4 years or less 1.38
5 years or less 1.44
7 years or less 1.52
10 years or less 1.60
15 years or less 1.65
20 years or less 1.65
30 years or less 1.65
Greater than 30 years 1.89
Convertible corporate debt having a delta range of .4-0, and Non-convertible
corporate debt, rated at least Ba3 with remaining terms of maturity of:
1 year or less..................................................................... 1.37
2 years or less.................................................................... 1.46
3 years or less.................................................................... 1.53
4 years or less.................................................................... 1.61
5 years or less.................................................................... 1.68
7 years or less.................................................................... 1.79
10 years or less................................................................... 1.89
15 years or less................................................................... 1.96
20 years or less................................................................... 1.96
30 years or less................................................................... 1.96
Greater than 30 years.............................................................. 2.05
Convertible corporate debt having a delta range of .4-0, and non-convertible
corporate debt, rated at least B1 and B2 with remaining terms of maturity
of:
1 year or less..................................................................... 1.50
2 years or less.................................................................... 1.60
3 years or less.................................................................... 1.68
4 years or less.................................................................... 1.76
5 years or less.................................................................... 1.85
7 years or less.................................................................... 1.97
10 years or less................................................................... 2.08
15 years or less................................................................... 2.16
20 years or less................................................................... 2.28
30 years or less................................................................... 2.29
42
Greater than 30 years.............................................................. 2.40
-------------------
* Discount Factors are for a seven-week exposure period; the Discount
Factor applicable to Rule 144A securities shall be increased by 20%.
Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for the Trust's assets
can be derived from other sources, securities rated below B by
Moody's and unrated securities, which are securities rated by neither
Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
Assets. If a convertible corporate debt security is unrated by
Moody's, S&P or Fitch, the Fund will use the percentage set forth
under "NR" in this table. Ratings assigned by S&P or Fitch are
generally accepted by Moody's at face value. However, adjustments to
face value may be made to particular categories of credits for which
the S&P and/or Fitch rating does not seem to approximate a Moody's
rating equivalent. Securities with different ratings assigned by S&P
and Fitch will be accepted at the lower of the two ratings.
"Moody's Eligible Assets" means:
(a) cash (including, for this purpose, receivables for investments sold to a
counterparty whose senior debt securities are rated at least Baa3 by Moody's
or a counterparty approved by Moody's and payable within five Business Days
following such Valuation Date and dividends and interest receivable within 49
days on investments);
(b) Short-Term Money Market Instruments;
(c) commercial paper that is not includible as a Short-Term Money Market
Instrument having on the Valuation Date a rating from Moody's of at least P-1
and maturing within 270 days;
(d) preferred stocks (i) which either (A) are issued by issuers whose senior
debt securities are rated at least Baa1 by Moody's or (B) are rated at least
Baa3 by Moody's or (C) in the event an issuer's senior debt securities or
preferred stock is not rated by Moody's, which either (1) are issued by an
issuer whose senior debt securities are rated at least A- by S&P or (2) are
rated at least A- by S&P and for this purpose have been assigned a Moody's
equivalent rating of at least Baa3, (ii) of issuers which have (or, in the
case of issuers which are special purpose corporations, whose parent companies
have) common stock listed on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market System, (iii) which have a minimum
issue size (when taken together with other of the issuer's issues of similar
tenor) of $40,000,000, (iv) which have paid cash dividends consistently during
the preceding three-year period (or, in the case of new issues without a
dividend history, are rated at least A1 by Moody's or, if not rated by
Moody's, are rated at least A+ by S&P), (v) which pay cumulative cash
dividends in U.S. dollars, (vi) which are not convertible into any other class
of stock and do not have warrants attached, (vii) which are not issued by
issuers in the transportation industry and (viii) in the case of auction rate
preferred stocks, which are rated at least Aa3 by Moody's, or if not rated by
Moody's, AA- by S&P, AA- by Fitch or are otherwise approved in writing by
Moody's and have never had a failed auction; provided, however, that for this
purpose the aggregate Market Value of the Company's holdings of any single
issue of auction rate preferred stock shall not be more than 1% of the
Corporation's total assets.
(e) common stocks (i) (A) which are traded on a nationally recognized stock
exchange or in the over-the-counter market, (B) if cash dividend paying, pay
cash dividends in U.S. dollars and (C) which may be sold without restriction
by the Corporation; provided, however, that (y) common stock which, while a
Moody's Eligible Asset owned by the Corporation, ceases paying any regular
cash dividend will no longer be considered a Moody's Eligible Asset until 71
days after the date of the announcement of such cessation, unless the issuer
of the common stock has senior debt securities rated at least A3 by Moody's
and (z) the aggregate Market Value of the Corporation's holdings of the common
stock of any issuer in excess of 4% in the case of utility common stock and 6%
in the case of non-utility common stock of the aggregate Market Value of the
Corporation's holdings shall not be Moody's Eligible Assets, (ii) which are
securities denominated in any currency other than the U.S. dollar or
securities of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
ADRs or their equivalents which are traded in the United States on exchanges
or over-the-counter and are issued by banks formed under the laws of the
United States, its states or the District of Columbia or (iii) which are
securities of issuers formed under the laws of jurisdictions other than the
United States (and in existence for at least five years) for which no ADRs are
traded; provided, however,
43
that the aggregate Market Value of the Corporation's holdings of securities
denominated in currencies other than the U.S. dollar and ADRs in excess of (A)
6% of the aggregate Market Value of the Outstanding shares of common stock of
such issuer thereof or (B) in excess of 10% of the Market Value of the
Corporation's Moody's Eligible Assets with respect to issuers formed under the
laws of any single such non-U.S. jurisdiction other than Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the United
Kingdom, shall not be a Moody's Eligible Asset;
(f) ADR securities, based on the following guidelines: (i) Sponsored ADR
program or (ii) Level II or Level III ADRs. Private placement Rule 144A ADRs
are not eligible for collateral consideration. Global GDR programs will be
evaluated on a case by case basis;
(g) U.S. Government Obligations;
(h) corporate evidences of indebtedness (i) which may be sold without
restriction by the Corporation which are rated at least B3 (Caa subordinate)
by Moody's (or, in the event the security is not rated by Moody's, the
security is rated at least B- by S&P and which for this purpose is assigned a
Moody's equivalent rating of one full rating category lower), with such rating
confirmed on each Valuation Date, (ii) which have a minimum issue size of at
least (A) $100,000,000 if rated at least Baa3 or (B) $50,000,000 if rated B or
Ba3, (iii) which are not convertible or exchangeable into equity of the
issuing corporation and have a maturity of not more than 30 years and (iv) for
which, if rated below Baa3 or not rated, the aggregate Market Value of the
Company's holdings do not exceed 10% of the aggregate Market Value of any
individual issue of corporate evidences of indebtedness calculated at the time
of original issuance; and
(i) convertible corporate evidences of indebtedness (i) which are issued by
issuers whose senior debt securities are rated at least B2 by Moody's (or, in
the event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least B by S&P
and which for this purpose is assigned a Moody's equivalent rating of one full
rating category lower), (ii) which are convertible into common stocks which
are traded on the New York Stock Exchange or the American Stock Exchange or
are quoted on the Nasdaq National Market System and (iii) which, if cash
dividend paying, pay cash dividends in U.S. dollars; provided, however, that
once convertible corporate evidences of indebtedness have been converted into
common stock, the common stock issued upon conversion must satisfy the
criteria set forth in clause (e) above and other relevant criteria set forth
in this definition in order to be a Moody's Eligible Asset; provided, however,
that the Corporation's investments in auction rate preferred stocks described
in clause (d) above shall be included in Moody's Eligible Assets only to the
extent that the aggregate Market Value of such stocks does not exceed 10% of
the aggregate Market Value of all of the Corporation's investments meeting the
criteria set forth in clauses (a) through (g) above less the aggregate Market
Value of those investments excluded from Moody's Eligible Assets pursuant to
the paragraph appearing after clause (i) below; and
(j) no assets which are subject to any lien or irrevocably deposited by the
Corporation for the payment of amounts needed to meet the obligations
described in clauses (a)(i) through (a)(iv) of the definition of "Basic
Maintenance Amount" may be includible in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses
(a)-(j), the Corporation's investment in preferred stock, common stock,
corporate evidences of indebtedness and convertible corporate evidences of
indebtedness shall not be treated as Moody's Eligible Assets except to the
extent they satisfy the following diversification requirements (utilizing
Moody's Industry and Sub-industry Categories) with respect to the Market Value
of the Corporation's holdings:
44
Issuer:
Non-Utility Maximum Utility Maximum Single
Moody's Rating(1)(2) Single Issuer(3)(4) Issuer(3)(4)
-------------- ------------------- -----------------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 or lower 2% 2%
Industry and State:
Non-Utility Maximum Utility Maximum Single Utility Maximum Single
Moody's Rating(1) Single Industry(3) Sub-Industry(3)(6) State(3)
----------------- ------------------- ---------------------- ----------------------
Aaa 100% 100% 100%
Aa 60% 60% 20%
A 40% 50% 10%(7)
CS/CB, Baa(5) 20% 50% 7%(7)
Ba 12% 12% 0%
B1/B2 8% 8% 0%
B3 or lower 5% 5% 0%
___________________
(1) Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for the Corporation's
assets can be derived from other sources, securities rated below B by
Moody's and unrated securities, which are securities rated by neither
Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
Assets. If a corporate, municipal or other debt security is unrated
by Moody's, S&P or Fitch, the Corporation will use the percentage set
forth under "B3 or lower" in this table. Ratings assigned by S&P or
Fitch are generally accepted by Moody's at face value. However,
adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to
approximate a Moody's rating equivalent
(2) Corporate evidences of indebtedness from issues ranging $50,000,000
to $100,000,000 are limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only
for the related Moody's rating category and each lower Moody's rating
category.
(4) Issuers subject to common ownership of 25% or more are considered as
one name.
(5) CS/CB refers to common stock and convertible corporate evidences of
indebtedness, which are diversified independently from the rating
level.
(6) In the case of utility common stock, utility preferred stock, utility
evidences of indebtedness and utility convertible evidences of
indebtedness, the definition of industry refers to sub-industries
(electric, water, hydro power, gas, diversified). Investments in
other sub-industries are eligible only to the extent that the
combined sum represents a percentage position of the Moody's Eligible
Assets less than or equal to the percentage limits in the
diversification tables above.
45
(7) Such percentage shall be 15% in the case of utilities regulated by
California, New York and Texas.
"Moody's Hedging Transactions" means for so long as any Preferred Shares are
rated by Moody's, the Fund may buy or sell financial futures contracts, write,
purchase or sell call options on financial futures contracts or purchase put
options on financial futures contracts or write call options on portfolio
securities, swaps and securities lending unless it receives written
confirmation from Moody's that engaging in such transactions would impair the
ratings then assigned to the Preferred Shares by Moody's, (collectively
"Moody's Hedging Transactions"), subject to the following limitations :
(i) Future and call options: For purposes of the Basic Maintenance Amount,
futures held by the Fund and call options sold by the Fund shall not be
included as Moody's Eligible Assets. However, such assets shall be valued at
Market Value by subtracting the good faith margin and the maximum daily
trading variance as of a Valuation Date. For call options purchased by the
Fund, the Market Value of the call option will be included as Moody's Eligible
Asset subject to a Moody's Discount Factor mutually agreed to between the Fund
and Moody's based on the characteristics of the option contract such as its
maturity and the underlying security of the contract.
(ii) Securities lending: The Fund may engage in securities lending in an
amount not to exceed 10% of the Fund's total gross assets (provided term and
conditions of the securities lending program are disclosed in advance to
Moody's, if Moody's is rating the preferred shares). For purposes of
calculating the Basic Maintenance Amount, such securities lent shall be
included as Moody's Eligible Assets with the appropriate Moody's Discount
Factor applied to such lent security. The obligation to return such collateral
shall not be included as an obligation/liability for purposes of calculating
the Basic Maintenance Amount. However, the Fund may reinvest cash collateral
for securities lent in conformity with its investment objectives and policies
and the provisions of these bylaws. In such event, to the extent that
securities lending collateral received is invested by the Fund in assets that
otherwise would be Moody's Eligible Assets and the value of such assets
exceeds the amount of the Fund's Moody's Eligible Assets by applying the
applicable Moody's Discount Factor to this amount and adding the product to
total Moody's Eligible Assets. Conversely, if the value of assets in which
securities lending collateral has been invested is less then the amount of the
Fund's obligation to return the collateral on a Valuation Date, such
difference shall be included as an obligation/liability of the Fund for
purposes of calculating the Basic Maintenance Amount. Collateral received by
the Fund in a securities lending transaction and maintained by the Fund in the
form received shall not be included as a Moody's Eligible Asset for purposes
of calculating the Basic Maintenance Amount.
(iii) Swaps (including Total Return Swaps and Interest Rate Swaps): Total
return and Interest Rate Swaps are subject to the following provisions:
(A) Only the cumulative unsettled profit and loss from a Total Return Swap
transaction will be calculated when determining the Basic Maintenance Amount.
If the Fund has an outstanding gain from a swap transaction on a Valuation
Date, the gain will be included as a Moody's Eligible Asset subject to the
Moody's Discount Factor on the counterparty to the swap transaction. If the
Fund has an outstanding liability from a swap transaction on a Valuation Date,
the Fund will subtract the outstanding liability from the total Moody's
Eligible Assets in calculating the Basic Maintenance Amount.
In addition, for swaps other than Total Return Swaps, the Market Value of the
position (positive or negative) will be included as a Moody's Eligible Asset.
The aggregate notional value of all swaps will not exceed the Liquidation
Preference of the Outstanding Preferred Shares. At the time a swap is
executed, the Fund will only enter into swap transactions where the
counterparty has at least a Fitch rating of A- or Moody's long-term rating of
A3.
46
(B) (1) The underlying securities subject to a Credit Default Swap sold by the
Fund will be subject to the applicable Moody's Discount Factor for each
security subject to the swap;
(2) If the Fund purchases a Credit Default Swap and holds the underlying
security, the Market Value of the Credit Default Swap and the underlying
security will be included as a Moody's Eligible Asset subject to the Moody's
Discount Factor assessed based on the counterparty risk and the duration of
the swap agreement; and
If not otherwise provided for in (a)(i)-(iii) above, derivative instruments
shall be treated as follows: Any derivative instruments will be valued
pursuant to the Fund's valuation procedures on a Valuation Date. The amount of
the net payment obligation and the cost of a closing transaction, as
appropriate, on any derivative instrument on a Valuation Date will be counted
as a liability for purposes of determining the Basic Maintenance Amount
(e.g.,, a written call option that is in the money for the holder). Any
derivative instrument with respect to which the Fund is owed payment on the
Valuation Date that is not based upon an individual security or securities
that are Moody's Eligible Assets will have a mutually agreed upon valuation by
Moody's and the Fund for purposes of determining Moody's Eligible Assets. Any
derivative instrument with respect to which the Fund is owed payment on the
valuation date that is based upon an individual security or securities that
are Moody's Eligible Assets (e.g., a purchased call option on a bond that is
in the money) will be valued as follows for purposes of determining Moody's
Eligible Assets: (A) For such derivative instruments that are exchange traded,
the value of the in-the-money amount of the payment obligation to the Fund
will be reduced by applying the Moody's Discount Factor (as it would apply to
the underlying security or securities) and then added to Moody's Eligible
Assets; and (B) for such derivative instruments that are not exchange traded,
the value of the in-the-money amount of the payment obligation to the Fund
will be (1) reduced as described in (A) and (B) further reduced by applying to
the remaining amount the Moody's Discount Factor determined by reference to
the credit rating of the derivative counterparty with the remaining amount
after these reductions then added to Moody's Eligible Assets.
For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the Basic Maintenance
Amount, the Discounted Value of all Forward Commitments to which the Fund is a
party and of all securities deliverable to the Fund pursuant to such Forward
Commitments shall be zero.
S&P Guidelines
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Series B Preferred
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio.
The following Discount Factors apply to portfolio holdings as
described below in order to constitute S&P Eligible Assets includable within
the calculation of Discounted Value:
Asset Class Obligor Overcollateralization
(Collateral) Factors (1)
Public Equity Small-Cap 217.4%
Public Equity Mid-Cap 186.6%
Public Equity Large-Cap 167.6%
47
Convertible Securities 150.9%
Fixed Rate Preferred 245.00%
Adjustable Rate Preferred 216.75%
Taxable Preferred (non-DRD) 164.00%
DRD Eligible Preferred Stock with a senior or preferred 245%
stock rating of at least BBB-
REIT and Non-DRD eligible Preferred Stock with a senior 164%
or preferred stock rating of at least BBB-
DRD Eligible Preferred Stock with a senior or preferred 250%
stock rating below BBB-
REIT and non-DRD Eligible Preferred Stock with a senior 169%
or preferred stock rating below BBB-
Un-rated DRD Eligible Preferred Stock 255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred 174%
Stock
Convertible bonds rated AAA 150.90%
Convertible bonds rated AA 157.58%
Convertible bonds rated A 164.25%
Convertible bonds rated BBB 170.92%
Convertible bonds rated BB 177.60%
Convertible bonds rated B 184.27%
Convertible bonds rated CCC 190.94%
U.S. Short-Term Money Market Investments with 104%
maturities of 180 days or less
U.S. Short-Term Money Market Investments with 113%
maturities of between 181 and 360 days
U.S. Government Securities (52 week Treasury Bills) 102.23%
U.S. Government Securities (Two-Year Treasury Notes) 104.23%
U.S. Government Securities (Five-Year Treasury Notes) 110.27%
U.S. Government Securities (Ten-Year Treasury Notes) 117.23%
48
U.S. Government Securities (Thirty-Year Treasury Bonds) 130.38%
Agency Mortgage Collateral (Fixed 15-Year) 132%
Agency Mortgage Collateral (Fixed 30-Year) 135%
Agency Mortgage Collateral (ARM 1/1) 124%
Agency Mortgage Collateral (ARM 3/1) 125%
Agency Mortgage Collateral (ARM 5/1) 125%
Agency Mortgage Collateral (ARM 10/1) 125%
Mortgage Pass-Through Fixed (15 Year) 134%
Mortgage Pass-Through Fixed (30 Year) 137%
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
49
Master Limited Partnerships 625%
Cash and Other Deposit Securities with 100%
Maturities of 30 days or less
______________
(1) For an S&P rating of AAA.
"S&P Eligible Assets" means:
(a) Deposit Assets; and
(b) common stocks that satisfy all of the following conditions:
(i) such common stock (including the common stock of
any predecessor or constituent issuer) has been
traded on a recognized national securities exchange
or quoted on the National Market System (or any
equivalent or successor thereto) of Nasdaq for at
least 450 days,
(ii) the Market Capitalization of such issuer of common
stock exceeds $100 million,
(iii) the issuer of such common stock is not an entity
that is treated as a partnership for federal income
tax purposes,
(iv) if such issuer is organized under the laws of any
jurisdiction other than the United States, any
state thereof, any possession or territory thereof
or the District of Columbia, the common stock of
such issuer held by the Corporation is traded on a
recognized national securities exchange or quoted
on the National Market System of Nasdaq either
directly or in the form of depository receipts and
(v) if such issuer is registered as an investment
company under the 1940 Act, such issuer does not
invest more than 25% of the value of its gross
assets in securities that are not S&P Eligible
Assets by reason of clause (iv) above;
provided, however, that the Corporation's holdings of the common
stock of any single issuer that satisfies the conditions set forth in
clauses (i) through (v) above shall be included in S&P Eligible
Assets only to the extent that:
(1) such holdings may be sold publicly by the
Corporation at any time without registration,
(2) to the extent remaining eligible after the
operation of item (1) above, such holdings do not
exceed a number of shares representing the average
weekly trading volume of such common stock during
the preceding 30 day period, and
(3) to the extent remaining eligible after the
operation of items (1) and (2) above, the aggregate
Market Value of such holdings, when added to the
aggregate Market Value of the Corporation's
holdings of all other similarly eligible shares of
common stock of issuers in the same Industry
Classification, does not exceed 10%
50
of the aggregate Market Value of the Corporation's
S&P Eligible Assets, provided, however, that the
Corporation's holdings of the common stock of any
single issuer that satisfies the conditions set
forth in clauses (i) through (v) above shall be
included in S&P Eligible Assets only to the extent
that:
(c) Preferred Stocks, on such basis as S&P may determine in response
to a request from the Corporation.
Notwithstanding the foregoing, an asset will not be considered an S&P
Eligible Asset if it is held in a margin account, is subject to any material
lien, mortgage, pledge, security interest or security agreement of any kind or
has been deposited irrevocably for the payment of dividends, redemption
payments or any other payment or obligation under the Corporation's Articles
Supplementary.
In addition, so long as any of each of the series of AMPS are
Outstanding and S&P is rating such the AMPS at the Fund's request, the Fund
will not, unless it has received written confirmation that any such
transaction would not impair the rating then assigned by S&P to the AMPS,
engage in any one or more of the following transactions:
(a) purchase or sell futures contracts; write, purchase or sell
options on futures contracts; or write put options (except covered put
options) or call options (except covered call options) on securities owned by
the Fund, enter into Swap, Cap or floor agreements (collectively, "S&P Hedging
Transactions"), except subject to the following limitations:
(i) for each net long or short position in S&P Hedging
Transactions, the Fund will maintain in a
segregated account with the Fund's custodian an
amount of cash or readily marketable securities
having a value, when added to any amounts on
deposit with the Fund's futures commission
merchants or brokers as margin or premium for such
position, at least equal to the market value of the
Fund's potential obligations on such position,
marked-to-market on a daily basis, in each case as
and to the extent required by the applicable rules
or orders of the SEC or by interpretations of the
SEC's staff;
(ii) the Fund will not engage in any S&P Hedging
Transaction which would cause the Fund at the time
of such transaction to own or have sold the lesser
of (A) outstanding futures contracts, in aggregate,
based on the Standard & Poor's 500 Index, the Dow
Jones Industrial Average, the Russell 2000 Index,
the Wilshire 5000 Index, the Nasdaq Composite Index
and the New York Stock Exchange Composite Index (or
any component of any of the forgoing) exceeding in
number 50% of the market value of the Fund's total
assets or (B) outstanding futures contracts based
on any of the aforementioned indices exceeding in
number 10% of the average number of daily traded
futures contracts based on such index in the 30
days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in closing transactions to
close out any outstanding futures contract which
the Fund owns or has sold or any outstanding option
thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the AMPS
Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay
variation margin on the second such Valuation Date;
51
(iv) the Fund will engage in a closing transaction to
close out any outstanding futures contract or
option thereon at least one week prior to the
delivery date under the terms of the futures
contract or option thereon unless the corporation
holds the securities deliverable under such terms;
and
(v) when the Fund writes a futures contract or option
thereon, either the amount of margin posted by the
Fund (in the case of a futures contract) or the
marked-to-market value of the Fund's obligation (in
the case of a put option written by the Fund) shall
be treated as a liability of the Fund for purposes
of calculating the AMPS Basic Maintenance Amount,
or, in the event the Fund writes a futures contract
or option thereon which requires delivery of an
underlying security and the Fund does not wish to
treat its obligations with respect thereto as a
liability for purposes of calculating the AMPS
Basic Maintenance Amount, it shall hold such
underlying security in its portfolio and shall not
include such security to the extent of such
contract or option as an S&P Eligible Asset.
(b) borrow money, except for the purpose of clearing securities
transactions if (i) the AMPS Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and (ii) such borrowing (A) is
privately arranged with a bank or other person and is not intended to be
publicly distributed or (B) is for "temporary purposes," and is in an amount
not exceeding 5 percent of the market value of the total assets of the Fund at
the time of the borrowing; for purposes of the foregoing, "temporary purposes"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) engage in any short sales of equity securities (other than short
sales against the box) unless the Fund maintains in a segregated account with
the Fund's custodian an amount of cash or other readily marketable securities
having a market value, when added to any amounts on deposit with the Fund's
broker as collateral for its obligation to replace the securities borrowed and
sold short, at least equal to the current market value of securities sold
short, marked-to-market on a daily basis;
(d) utilize any pricing service other than FT Interactive Data,
Reuters, Telekurs, Bloomberg Financial Markets, J.J. Kenney Pricing Service,
Merrill Lynch Securities Pricing Service or Bridge Data Corp., and any pricing
service then permitted by S&P; or
(e) enter into any reverse repurchase agreement, other than with a
counterparty that is rated at least "A-1+" by S&P;
(f) enter into any interest rate swap agreements, unless:
(i) The counterparty to the swap transaction has a
short-term rating of 'A-1' or, if the counterparty
does not have a short-term rating, the
counterparty's senior unsecured long-term debt
rating is 'A-' or higher;
(ii) The interest rate swap transaction will be
marked-to-market weekly by the swap counterparty;
(iii) Provision is made for the agreement to terminate
immediately in the event the trust fails to
maintain an aggregate discounted value at least
equal to the basic maintenance amount on two
consecutive valuation dates;
52
(iv) For the purpose of calculating the asset coverage
test 90% of any positive mark-to-market valuation
of the fund's rights will be eligible assets and
100% of any negative mark-to-market valuation of
the fund's rights will be included in the
calculation of the basic maintenance amount; and
(v) The trust maintains liquid assets with a value at
least equal to the net amount of the excess, if
any, of the fund's obligations over its entitlement
with respect to each swap and at least equal to the
fund's obligations with respect to any caps or
floors.
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 therefor 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.
Beneficial Owners
Name and Address of
Beneficial/Record Owner Amount of Shares and
as of September 15, 2004 Title of Class Nature of Ownership Percent of Class
------------------------ -------------- -------------------- ----------------
Cede & Co.* Common 82,320,948 (Record) 97.10%
P.O. Box 29
Bowling Green Station
New York, NY 10274
53
* A nominee partnership of DTC.
As of September 15, 2004, the Directors and Officers of the Fund as a
group beneficially owned approximately 3.11% of the outstanding shares of the
Fund's Common Shares.
General Information
Book-Entry-Only Issuance
DTC will act as securities depository for the shares of Series A
Preferred and/or AMPS offered pursuant to the Prospectus. The information in
this section concerning DTC and DTC's book-entry system is based upon
information obtained from DTC. The securities offered hereby initially will be
issued only as fully-registered securities registered in the name of Cede &
Co. (as nominee for DTC). One or more fully-registered global security
certificates initially will be issued, representing in the aggregate the total
number of securities, and deposited with DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its participants
deposit with DTC. DTC also facilities the settlement among participants of
securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct DTC participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with a direct participant, either directly or
indirectly through other entities.
Purchases of securities within the DTC system must be made by or
through direct participants, which will receive a credit for the securities on
DTC's records. The ownership interest of each actual purchaser of a security,
a beneficial owner, is in turn to be recorded on the direct or indirect
participants' records. Beneficial owners will not receive written confirmation
from DTC of their purchases, but beneficial owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the direct or indirect
participants through which the beneficial owners purchased securities.
Transfers of ownership interests in securities are to be accomplished by
entries made on the books of participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interests in securities, except as provided herein.
DTC has no knowledge of the actual beneficial owners of the
securities being offered pursuant to this Prospectus; DTC's records reflect
only the identity of the direct participants to whose accounts such securities
are credited, which may or may not be the beneficial owners. The participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
54
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 Registered Public Accounting Firm
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is special counsel to the Fund in connection with the
issuance of the Preferred Shares.
PricewaterhouseCoopers LLP serves as the Independent Registered
Public Accounting Firm of the Fund and will annually audit the financial
statements of the Fund.
55
Proxy Voting Procedures
The Fund has adopted the proxy voting procedures of the Investment
Adviser and has directed the Investment Adviser to vote all proxies relating
to the Fund's voting securities in accordance with such procedures. The proxy
voting procedures are attached hereto as Appendix A. Information regarding how
the Registrant voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available (i) without charge, upon
request, by calling 1-800-422-3554, or on the Registrant's website at
www.gabelli.com, and (ii) on the Commission's website at http://www.sec.gov.
Code of Ethics
The Fund and the Investment Adviser have adopted a code of ethics.
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.
Financial Statements
The audited financial statements included in the Annual Report to
the Fund's Shareholders for the period ended December 31, 2003, together with
the report of PricewaterhouseCoopers LLP thereon, are incorporated herein by
reference from the Fund's Annual Report to Shareholders. All other portions
of the Annual Report to Shareholders are not incorporated herein by reference
and are not part of the Registration Statement. A copy of the Annual Report
to Shareholders may be obtained without charge by
56
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).
57
Glossary
"Adjusted Value" of each Eligible Asset shall be computed as follows:
(i) cash shall be valued at 100% of the face value thereof; and
(ii) all other Eligible Assets shall be valued at the applicable
Discounted Value thereof; and
(iii) each asset that is not an Eligible Asset shall be valued at
zero.
"Administrator" means the other party to the Administration Agreement with the
Fund, which shall initially be Gabelli Funds, LLC, a New York limited
liability company, and will include, as appropriate, any sub-administrator
appointed by the Administrator."Affiliate" means, with respect to the Auction
Agent, any person known to the Auction Agent to be controlled by, in control
of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the
Fund will be deemed to be an Affiliate nor will any Person controlled by, in
control of or under common control with such Person, one of the directors or
executive officers of which is director of the Fund, be deemed to be an
Affiliate solely because such director or executive officer is also a director
of the Fund.
"Agent Member" means a member of or a participant in the Securities Depository
that will act on behalf of a Bidder.
"All Hold Rate" means 90% of the Reference Rate.
"AMPS" means each of the Fund's AMPS, $.001 par value per share and
liquidation preference $25,000 per share.
"AMPS Basic Maintenance Amount Test" means a test which is met if the lower of
the aggregate Discounted Values of the Moody's Eligible Assets or the S&P
Eligible Assets if both Moody's and S&P are then rating the AMPS at the
request of the Fund, or the Eligible Assets of whichever of Moody's and S&P is
then doing so if only one of Moody's and S&P is then rating the AMPS at the
request of the Fund, meets or exceeds the Basic Maintenance Amount with
respect to the AMPS.
"Applicable Rate" means, with respect to the AMPS, for each Dividend Period
(i) if Sufficient Clearing Bids exist for the Auction in respect thereof, the
Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist for the
Auction in respect thereof or an Auction does not take place with respect to
such Dividend Period because of the commencement of a Default Period that ends
prior to an Auction Date, the Maximum Rate and (iii) if all AMPS is the
subject of Submitted Hold Orders for the Auction in respect thereof, the All
Hold Rate.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another commercial
bank, trust company, or other financial institution appointed by a resolution
of the Board of Trustees enters into an agreement with the Fund to follow the
Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" means the last day of the initial Dividend Period and each
seventh day after the immediately preceding Auction Date; provided, however,
that if any such seventh day is not a Business
58
Day, such Auction Date shall be the first preceding day that is a Business Day
and the next Auction Date, if for a Standard Dividend Period, shall (subject
to the same advancement procedure) be the seventh day after the date that the
preceding Auction Date would have been if not for the advancement procedure;
provided further, however, that the Auction Date for the Auction at the
conclusion of any Special Dividend Period shall be the last Business Day in
such Special Dividend Period and that no more than one Auction shall be held
during any Dividend Period; provided, further, however, that the Auction Date
following a Default Period shall be the last Business Day in the Standard
Dividend Period that commenced during such Default Period. Notwithstanding the
foregoing, in the event an auction is not held because an unforeseen event or
unforeseen events cause a day that otherwise would have been an Auction Date
not to be a Business Day, then the length of the then-current dividend period
will be extended by seven days (or a multiple thereof if necessary because of
such unforeseen event or events).
"Auction Procedures" means the procedures for conducting Auctions described in
"Additional Information Concerning Auctions for AMPS."
"Available AMPS" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
"Basic Maintenance Amount" has the meaning set forth in "Moody's and S&P
Guidelines."
"Basic Maintenance Report" means, with respect to the AMPS, a report prepared
by the Administrator which sets forth, as of the related Monthly Valuation
Date, (i) Moody's Eligible Assets and S&P Eligible Assets sufficient to meet
or exceed the Basic Maintenance Amount, the Market Value and Discounted Value
thereof (seriatim and in the aggregate), (iii) the Basic Maintenance Amount,
and (iv) the net asset value of the Fund. Such report will also include (A)
the month-end closing price for the Common Shares of the Fund (B) the monthly
total-return per Common Shares, which will be determined based upon month-end
closing share prices, assuming reinvestment of all dividends paid during such
month and (C) the total leverage positions of the Fund. For the purposes of
this SAI, "Basic Maintenance Report" or "Report" shall have a correlative
meaning with respect to any other class or series of Preferred Shares.
"Beneficial Owner" with respect to AMPS, means a customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer (or, if applicable, the
Auction Agent) as a holder of such shares of such series.
"Bid" has the meaning set forth in "Additional Information Concerning Auctions
for AMPS."
"Bidder" has the meaning set forth in "Additional Information Concerning
Auctions for AMPS."
"Board of Trustees" or "Board" means the Board of Trustees of the Fund or any
duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York, New York are authorized or obligated by law to close.
59
"By-Laws" means the By-Laws of the Fund, as amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the shares of the Fund's common shares, par value $.001
per share.
"Cure Date" has the meaning set forth in paragraph 3(a)(i) of Article II of
the Statement of Preferences for the Series A Preferred and paragraph 3(a)(ii)
of Article I of the Statement of Preferences for the AMPS.
"Date of Original Issue" means the date on which the Series A Preferred or
AMPS, as the case may be, is originally issued by the Fund.
"Declaration" means the Agreement and Declaration of Trust of the Fund, dated
as of February 25, 1999, as amended, supplemented or restated from time to
time (including by the Statements of Preferences or by way of any other
supplement or Statement of Preferences authorizing or creating a class of
shares of beneficial interest in the Fund).
"Default Period" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and AMPS -- Dividends and Dividend Periods
from the AMPS."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S.
Government Securities. Except for determining whether the Fund has Eligible
Assets with an Adjusted Value equal to or greater than the Basic Maintenance
Amount, each Deposit Asset shall be deemed to have a value equal to its
principal or face amount payable at maturity plus any interest payable thereon
after delivery of such Deposit Asset but only if payable on or prior to the
applicable payment date in advance of which the relevant deposit is made.
"Discount Factor" means (i) so long as Moody's is rating the Series A
Preferred or AMPS at the Fund's request, the Moody's Discount Factor, (ii) so
long as S&P is rating the AMPS, the S&P Discount Factor, and/or (iii) any
applicable discount factor established by any Other Rating Agency, whichever
is applicable.
"Discounted Value" means, as applicable, (i) the quotient of the Market Value
of an Eligible Asset divided by the applicable Discount Factor, or (ii) such
other formula for determining the discounted value of an Eligible Asset as may
be established by an applicable Rating Agency, provided that with respect to
an Eligible Asset that is currently callable, Discounted Value will be equal
to the applicable quotient or product as calculated above or the call price,
whichever is lower, and that with respect to an Eligible Asset that is
prepayable, Discounted Value will be equal to the applicable quotient or
product as calculated above or the par value, whichever is lower.
"Dividend Default" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and AMPS -- Dividends and Dividend Periods
for the AMPS."
"Dividend Payment Date" means, with respect to the Series A Preferred, any
date on which dividends declared by the Board of Trustees thereon are payable
pursuant to the provisions of paragraph 1(a) of Article II of the Statement of
Preferences of the Series A Preferred, and, with respect to the AMPS, any date
on which dividends declared by the Board of Trustees thereon are payable
pursuant to the provisions
60
of paragraph 2(b) of Article I of the Statement of Preferences, for the AMPS,
and shall have a correlative meaning with respect to any other class or series
of Preferred Shares.
"Dividend Period" means, with respect to Series A Preferred, the quarterly
dividend specified in paragraph 1(a) of Article II of the Statement of
Preferences for the Series A Preferred and, with respect to AMPS, the initial
period determined in the manner set forth under "Designation" in the Statement
of Preferences of the AMPS, and thereafter, the period commencing on the
Business Day following each Auction Date and ending on the next Auction Date
or, if such next Auction Date is not immediately followed by a Business Day,
on the latest day prior to the next succeeding Business Day and, with respect
to any other preferred stock issued by the Fund, the periods specified in or
determinable by reference to the statement of preferences therefor.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the
Series A Preferred or AMPS at the request of the Fund), S&P Eligible Assets
(if S&P is then rating the AMPS at the request of the Fund), and/or Other
Rating Agency Eligible Assets if any Other Rating Agency is then rating the
Series A Preferred or AMPS, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those shares of
AMPS listed in that person's name in the records of the Fund or the Auction
Agent or (ii) the beneficial owner of those shares of AMPS which are listed
under such person's Broker-Dealer's name in the records of the Auction Agent,
which Broker-Dealer will have signed a master purchaser's letter.
"Governing Documents" means the Declaration and the By-Laws
"Hold Order" has the meaning set forth in "Additional Information Concerning
Auctions for AMPS."
"Holder" means, with respect to each of the series of AMPS, the registered
holder of AMPS as the same appears on the share ledger or share records of the
Fund or records of the Auction Agent, as the case may be.
"Industry Classification" means a six-digit industry classification in the
Standard Industry Classification system published by the United States.
"LIBOR Dealers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated and
such other dealer or dealers as the Fund may from time to time appoint, or, in
lieu of any thereof, their respective affiliates or successors.
"LIBOR Rate" on any Auction Date, means (i) the rate for deposits in U.S.
dollars for the designated Dividend Period, which appears on display page 3750
of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page as
may replace that page on that service, or such other service as may be
selected by the LIBOR Dealer or its successors that are LIBOR Dealers) as of
11:00 a.m., London time, on the day that is the London Business Day preceding
the Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does
not appear on Telerate Page 3750 or such other page as may replace such
Telerate Page 3750, (A) the LIBOR Dealer shall determine the arithmetic mean
of the offered quotations of the Reference Banks to leading banks in the
London interbank market for deposits in U.S. dollars for the designated
Dividend Period in an amount determined by such LIBOR Dealer by reference to
requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by such LIBOR Dealer to the Reference Banks, (B) if at least two of
the Reference Banks provide such quotations, LIBOR Rate shall equal such
arithmetic mean of such quotations, (C) if only one or none of the Reference
Banks provide such quotations, LIBOR Rate shall be deemed to be the arithmetic
mean of the offered quotations that leading banks in The City of New York
selected by the LIBOR Dealer (after obtaining the Fund's
61
approval) are quoting on the relevant LIBOR Determination Date for deposits in
U.S. dollars for the designated Dividend Period in an amount determined by the
LIBOR Dealer (after obtaining the Fund's approval) that is representative of a
single transaction in such market at such time by reference to the principal
London offices of leading banks in the London interbank market; provided,
however, that if one of the LIBOR Dealers does not quote a rate required to
determine the LIBOR Rate, the LIBOR Rate will be determined on the basis of
the quotation or quotations furnished by any Substitute LIBOR Dealer or
Substitute LIBOR Dealers selected by the Fund to provide such rate or rates
not being supplied by the LIBOR Dealer; provided further, that if the LIBOR
Dealer and Substitute LIBOR Dealers are required but unable to determine a
rate in accordance with at least one of the procedures provided above, LIBOR
Rate shall be LIBOR Rate as determined on the previous Auction Date. If the
number of Dividend Period days shall be (1) 7 or more but fewer than 21 days,
such rate shall be the seven-day LIBOR rate; (2) more than 21 but fewer than
49 days, such rate shall be the one-month LIBOR rate; (3) 49 or more but fewer
than 77 days, such rate shall be the two-month LIBOR rate; (4) 77 or more but
fewer than 112 days, such rate shall be the three-month LIBOR rate; (5) 112 or
more but fewer than 140 days, such rate shall be the four-month LIBOR rate;
(6) 140 or more but fewer than 168 days, such rate shall be the five-month
LIBOR rate; (7) 168 or more but fewer than 189 days, such rate shall be the
six-month LIBOR rate; (8) 189 or more but fewer than 217 days, such rate shall
be the seven-month LIBOR rate; (9) 217 or more but fewer than 252 days, such
rate shall be the eight-month LIBOR rate; (10) 252 or more but fewer than 287
days, such rate shall be the nine-month LIBOR rate; (11) 287 or more but fewer
than 315 days, such rate shall be the ten-month LIBOR rate; (12) 315 or more
but fewer than 343 days, such rate shall be the eleven-month LIBOR rate; and
(13) 343 or more but fewer than 365 days, such rate shall be the twelve-month
LIBOR rate.
"London Business Day" means any day on which commercial banks are generally
open for business in London.
"Liquidation Preference" means $25 per share of Series A Preferred and $25,000
per share of each of the series of AMPS and will have a correlative meaning
with respect to shares of any other class or series of Preferred Shares.
"Market Capitalization" means, with respect to any issue of common stock, as
of any date, the product of (i) the number of shares of such common stock
issued and outstanding as of the close of business on the date of
determination thereof and (ii) the Market Value per share of such common stock
as of the close of business on the date of determination thereof.
"Market Value" means the amount determined by the Fund with respect to
specific Eligible Assets in accordance with valuation policies adopted from
time to time by the Board of Trustees as being in compliance with the
requirements of the 1940 Act.
Notwithstanding the foregoing, "Market Value" may, at the option of
the Fund with respect to any of its assets, mean the amount determined with
respect to specific Eligible Assets of the Fund in the manner set forth below:
(i) as to any common or preferred stock which is an Eligible
Asset, (a) if the stock is traded on a national securities
exchange or quoted on the Nasdaq System, the last sales
price reported on the Valuation Date or (b) if there was no
reported sales price on the Valuation Date, the price
obtained from a Pricing Service as of the Valuation Date, or
(c) if there was no reported sales price on the Valuation
Date or price available from a Pricing Service, the lower of
two bid prices for such stock provided to the Administrator
by two recognized securities dealers with a minimum
capitalization of $25,000,000 (or otherwise approved for
such purpose by Moody's and S&P) at least one of which will
be provided
62
in writing or by telecopy, telex, other electronic
transcription, computer obtained quotation reducible to
written form or similar means, and in turn provided to the
Fund by any such means by such administrator, or, if two bid
prices cannot be obtained, such Eligible Asset will have a
Market Value of zero;
(ii) as to any U.S. Government Obligation, Short-Term Money
Market Instrument (other than demand deposits, federal
funds, bankers' acceptances and next Business Day repurchase
agreements) and commercial paper, with a maturity of greater
than 60 days, the product of (a) the principal amount
(accreted principal to the extent such instrument accretes
interest) of such instrument and (b) the price provided by a
Pricing Service or, if not obtainable through a Pricing
Service, the lower of the bid prices for the same kind of
instruments having, as nearly as practicable, comparable
interest rates and maturities provided by two recognized
securities dealers having minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by
Moody's and S&P) to the administrator, at least one of which
will be provided in writing or by telecopy, telex, other
electronic transcription, computer obtained quotation
reducible to written form or similar means, and in turn
provided to the Fund by any such means by such
administrator, or, if two bid prices cannot be obtained,
such Eligible Asset will have a Market Value of zero;
(iii) as to cash, demand and timed deposits, federal funds,
bankers' acceptances and next Business Day repurchase
agreements included in Short-Term Money Market Instruments,
the face value thereof;
(iv) as to any U.S. Government Obligation, Short-Term Money
Market Instrument or commercial paper with a maturity of 60
days or fewer, amortized cost unless the Board of Trustees
determines that such value does not constitute fair value;
or
(v) as to any other evidence of indebtedness which is an
Eligible Asset, (a) the product of (1) the unpaid principal
balance of such indebtedness as of the Valuation Date and
(2)(A) if such indebtedness is traded on a national
securities exchange or quoted on the Nasdaq System, the last
sales price reported on the Valuation Date or (B) if there
was no reported sales price on the Valuation Date and if
such indebtedness is not traded on a national securities
exchange or quoted on the Nasdaq System, the price obtained
from a Pricing Service as of the Valuation Date or (C) if
there was no reported sales price on the Valuation Date or
if such indebtedness is not traded on a national securities
exchange or quoted on the Nasdaq System, and a price was not
obtainable from a Pricing Service as of the Valuation Date,
the lower of two bid prices for such indebtedness provided
by two recognized dealers with a minimum capitalization of
$25,000,000 (or otherwise approved for such purpose by
Moody's and S&P) to the administrator of the Fund's assets,
at least one of which will be provided in writing or by
telecopy, telex, other electronic transcription, computer
obtained quotation reducible to written form or similar
means, and in turn provided to the Fund by any such means by
such administrator, plus (b) accrued interest on such
indebtedness.
Notwithstanding the foregoing, in the case of preferred stock that is
rated by a single Rating Agency, "Market Value" shall have the meaning set
forth in the governing documents of such preferred stock.
"Maximum Rate" means, on any day on which the Applicable Rate is determined,
the greater of (i) the applicable percentage set forth in the table below of
the Reference Rate or (ii) the applicable spread set
63
forth in the table below plus the Reference Rate. The reference rate is the
applicable LIBOR Rate (for a dividend period or a special dividend period of
fewer than 365 days), or the applicable Treasury Index Rate (for a special
dividend period of 365 days or more). The applicable percentage and applicable
spread will be determined based on the lower of the credit ratings assigned to
the AMPS by Moody's and S&P subject to upward. If Moody's and S&P or both do
not make such ratings available, the rate will be determined by reference to
equivalent ratings issued by a substitute rating agency.
---------------------------------------------------------------------------------------------------------------------
Credit Ratings Applicable Percentage Applicable Spread
------------------------------------------------- ---------------------------- ---------------------------
Moody's S&P
----------------------- ---------------------
Aaa AAA 125% 1.25%
Aa3 to Aa1 AA- to AA+ 150% 1.50%
A3 to A1 A- to A+ 200% 2.00%
Baa3 to Baa1 BBB- to BBB+ 250% 2.50%
Ba1 and lower BB+ and lower 300% 3.00%
"Monthly Valuation Date" means the last Valuation Date of any calendar month.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Moody's Discount Factor" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning ascribed to it in "Moody's and S&P
Guidelines -- Moody's Guidelines."
"1940 Act" means the Investment Company Act of 1940, or any successor statute.
"1940 Act Asset Coverage" means asset coverage, as determined in accordance
with Section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Fund which are stock, including all
Outstanding shares of Series A Preferred and the AMPS (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common
shares), determined on the basis of values calculated as of a time within 48
hours (not including Saturdays, Sundays or holidays) next preceding the time
of such determination.
"1940 Act Asset Coverage Certificate" means the certificate required to be
delivered by the Fund pursuant to paragraph 9(a)(i)(B) of Article I of the
Statement of Preferences of each of the series of AMPS.
"Non-Call Period" means a period determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the AMPS subject to such
Special Dividend Period are not subject to redemption at the option of the
Fund but only to mandatory redemption.
"NRSRO" means a Nationally Recognized Statistical Ratings Organization.
"Order" has the meaning set forth in "Additional Information Concerning
Auctions for AMPS."
64
"Other Rating Agency" means any rating agency other than Moody's and S&P then
providing a rating for the AMPS pursuant to the request of the Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated by
any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the AMPS.
"Outstanding" means, as of any date, Preferred Shares theretofore issued by
the Fund except:
(i) any such Preferred Shares theretofore cancelled by the Fund
or delivered to the Fund for cancellation;
(ii) any such share of Preferred Shares other than auction market
Preferred Shares as to which a notice of redemption will
have been given and for whose payment at the redemption
thereof Deposit Assets in the necessary amount are held by
the Fund in trust for, or have been irrevocably deposited
with the relevant disbursing agent for payment to, the
holder of such share pursuant to the Statement of
Preferences with respect thereto;
(iii) in the case of auction market Preferred Shares, any such
shares theretofore delivered to the applicable auction agent
for cancellation or with respect to which the Fund has given
notice of redemption and irrevocably deposited with the
applicable paying agent sufficient funds to redeem such
shares; and
(iv) any such Preferred Shares in exchange for or in lieu of
which other shares have been issued and delivered.
Notwithstanding the foregoing, (x) for purposes of voting rights (including
the determination of the number of shares required to constitute a quorum),
any Preferred Shares as to which the Fund or any subsidiary is the holder or
Existing Holder, as applicable, will be disregarded and deemed not
Outstanding; and (y) in connection with any auction, any auction market
Preferred Shares as to which the Fund or any Person known to the auction agent
to be an subsidiary is the holder or Existing Holder, as applicable, will be
disregarded and not deemed Outstanding.
"Paying Agent" means with respect to each of the series of the AMPS, the Bank
of New York unless and until another entity appointed by a resolution of the
Board of Trustees enters into an agreement with the Fund to serve as paying
agent, which paying agent may be the same as the Auction Agent and, with
respect to any other class or series of Preferred Shares, the Person appointed
by the Fund as dividend disbursing or paying agent with respect to such class
or series.
"Person" means and includes an individual, a partnership, the Fund, a trust, a
corporation, a limited liability company, an unincorporated association, a
joint venture or other entity or a government or any agency or political
subdivision thereof.
"Potential Beneficial Owner" or "Potential Holder" means (i) any Existing
Holder who may be interested in acquiring additional shares of AMPS or (ii)
any other person who may be interested in acquiring shares of AMPS and who has
signed a master purchaser's letter or whose shares will be listed under such
person's Broker-Dealer's name on the records of the Auction Agent which
Broker-Dealer will have executed a master purchaser's letter.
"Preferred Shares" means the preferred shares, par value $.001 per share, of
the Fund, and includes the Series A Preferred and each of the series of AMPS.
65
"Premium Call Period" means a period consisting of a number of whole years as
determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Dividend Period will be redeemable at the Fund's option at a price per share
equal to the Liquidation Preference plus accumulated but unpaid dividends
(whether or not earned or declared) plus a premium expressed as a percentage
or percentages of the Liquidation Preference or expressed as a formula using
specified variables as determined by the Board of Trustees after consultation
with the Broker-Dealers.
"Pricing Service" means any of the following: Bloomberg Financial Service,
Bridge Information Services, Data Resources Inc., FT Interactive,
International Securities Market Association, Merrill Lynch Securities Pricing
Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Telerate, Trepp Pricing
and Wood Gundy.
"Rating Agency" means Moody's and S&P as long as such rating agency is then
rating the Series A Preferred or the AMPS at the request of the Fund, or any
other rating agency then rating the Series A Preferred or the AMPS at the
request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's
and S&P Guidelines."
"Redemption Date" means, with respect to shares of the Fund's Outstanding
Preferred Shares, the date fixed by the Fund for the redemption of such
shares.
"Redemption Default" has the meaning set forth in "Additional Information
Concerning the Series A Preferred and the AMPS -- Dividends and Dividend
Periods for the AMPS."
"Redemption Price" means, with respect to the Series A Preferred, the price
set forth in paragraph 3(a) of Article II of the Statement of Preferences for
the Series A Preferred and, with respect to each of the series of AMPS, the
price set forth in paragraph 3(a)(i) of Article I of each of the Statement of
Preferences for the AMPS.
"Reference Banks" means four major banks in the London interbank market
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates or successors or such other party as the Fund may from time to time
appoint.
"Reference Rate" means, with respect to the determination of the Default Rate,
the applicable LIBOR Rate for a Dividend Period of 364 days or fewer or the
applicable Treasury Index Rate for a Dividend Period of longer than 364 days
and, with respect to the determination of the Maximum Rate, the LIBOR Rate or
the Treasury Index Rate, as appropriate.
"S&P" means S&P, or its successors.
"S&P Discount Factor" has the meaning set forth in "Moody's and S&P Guidelines
-- S&P Guidelines."
"S&P Eligible Assets" has the meaning set forth in "Moody's and S&P Guidelines
-- S&P Guidelines."
"S&P Hedging Transactions" has the meaning set forth in "Moody's and S&P
Guidelines -- S&P Guidelines."
"SEC" means the United States Securities and Exchange Commission.
66
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the shares of Series A Preferred or the AMPS.
"Sell Order" has the meaning set forth in "Additional Information Concerning
Auctions for the AMPS."
"Series A Preferred" means the Fund's Series A Cumulative Preferred Shares,
$.001 par value per share and liquidation preference $25 per share.
"Short-Term Money Market Instruments" means the following types of instruments
if, on the date of purchase or other acquisition thereof by the Fund, the
remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper matures
in 30 days, or A-1+ if such commercial paper matures in over
30 days;
(ii) AAAm rated money market funds
(iii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or
trust company incorporated under the laws of the United
States of America or any state thereof or the District of
Columbia or (B) a United States branch office or agency of a
foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the
laws of the United States, any state thereof or the District
of Columbia) or (C) A-1+ rated institutions;
(iv) overnight funds; and
(v) U.S. Government Securities.
Notwithstanding the foregoing, in the case of preferred stock that is rated by
a single Rating Agency, "Short-Term Money Market Instruments" shall have the
meaning set forth in the governing documents of such preferred stock.
"Special Dividend Period" means a Dividend Period that is not a Standard
Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special Dividend
Period of more than one year, either, or any combination of (i) a Non-Call
Period and (ii) a Premium Call Period.
"Standard Dividend Period" means a Dividend Period of seven days, subject to
increase or decrease to the extent necessary for the next Auction Date and
Dividend Payment Date to each be Business Days.
"Statement of Preferences" means the Statement of Preferences of the Fund
establishing, as the case may be, the Series A Preferred or the AMPS.
"Submission Deadline" means 1:30 p.m., New York City time, on any Auction Date
or such other time on any Auction Date by which Broker-Dealers are required to
submit Orders to the Auction Agent as specified by the Auction Agent from time
to time.
"Submitted Bid" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
67
"Submitted Bid Order" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
"Submitted Hold Order" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
"Submitted Order" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
"Submitted Sell Order" has the meaning set forth in "Additional Information
Concerning Auctions for AMPS -- Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate."
"Substitute LIBOR Dealer" means any LIBOR dealer selected by the Fund as to
which Moody's, S&P or any other Rating Agency then rating the Preferred Shares
shall not have objected; provided, however, that none of such entities shall
be a LIBOR Dealer.
"Substitute U.S. Government Securities Dealer" means any U.S. Government
securities dealer selected by the Fund as to which Moody's, S&P or any other
Rating Agency then rating the Preferred Shares shall not have objected;
provided, however, that none of such entities shall be a U.S. Government
Securities Dealer.
"Sufficient Clearing Bids" has the meaning set forth in "Additional
Information Concerning Auctions for AMPS -- Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate."
"Sufficient Clearing Orders" means that all shares of AMPS are the subject of
Submitted Hold Orders or that the number of shares of AMPS that are the
subject of Submitted Bids by Potential Holders specifying one or more rates
equal to or less than the Maximum Rate exceeds or equals the sum of (i) the
number of shares of AMPS that are subject of Submitted Bids by Existing
Holders specifying one or more rates higher than the Maximum Rate and (ii) the
number of shares of AMPS that are subject to Submitted Sell Orders.
"Treasury Index Rate" means the average yield to maturity for actively traded,
marketable U.S. Treasury fixed interest rate securities having the same number
of 30-day periods to maturity as the length of the applicable Dividend Period,
determined, to the extent necessary, by linear interpolation based upon the
yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
U.S. Government Securities Dealers selected by the Fund; provided further,
however, that if one of the U.S. Government Securities Dealers does not quote
a rate required to determine the Treasury Index Rate, the Treasury Index Rate
shall be determined on the basis of the quotation or quotations furnished by
any Substitute U.S. Government Securities Dealer or Substitute U.S. Government
Securities Dealers selected by the Fund to provide such rate or rates not
being supplied by the U.S. Government Securities Dealer; provided further,
that if the U.S. Government Securities Dealer and Substitute U.S. Government
Securities Dealers are required but unable to determine a rate in accordance
with at least one of the procedures provided above, the Treasury Index Rate
shall be the Treasury Index Rate as determined on the previous Auction Date.
68
"U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan Guaranty
Trust Company of New York and any other U.S. Government Securities dealer
selected by the Fund as to which Moody's (if Moody's is then rating the
Preferred Shares at the request of the Fund) and S&P (if S&P is then rating
the Preferred Shares at the request of the Fund) shall not have objected, or
their respective affiliates or successors if U.S. Government Securities
dealers.
"U.S. Government Securities" means direct obligations of the United States or
by its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other date
as the Fund and Rating Agencies may agree to for purposes of determining the
Basic Maintenance Amount. Notwithstanding the foregoing, in the case of
preferred stock that is rated by a single Rating Agency, "Valuation Date"
shall have the meaning set forth in the governing documents of such preferred
stock.
"Winning Bid Rate" means the lowest rate specified in the Submitted Bids which
if:
(i) (a) each such Submitted Bid of Existing Holders
specifying such lowest rate and
(b) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold
the shares of such series that are subject to such
Submitted Bids; and
(ii) (a) each such Submitted Bid of Potential Holders
specifying such lowest rate and
(b) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted;
would result in such Existing Holders described in subclause (i) above
continuing to hold an aggregate number of shares of Outstanding AMPS which,
when added to the number of shares of Outstanding AMPS to be purchased by such
Potential Holders described in subclause (ii) above, would equal not less than
the Available AMPS.
69
APPENDIX A
GABELLI ASSET MANAGEMENT INC. and AFFILIATES
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The Voting of Proxies on Behalf of Clients
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Rules 204(4)-2 and 204-2 under the Investment Advisers Act of 1940
and Rule 30b1-4 under the Investment Company Act of 1940 require investment
advisers to adopt written policies and procedures governing the voting of
proxies on behalf of their clients.
These procedures will be used by GAMCO Investors, Inc., Gabelli
Funds, LLC and Gabelli Advisers, Inc. (collectively, the "Advisers") to
determine how to vote proxies relating to portfolio securities held by their
clients, including the procedures that the Advisers use when a vote presents a
conflict between the interests of the shareholders of an investment company
managed by one of the Advisers, on the one hand, and those of the Advisers;
the principal underwriter; or any affiliated person of the investment company,
the Advisers, or the principal underwriter. These procedures will not apply
where the Advisers do not have voting discretion or where the Advisers have
agreed to with a client to vote the client's proxies in accordance with
specific guidelines or procedures supplied by the client (to the extent
permitted by ERISA).
I. Proxy Voting Committee
The Proxy Voting Committee was originally formed in April 1989 for the
purpose of formulating guidelines and reviewing proxy statements within the
parameters set by the substantive proxy voting guidelines originally published
by GAMCO Investors, Inc. in 1988 and updated periodically, a copy of which are
appended as Exhibit A. The Committee will include representatives of Research,
Administration, Legal, and the Advisers. Additional or replacement members of
the Committee will be nominated by the Chairman and voted upon by the entire
Committee. As of June 30, 2003, the members are:
Bruce N. Alpert, Chief Operating Officer of Gabelli Funds, LLC
Ivan Arteaga, Research Analyst
Caesar M. P. Bryan, Portfolio Manager
Stephen DeTore, Deputy General Counsel
Joshua Fenton, Director of Research
Douglas R. Jamieson, Chief Operating Officer of GAMCO
James E. McKee, General Counsel
Karyn M. Nappi, Director of Proxy Voting Services
William S. Selby, Managing Director of GAMCO
Howard F. Ward, Portfolio Manager
Peter D. Zaglio, Senior Vice President
Peter D. Zaglio currently chairs the Committee. In his absence, the
Director of Research will chair the Committee. Meetings are held as needed
basis to form views on the manner in which the Advisers should vote proxies on
behalf of their clients.
70
In general, the Director of Proxy Voting Services, using the Proxy
Guidelines, recommendations of Institutional Shareholder Corporate Governance
Service ("ISS"), other third-party services and the analysts of Gabelli &
Company, Inc., will determine how to vote on each issue. For non-controversial
matters, the Director of Proxy Voting Services may vote the proxy if the vote
is (1) consistent with the recommendations of the issuer's Board of Directors
and not contrary to the Proxy Guidelines; (2) consistent with the
recommendations of the issuer's Board of Directors and is a non-controversial
issue not covered by the Proxy Guidelines; or (3) the vote is contrary to the
recommendations of the Board of Directors but is consistent with the Proxy
Guidelines. In those instances, the Director of Proxy Voting Services or the
Chairman of the Committee may sign and date the proxy statement indicating how
each issue will be voted.
All matters identified by the Chairman of the Committee, the Director
of Proxy Voting Services or the Legal Department as controversial, taking into
account the recommendations of ISS or other third party services and the
analysts of Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy Voting
Services or the Legal Department has identified the matter as one that (1) is
controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a conflict of interest between the Advisers
and their clients, the Chairman of the Committee will initially determine what
vote to recommend that the Advisers should cast and the matter will go before
the Committee.
For matters submitted to the Committee, each member of the Committee
will receive, prior to the meeting, a copy of the proxy statement, any
relevant third party research, a summary of any views provided by the Chief
Investment Officer and any recommendations by Gabelli & Company, Inc.
analysts. The Chief Investment Officer or the Gabelli & Company, Inc. analysts
may be invited to present their viewpoints. If the Legal Department believes
that the matter before the committee is one with respect to which a conflict
of interest may exist between the Advisers and their clients, counsel will
provide an opinion to the Committee concerning the conflict. If the matter is
one in which the interests of the clients of one or more of Advisers may
diverge, counsel will so advise and the Committee may make different
recommendations as to different clients. For any matters where the
recommendation may trigger appraisal rights, counsel will provide an opinion
concerning the likely risks and merits of such an appraisal action.
Each matter submitted to the Committee will be determined by the vote
of a majority of the members present at the meeting. Should the vote
concerning one or more recommendations be tied in a vote of the Committee, the
Chairman of the Committee will cast the deciding vote. The Committee will
notify the proxy department of its decisions and the proxies will be voted
accordingly.
Although the Proxy Guidelines express the normal preferences for the
voting of any shares not covered by a contrary investment guideline provided
by the client, the Committee is not bound by the preferences set forth in the
Proxy Guidelines and will review each matter on its own merits. Written
minutes of all Proxy Voting Committee meetings will be maintained. The
Advisers subscribe to ISS, which supplies current information on companies,
matters being voted on, regulations, trends in proxy voting and information on
corporate governance issues.
If the vote cast either by the analyst or as a result of the
deliberations of the Proxy Voting Committee runs contrary to the
recommendation of the Board of Directors of the issuer, the matter will be
referred to legal counsel to determine whether an amendment to the most
recently filed Schedule 13D is appropriate.
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II. Social Issues and Other Client Guidelines
If a client has provided special instructions relating to the voting
of proxies, they should be noted in the client's account file and forwarded to
the proxy department. This is the responsibility of the investment
professional or sales assistant for the client. In accordance with Department
of Labor guidelines, the Advisers' policy is to vote on behalf of ERISA
accounts in the best interest of the plan participants with regard to social
issues that carry an economic impact. Where an account is not governed by
ERISA, the Advisers will vote shares held on behalf of the client in a manner
consistent with any individual investment/voting guidelines provided by the
client. Otherwise the Advisers will abstain with respect to those shares.
III. Client Retention of Voting Rights
If a client chooses to retain the right to vote proxies or if there
is any change in voting authority, the following should be notified by the
investment professional or sales assistant for the client.
- Operations
- Legal Department
- Proxy Department
- Investment professional assigned to the account
In the event that the Board of Directors (or a Committee thereof) of
one or more of the investment companies managed by one of the Advisers has
retained direct voting control over any security, the Proxy Voting Department
will provide each Board Member (or Committee member) with a copy of the proxy
statement together with any other relevant information including
recommendations of ISS or other third-party services.
IV. Voting Records
The Proxy Voting Department will retain a record of matters voted
upon by the Advisers for their clients. The Advisers' staff may request
proxy-voting records for use in presentations to current or prospective
clients. Requests for proxy voting records should be made at least ten days
prior to client meetings.
If a client wishes to receive a proxy voting record on a quarterly,
semi-annual or annual basis, please notify the Proxy Voting Department. The
reports will be available for mailing approximately ten days after the quarter
end of the period. First quarter reports may be delayed since the end of the
quarter falls during the height of the proxy season.
A letter is sent to the custodians for all clients for which the
Advisers have voting responsibility instructing them to forward all proxy
materials to:
[Adviser name]
Attn: Proxy Voting Department
One Corporate Center
Rye, New York 10580-1433
The sales assistant sends the letters to the custodians along with the
trading/DTC instructions. Proxy voting records will be retained in compliance
with Rule 204-2 under the Investment Advisers Act.
72
V. Voting Procedures
1. Custodian banks, outside brokerage firms and Wexford Clearing Services
Corporation are responsible for forwarding proxies directly to GAMCO.
Proxies are received in one of two forms:
o Shareholder Vote Authorization Forms (VAFs) - Issued by ADP. VAFs
must be voted through the issuing institution causing a time lag. ADP is
an outside service contracted by the various institutions to issue proxy
materials.
o Proxy cards which may be voted directly.
2. Upon receipt of the proxy, the number of shares each form represents is
logged into the proxy system according to security.
3. In the case of a discrepancy such as an incorrect number of shares, an
improperly signed or dated card, wrong class of security, etc., the issuing
custodian is notified by phone. A corrected proxy is requested. Any
arrangements are made to insure that a proper proxy is received in time to be
voted (overnight delivery, fax, etc.). When securities are out on loan on
record date, the custodian is requested to supply written verification.
4. Upon receipt of instructions from the proxy committee (see Administrative),
the votes are cast and recorded for each account on an individual basis.
Since January 1, 1992, records have been maintained on the Proxy Edge system.
The system is backed up regularly. From 1990 through 1991, records were
maintained on the PROXY VOTER system and in hardcopy format. Prior to 1990,
records were maintained on diskette and in hardcopy format.
PROXY EDGE records include:
Security Name and Cusip Number
Date and Type of Meeting (Annual, Special, Contest)
Client Name
Adviser or Fund Account Number
Directors' Recommendation
How GAMCO voted for the client on each issue
The rationale for the vote when it appropriate
Records prior to the institution of the PROXY EDGE system include:
Security name
Type of Meeting (Annual, Special, Contest)
Date of Meeting
Name of Custodian
Name of Client
Custodian Account Number
Adviser or Fund Account Number
Directors' recommendation
How the Adviser voted for the client on each issue
Date the proxy statement was received and by whom
Name of person posting the vote
Date and method by which the vote was cast
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o From these records individual client proxy voting records are
compiled. It is our policy to provide institutional clients with a proxy
voting record during client reviews. In addition, we will supply a proxy
voting record at the request of the client on a quarterly, semi-annual or
annual basis.
5. VAFs are kept alphabetically by security. Records for the current proxy
season are located in the Proxy Voting Department office. In preparation for
the upcoming season, files are transferred to an offsite storage facility
during January/February.
6. Shareholder Vote Authorization Forms issued by ADP are always sent directly
to a specific individual at ADP.
7. If a proxy card or VAF is received too late to be voted in the conventional
matter, every attempt is made to vote on one of the following manners:
o VAFs can be faxed to ADP up until the time of the meeting. This is
followed up by mailing the original form.
o When a solicitor has been retained, the solicitor is called. At the
solicitor's direction, the proxy is faxed.
8. In the case of a proxy contest, records are maintained for each opposing
entity.
9. Voting in Person
a) At times it may be necessary to vote the shares in person. In this case, a
"legal proxy" is obtained in the following manner:
o Banks and brokerage firms using the services at ADP:
A call is placed to ADP requesting legal proxies. The VAFs are then sent
overnight to ADP. ADP issues individual legal proxies and sends them back
via overnight. A lead-time of at least two weeks prior to the meeting is
needed to do this. Alternatively, the procedures detailed below for banks
not using ADP may be implemented.
o Banks and brokerage firms issuing proxies directly:
The bank is called and/or faxed and a legal proxy is requested.
All legal proxies should appoint:
"Representative of [Adviser name] with full power of substitution."
b) The legal proxies are given to the person attending the meeting along with
the following supplemental material:
o A limited Power of Attorney appointing the attendee an Adviser
representative.
o A list of all shares being voted by custodian only. Client names and
account numbers are not included. This list must be presented, along with
the proxies, to the Inspectors of Elections and/or tabulator at least
one-half hour prior to the scheduled start of the meeting. The tabulator
must
74
"qualify" the votes (i.e. determine if the vote have previously been
cast, if the votes have been rescinded, etc. vote have previously been
cast, etc.).
o A sample ERISA and Individual contract.
o A sample of the annual authorization to vote proxies form.
o A copy of our most recent Schedule 13D filing (if applicable).
o
o
o PROXY VOTING GUIDELINES
GENERAL POLICY STATEMENT
It is the policy of Gabelli Asset Management Inc. to vote in the best economic
interests of our clients. As we state in our Magna Carta of Shareholders
Rights, established in May 1988, we are neither for nor against management. We
are for shareholders.
At our first proxy committee meeting in 1989, it was decided that each proxy
statement should be evaluated on its own merits within the framework first
established by our Magna Carta of Shareholders Rights. The attached guidelines
serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all of our
research on the company, its directors, and their short and long-term goals
for the company. In cases where issues that we generally do not approve of are
combined with other issues, the negative aspects of the issues will be
factored into the evaluation of the overall proposals but will not necessitate
a vote in opposition to the overall proposals.
BOARD OF DIRECTORS
The advisers do not consider the election of the Board of Directors a routine
issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
o Historical responsiveness to shareholders
This may include such areas as:
-Paying greenmail
-Failure to adopt shareholder resolutions receiving a majority of
shareholder votes
o Qualifications
o Nominating committee in place
o Number of outside directors on the board
o Attendance at meetings
o Overall performance
SELECTION OF AUDITORS
In general, we support the Board of Directors' recommendation for auditors.
BLANK CHECK PREFERRED STOCK
We oppose the issuance of blank check preferred stock.
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Blank check preferred stock allows the company to issue stock and establish
dividends, voting rights, etc. without further shareholder approval.
CLASSIFIED BOARD
A classified board is one where the directors are divided into classes with
overlapping terms. A different class is elected at each annual meeting.
While a classified board promotes continuity of directors facilitating long
range planning, we feel directors should be accountable to shareholders on an
annual basis. We will look at this proposal on a case-by-case basis taking
into consideration the board's historical responsiveness to the rights of
shareholders.
Where a classified board is in place we will generally not support attempts to
change to an annually elected board.
When an annually elected board is in place, we generally will not support
attempts to classify the board.
INCREASE AUTHORIZED COMMON STOCK
The request to increase the amount of outstanding shares is considered on a
case-by-case basis.
Factors taken into consideration include:
o Future use of additional shares
-Stock split
-Stock option or other executive compensation plan -Finance growth of
company/strengthen balance sheet -Aid in restructuring -Improve credit
rating -Implement a poison pill or other takeover defense
o Amount of stock currently authorized but not yet issued or reserved for
stock option plans
o Amount of additional stock to be authorized and its dilutive effect
We will support this proposal if a detailed and verifiable plan for the use of
the additional shares is contained in the proxy statement.
CONFIDENTIAL BALLOT
We support the idea that a shareholder's identity and vote should be treated
with confidentiality.
However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse the use
of independent Inspectors of Election.
CUMULATIVE VOTING
In general, we support cumulative voting.
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Cumulative voting is a process by which a shareholder may multiply the number
of directors being elected by the number of shares held on record date and
cast the total number for one candidate or allocate the voting among two or
more candidates.
Where cumulative voting is in place, we will vote against any proposal to
rescind this shareholder right.
Cumulative voting may result in a minority block of stock gaining
representation on the board. When a proposal is made to institute cumulative
voting, the proposal will be reviewed on a case-by-case basis. While we feel
that each board member should represent all shareholders, cumulative voting
provides minority shareholders an opportunity to have their views represented.
DIRECTOR LIABILITY AND INDEMNIFICATION
We support efforts to attract the best possible directors by limiting the
liability and increasing the indemnification of directors, except in the case
of insider dealing.
EQUAL ACCESS TO THE PROXY
The SEC's rules provide for shareholder resolutions. However, the resolutions
are limited in scope and there is a 500 word limit on proponents' written
arguments. Management has no such limitations. While we support equal access
to the proxy, we would look at such variables as length of time required to
respond, percentage of ownership, etc.
FAIR PRICE PROVISIONS
Charter provisions requiring a bidder to pay all shareholders a fair price are
intended to prevent two-tier tender offers that may be abusive. Typically,
these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders should be
entitled to receive the same benefits.
Reviewed on a case-by-case basis.
GOLDEN PARACHUTES
Golden parachutes are severance payments to top executives who are terminated
or demoted after a takeover.
We support any proposal that would assure management of its own welfare so
that they may continue to make decisions in the best interest of the company
and shareholders even if the decision results in them losing their job. We do
not, however, support excessive golden parachutes. Therefore, each proposal
will be decided on a case-by- case basis.
Note: Congress has imposed a tax on any parachute that is more than three
times the executive's average annual compensation.
ANTI-GREENMAIL PROPOSALS
We do not support greenmail. An offer extended to one shareholder should be
extended to all shareholders equally across the board.
77
LIMIT SHAREHOLDERS' RIGHTS TO CALL SPECIAL MEETINGS
We support the right of shareholders to call a special meeting.
CONSIDERATION OF NONFINANCIAL EFFECTS OF A MERGER
This proposal releases the directors from only looking at the financial
effects of a merger and allows them the opportunity to consider the merger's
effects on employees, the community, and consumers.
As a fiduciary, we are obligated to vote in the best economic interests of our
clients. In general, this proposal does not allow us to do that. Therefore, we
generally cannot support this proposal.
Reviewed on a case-by-case basis.
MERGERS, BUYOUTS, SPIN-OFFS, RESTRUCTURINGS
Each of the above is considered on a case-by-case basis. According to the
Department of Labor, we are not required to vote for a proposal simply because
the offering price is at a premium to the current market price. We may take
into consideration the long term interests of the shareholders.
MILITARY ISSUES
Shareholder proposals regarding military production must be evaluated on a
purely economic set of criteria for our ERISA clients. As such, decisions will
be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according
to the client's direction when applicable. Where no direction has been given,
we will vote in the best economic interests of our clients. It is not our duty
to impose our social judgment on others.
NORTHERN IRELAND
Shareholder proposals requesting the signing of the MacBride principles for
the purpose of countering the discrimination of Catholics in hiring practices
must be evaluated on a purely economic set of criteria for our ERISA clients.
As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according
to client direction when applicable. Where no direction has been given, we
will vote in the best economic interests of our clients. It is not our duty to
impose our social judgment on others.
OPT OUT OF STATE ANTI-TAKEOVER LAW
This shareholder proposal requests that a company opt out of the coverage of
the state's takeover statutes. Example: Delaware law requires that a buyer
must acquire at least 85% of the company's stock before the buyer can exercise
control unless the board approves.
We consider this on a case-by-case basis. Our decision will be based on the
following:
o State of Incorporation
o Management history of responsiveness to shareholders
o Other mitigating factors
78
POISON PILL
In general, we do not endorse poison pills.
In certain cases where management has a history of being responsive to the
needs of shareholders and the stock is very liquid, we will reconsider this
position.
REINCORPORATION
Generally, we support reincorporation for well-defined business reasons. We
oppose reincorporation if proposed solely for the purpose of reincorporating
in a state with more stringent anti-takeover statutes that may negatively
impact the value of the stock.
STOCK OPTION PLANS
Stock option plans are an excellent way to attract, hold and motivate
directors and employees. However, each stock option plan must be evaluated on
its own merits, taking into consideration the following:
o Dilution of voting power or earnings per share by more than 10%
o Kind of stock to be awarded, to whom, when and how much
o Method of payment
o Amount of stock already authorized but not yet issued under existing
stock option plans
SUPERMAJORITY VOTE REQUIREMENTS
Supermajority vote requirements in a company's charter or bylaws require a
level of voting approval in excess of a simple majority of the outstanding
shares. In general, we oppose supermajority-voting requirements. Supermajority
requirements often exceed the average level of shareholder participation. We
support proposals' approvals by a simple majority of the shares voting.
LIMIT SHAREHOLDERS RIGHT TO ACT BY WRITTEN CONSENT
Written consent allows shareholders to initiate and carry on a shareholder
action without having to wait until the next annual meeting or to call a
special meeting. It permits action to be taken by the written consent of the
same percentage of the shares that would be required to effect proposed action
at a shareholder meeting.
Reviewed on a case-by-case basis.
79
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements (audited) for fiscal year 2003*
(2) Exhibits
(a) (i) Agreement and Declaration of Trust of Registrant(3)
(ii) Form of Statement of Preferences for the __%
Series A Cumulative Preferred Shares(5)
(iii)Form of Statement of Preferences for the Auction Market
Preferred Shares(5)
(b) By-Laws of Registrant(3)
(c) Not applicable
(d) (i) Form of Specimen Share Certificate for the __% Series A
Cumulative Preferred Shares (4)
(ii) Form of Specimen Share
Certificate for the Auction Market Preferred Shares (4)
(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) Form of Purchase Agreement (4)
(i) Not applicable
(j) Form of Custodian Contract (2)
(k) (i) Form of Registrar, Transfer Agency and Service Agreement (3)
(ii) Form of Auction Agency Agreement (4)
(iii)Form of Broker-Dealer Agreement (4)
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP with respect to legality (5)
(m) Not applicable
(n) (i) Consent of Independent Registered Public Accounting Firm (1)
(ii) Powers of Attorney (2)
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Codes of Ethics of the Fund and the Investment Adviser (2)
___________________
* Incorporated by reference to the Fund's annual report filed March 10, 2004.
(1) Filed herewith.
(2) Incorporated by reference to the Registrant's Pre-Effective Amendment No.
1 to the Fund's Registration Statement on Form N-2 Nos. 333-108409 and
811-21423, as filed with the Securities and Exchange Commission on October 27,
2003.
(3) Incorporated by reference to the Registrant's Pre-Effective Amendment No.
3 to the Fund's Registration Statement on Form N-2 Nos. 333-108409 and
811-21423, as filed with the Securities and Exchange Commission on November
24, 2003.
C-1
(4) Incorporated by reference to the Registrant's Pre-Effective Amendment No.
1 on Form N-2 Nos. 333-113708 and 811-21423, as filed with the Securities and
Exchange Commission on June 6, 2004.
(5) Invorporatied by reference to the Registrant's Pre-Effective Amendment
No.2 on Form N-2 Nos. 333-13708 and 811-21423, as filed with the Securities
and Exchange Commission on October 5, 2004
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..................................................$20,000
SEC Registration fees.............................................$44,345
Rating Agency Fees...............................................$170,000
Printing/engraving expenses......................................$100,000
Accounting fees...................................................$50,000
Legal fees.......................................................$150,000
Miscellaneous.....................................................$65,655
Total.......................................................$600,000
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of September 15, 2003
Number of Record
Title of Class Holders
-------------- ----------------
Common Shares of Beneficial Interest 76,159
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.
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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.
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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
C-4
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
C-5
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, Massachusetts
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.
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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.
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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 7th day of October,
2004.
THE GABELLI DIVIDEND & INCOME TRUST
By: /s/ Bruce N. Alpert
---------------------------------
Bruce N. Alpert
President
By: /s/ Richard C. Sell
---------------------------------
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 7th day of October, 2004.
Name Title
Signature
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 President
-------------------------------
Bruce N. Alpert
Attorney-in-Fact
*Pursuant to a Power of Attorney
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99(n)(i) Consent of Independent Registered
Public Accounting Firm