As filed with the Securities and Exchange Commission on June 13, 2001
Securities Act File No. 333-59874
Investment Company Act File No. 811-4700
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
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[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. 26
(Check Appropriate Box or Boxes)
------------------------
THE GABELLI EQUITY TRUST INC.
(Exact Name of Registrant as Specified in Charter)
------------------------
One Corporate Center
Rye, New York 10580-1434
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1434
(914) 921-5100
(Name and Address of Agent for Service)
------------------------
Copies to:
Richard T. Prins, Esq. James E. McKee, Esq. Cynthia Cobden, Esq.
Skadden, Arps, Slate, The Gabelli Equity Simpson Thacher & Bartlett
Meagher & Flom LLP Trust Inc. 425 Lexington Avenue
Four Times Square One Corporate Center New York, New York
New York, New York 10036 Rye, New York 10017
(212) 735-3000 10580-1434 (212) 455-2000
(914) 921-5100
------------------------
Approximate date of proposed public offering: As soon as
practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, as amended, other than securities offered in connection with a
dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check
appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective
date for a previously filed [post-effective amendment] [registration
statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is.
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Being Price Offering Registration
Securities Registered Per Share Price (1) Fee
-------------------- -------------- ---------- --------- -------------
__% Tax Advantaged 1,600,000 $ 25 $40,000,000 $10,000
Series B Shares
Cumulative
Preferred Stock
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in accordance
with section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said section 8(a), may determine.
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
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PART A
1. Outside Front Cover....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page.................................... Outside Front Cover Page;
Inside Front Cover Page
3. Fee Table and Synopsis.................... Not Applicable
4. Financial Highlights...................... Financial Highlights
5. Plan of Distribution...................... Outside Front Cover Page;
Prospectus Summary;
Underwriting
6. Selling Shareholders...................... Not Applicable
7. Use of Proceeds........................... Use of Proceeds; Investment
Objectives and Policies
8. General Description of the
Registrant.............................. Outside Front Cover Page;
Prospectus Summary; The
Fund; Investment
Objectives and Policies;
Other Investments;
Special Investment
Methods; Risk Factors &
Special Considerations;
Description of Series B
Cumulative Preferred
Stock; Certain Provisions of
the Charter and By Laws
9. Management................................ Outside Front Cover Page;
Prospectus Summary;
Management of the Fund;
Custodian, Transfer Agent
and Dividend-Disbursing
Agent
10. Capital Stock, Long-Term Debt,
and Other Securities.................... Outside Front Cover Page;
Prospectus Summary;
Investment Objectives and
Policies; Description of
Series B Cumulative
Preferred Stock;
Description of Capital
Stock and Other
Securities; Taxation
11. Defaults and Arrears on Senior
Securities.............................. Not Applicable
12. Legal Proceedings......................... Not Applicable
13. Table of Contents of the Statement
of Additional Information............... Table of Contents of the
Statement of Additional
Information
PART B Location in Statement of
Additional Information
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14. Cover Page................................ Outside Front Cover Page
15. Table of Contents......................... Outside Front Cover Page
16. General Information and History........... The Fund
17. Investment Objectives and
Policies................................ Investment Objectives and
Policies; Investment
Restrictions
18. Management................................ Management of the Fund
19. Control Persons and Principal
Holders of Securities................... Management of the Fund;
Beneficial Owners
20. Investment Advisory and Other
Services................................ Management of the Fund
21. Brokerage Allocation and Other
Practices............................... Portfolio Transactions
22. Tax Status................................ Taxation
23. Financial Statements...................... Financial Statements
PART C
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
[FLAG]
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2001
PROSPECTUS
6,600,000 Shares
[GABELLI LOGO] The Gabelli
Equity Trust Inc.
__% Tax Advantaged Series B Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
-----------------
The Gabelli Equity Trust Inc. is a closed-end non-diversified
management investment company that has a primary investment objective of
long-term growth of capital and a secondary investment objective of income.
The Fund's investments are selected by its Investment Adviser, Gabelli
Funds, LLC. The Fund invests primarily in equity securities including
common stock, preferred stock, convertible or exchangeable securities and
warrants and rights to purchase such securities.
This prospectus offers shares of the Fund's __% Tax Advantaged
Series B Cumulative Preferred Stock (the "Series B Preferred"), liquidation
preference $25 per share. The shares of Series B Preferred will be listed
and traded on the New York Stock Exchange. As of March 31, 2001, the Fund
had outstanding 5,368,900 shares of 7.25% Tax Advantaged Cumulative
Preferred Stock (the "Series A Preferred").
Dividends on the Series B Preferred are cumulative from the date
of original issuance of the shares at the annual rate of __% of the
liquidation preference of $25 per share and are payable quarterly on March
26, June 26, September 26 and December 26 in each year, commencing on
September 26, 2001.
The Fund expects that dividends paid on the Series B Preferred
will consist of long-term capital gains (consisting of 20% federal tax rate
capital gains from the sale of assets held longer than 12 months), net
investment income, short-term capital gains and, in unusual circumstances,
return of capital. Over the past one, three and five fiscal years ending
December 31, 2000, the distributions of taxable income by the Fund
consisted of 85%, 88%, and 86% long-term capital gains. No assurance can be
given, however, as to what percentage, if any, of the dividends paid on the
Series B Preferred will consist of long-term capital gains, which are taxed
at lower rates for individuals than ordinary income (net investment income
and short-term capital gains).
The Series B Preferred cannot be issued unless it is rated 'aaa'
by the Moody's Investors Service, Inc. In order to keep that rating, the
Fund will be required to maintain a minimum discounted asset coverage with
respect to the Series B Preferred and Series A Preferred under guidelines
established by Moody's. See "Description of Series B Preferred -- Rating
Agency Guidelines." The Fund is also required to maintain a minimum asset
coverage by the Investment Company Act of 1940, as amended (the "1940
Act"). If the Fund fails to maintain either of those two minimum asset
coverage requirements, the Fund can require that some or all of the Series
A or Series B Preferred be sold back to it (redeemed) for cash at a price
equal to $25 per share plus accumulated but unpaid dividends (whether or
not earned or declared). See "Description of Series B Preferred --
Redemption."
On or after __, 2006 the Fund has the option of redeeming some or
all of the Series B Preferred for cash at a price equal to the Redemption
Price.
Application has been made to list the Series B Preferred on the
New York Stock Exchange. Trading of the Series B Preferred on the New York
Stock Exchange is expected to commence within 30 days of the date of this
prospectus. Prior to this offering, there has been no public market for the
Series B Preferred. See "Underwriting."
-----------------
Investing in our Series B Preferred involves risks. See "Risk
Factors" beginning on page _______.
-----------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
-----------------
Per Share Total
--------- -----
Public Offering Price(1) $ $
Underwriting Discount(2) $ $
Proceeds to the Fund (before expenses) (3) $ $
-----------------
(1) Plus accumulated dividends, if any, from .
(2) The Fund and the Investment Adviser have agreed to
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933,
as amended.
(3) Offering expenses payable by the Fund are estimated at
$ .
-----------------
The shares of Series B Preferred are being offered by the
underwriters listed in this prospectus, subject to prior sale, when, as and
if accepted by them and subject to certain conditions. The Fund expects
that delivery of the shares of Series B Preferred will be made in
book-entry form through the facilities of The Depository Trust Company on
or about ___, 2001.
__________
----------------
Salomon Smith Barney
Merrill Lynch & Co.
Gabelli & Company, Inc.
_____________, 2001
This prospectus sets forth concisely important information about
the Fund that you should know before deciding whether to invest. You should
read the prospectus and retain it for future reference.
The Fund has also filed with the Securities Exchange Commission a
Statement of Additional Information, dated, ______, 2001 (the "SAI"), which
contains additional information about the Fund. The SAI is incorporated by
reference in its entirety into this prospectus. You can review the table of
contents of the SAI on page __ of this prospectus. You may request a free
copy of the SAI by writing to the Fund at its address at One Corporate
Center, Rye, New York 10580-1434 or calling the Fund toll-free at (800)
422-3554. You may also obtain the SAI on the Securities and Exchange
Commission's web site (http://www.sec.gov).
Certain persons participating in this offering may engage in
transactions that stabilize, maintain or otherwise affect the market price
of the Series B Preferred of the Fund, including the entry of stabilizing
bids, syndicate covering transactions or the imposition of penalty bids.
For a description of these activities, see "Underwriting."
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed
information contained in the prospectus and the SAI.
The Fund The Fund is a closed-end non-diversified
management investment company that has
been in operation since August 21, 1986.
As of March 31, 2001, the net assets of
the Fund were approximately $1.4 billion.
The Fund's outstanding common stock, par
value $.001 per share, is listed and
traded on the New York Stock Exchange. As
of March 31, 2001, the Fund had
126,803,143 shares of common stock
outstanding. The Fund recently completed
a Rights Offering for shares of common
stock at a per share purchase price of
$7.00. As of March 31, 2001, the Fund
also had outstanding 5,368,900 shares of
Series A Preferred, $25 per share
liquidation preference. The Fund is
offering shares of its Series B Preferred
pursuant to this prospectus. The Series A
Preferred and Series B Preferred have the
same senority with respect to dividends
and liquidation preference.
Investment Objectives The Fund's primary investment objective
is long-term growth of capital, primarily
through investment in a portfolio of
equity securities including common stock,
preferred stock, convertible or
exchangeable securities and warrants and
rights to purchase such securities.
Income is a secondary objective of the
Fund. No assurance can be given that the
Fund will achieve its investment
objectives. See "Investment Objectives
and Policies."
Dividends
and Distributions Dividends on the Series B Preferred, at
the annual rate of __% of its liquidation
preference, are cumulative from the
original issue date and are payable,
when, as and if declared by the Board of
Directors of the Fund, out of funds
legally available therefor, quarterly on
March 26, June 26, September 26 and
December 26 in each year, commencing
September 26, 2001. In the event that
for any calendar year the total
distributions on shares of the Series A
Preferred and Series B Preferred
(collectively, the "Preferred Stock")
exceed the Fund's net investment income
and net capital gain allocable to those
shares, the excess distributions will
generally be treated as a tax-free return
of capital (to the extent of the
stockholder's tax basis in his or her
shares). The amount treated as a tax-free
return of capital will reduce a
stockholder's adjusted basis in his or
her shares of Series B Preferred, thereby
increasing the stockholder's potential
gain or reducing his or her potential
loss on the sale of the shares.
The Fund has a policy, which may be
modified at any time by its Board of
Directors, of paying distributions on its
common stock of at least 10% of average
quarter-end net assets attributable to
common stock. To implement this policy,
the Fund makes quarterly distributions of
$0.27 per share at the end of each of the
first three calendar quarters of each
year to holders of its common stock. The
Fund's distribution in December for each
calendar year is an adjusting
distribution (equal to the sum of 2.5% of
the net asset value of the Fund as of the
last day of the four preceding calendar
quarters less the aggregate distributions
of $0.81 per share made for the most
recent three calendar quarters) in order
to meet the Fund's 10% pay-out goal.
The common stock dividend policy of the
Fund may be modified from time to time by
the Board of Directors.
The Offering The Fund is offering 6,600,000 shares of
___% Tax Advantaged Series B Cumulative
Preferred, par value $.001 per share,
liquidation preference $25 per share, at
a purchase price of $25 per share.
Potential Tax Benefit
to Certain Investors Most individuals pay Federal income tax
at a lower rate on long term capital
gains than on ordinary income and
short-term capital gains. For individuals
in the highest tax brackets this
differential currently can be as great as
19.1%, the difference between 39.1% on
ordinary income and short-term capital
gains and 20% on long-term capital gains.
In accordance with the current view of
the Internal Revenue Service, the Fund
intends to allocate its net long-term
capital gain, net short-term capital gain
and ordinary investment income
proportionately among its common stock
and Preferred Stock. Over the past one,
three and five fiscal years ending
December 31, 2000, the distributions of
taxable income by the Fund consisted of
85%, 88%, and 86% long-term capital
gains. If the Fund continues to pay a
portion of its distributions in the form
of long-term capital gain distributions,
most individual investors will
accordingly realize a tax benefit and pay
a lower rate of Federal income tax on
their Series B Preferred dividends than
if the Fund did not distribute long-term
capital gains.
Rating and Asset
Coverage Requirements Before it can be issued, the Series B
Preferred must receive a rating of 'aaa'
from Moody's. The Fund's Articles
Supplementary, which set forth the rights
and preferences of the Series B
Preferred, contain certain tests that the
Fund mustsatisfy to obtain and maintain a
rating of 'aaa' from Moody's on the
Series B Preferred. See "Description of
Series B Preferred -- Rating Agency
Guidelines."
Under the asset coverage tests to which
the Fund is subject, the Fund is required
to maintain (i) adjusted assets greater
than or equal to a basic maintenance
amount, both of which are calculated
pursuant to the 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, as
amended), with respect to all outstanding
senior stock of the Fund, including the
Preferred Stock. See "Description of
Series B Preferred -- Asset Maintenance."
Mandatory
Redemption The Series B Preferred may be subject to
mandatory redemption by the Fund to the
extent the Fund fails to maintain the
asset coverage requirements in accordance
with the rating agency guidelines or the
1940 Act described above and does not
cure such failure by the applicable cure
date. Any such redemption will be made
for cash at a price equal to $25 per
share plus accumulated and unpaid
dividends (whether or not earned or
declared) to the redemption date. In such
circumstances, the Fund may, but is not
required to, redeem a sufficient number
of shares of Preferred Stock so that
after the redemption it exceeds the asset
coverage required by each of the rating
agency guidelines and the 1940 Act by
10%. See "Description of Series B
Preferred -- Redemption -- Mandatory
Redemption."
Optional Redemption Commencing __, 2006 and at any time
thereafter, the Fund at its option may
redeem the Series B Preferred, in whole
or in part, for cash at a price per share
equal to the Redemption Price. Prior to
__, 2006, the Series B Preferred will
be redeemable at the option of the Fund
at the redemption price only to the
extent necessary for the Fund to continue
to qualify for tax treatment as a
regulated investment company. See
"Description of Series B Preferred --
Redemption -- Optional Redemption."
Voting Rights At all times, holders of shares of the
Fund's preferred stock (including the
Series B Preferred) outstanding at the
time, voting as a single class, will be
entitled to elect two members of the
Fund's Board of Directors, and holders of
the preferred stock and common stock,
voting as a single class, will elect the
remaining directors. However, upon a
failure by the Fund to pay dividends on
any of its preferred stock in an amount
equal to two full years' dividends,
holders of the preferred stock, voting as
a single class, will have the right to
elect the smallest number of directors
that would constitute a majority of the
directors until all cumulative dividends
on all shares of preferred stock have
been paid or provided for. Holders of
Series B Preferred and any other
preferred stock will vote separately as a
class on certain other matters, as
required under the Articles
Supplementary, the 1940 Act and Maryland
law. Except as otherwise indicated in
this prospectus and as otherwise required
by applicable law, holders of Series B
Preferred will be entitled to one vote
per share on each matter submitted to a
vote of stockholders and will vote
together with holders of shares of common
stock and any other preferred stock as a
single class. See "Description of Series
B Preferred -- Voting Rights."
Liquidation
Preference The liquidation preference of each share
of Series B Preferred is $25 plus an
amount equal to accumulated but unpaid
dividends (whether or not earned or
declared) to the date of distribution.
See "Description of Series B Preferred --
Liquidation Rights."
Use of Proceeds The Fund will use the net proceeds from
the Offering to purchase additional
portfolio securities in accordance with
its investment objectives and policies.
See "Use of Proceeds."
Listing Prior to the Offering, there has been no
public market for the Series B Preferred.
Series B Preferred will be listed on the
New York Stock Exchange. However, during
an initial period which is not expected
to exceed 30 days after the date of this
prospectus, the Series B Preferred will
not be listed on any securities exchange.
Special Characteristics
and Risks The market price for the Series B
Preferred will be influenced by changes
in interest rates, the perceived credit
quality of the Series B Preferred and
other factors. As indicated above, the
Series B Preferred is subject to
redemption under specified circumstances.
Subject to such circumstances, the Series
B Preferred is perpetual. The credit
rating on the Series B Preferred could be
reduced or withdrawn while an investor
holds shares, and the credit rating does
not eliminate or mitigate the risks of
investing in the Series B Preferred. A
reduction or withdrawal of the credit
rating would likely have an adverse
effect on the market value of the Series
B Preferred. The Series B Preferred is
not an obligation of the Fund. Although
unlikely, precipitous declines in the
value of the Fund's assets could result
in the Fund having insufficient assets to
redeem all of the Series B Preferred for
the full redemption price.
As a non-diversified investment company
under the 1940 Act, the Fund is not
limited in the proportion of its assets
that may be invested in securities of a
single issuer, and, accordingly, an
investment in the Fund may, under certain
circumstances, present greater risk to an
investor than an investment in a
diversified company. See "Risk Factors
and Special Considerations --
Non-Diversified Status."
The Fund may invest up to 35% of its
total assets in foreign securities.
Investing in securities of foreign
companies and foreign governments, which
generally are denominated in foreign
currencies, may involve certain risks and
opportunities not typically associated
with investing in domestic companies and
could cause the Fund to be affected
favorably or unfavorably by changes in
currency exchange rates and revaluation
of currencies. See "Risk Factors and
Special Considerations - Foreign
Securities."
The Investment Adviser (as hereinafter
defined) is dependent upon the expertise
of Mr. Mario J. Gabelli in providing
advisory services with respect to the
Fund's investments. If the Investment
Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund
could be adversely affected. There can be
no assurance that a suitable replacement
could be found for Mr. Gabelli in the
event of his death, resignation,
retirement or inability to act on behalf
of the Investment Adviser.
During an initial period which is not
expected to exceed 30 days after the date
of this prospectus, the Series B
Preferred will not be listed on any
securities exchange. During such period,
the underwriters intend to make a market
in the Series B Preferred; however, they
have no obligation to do so.
Consequently, an investment in the Series
B Preferred may be illiquid during such
period.
Federal Income Tax
Considerations The Fund has qualified, and intends to
remain qualified, for Federal income tax
purposes, as a regulated investment
company. Qualification requires, among
other things, compliance by the Fund with
certain distribution requirements.
Statutory limitations on distributions on
the common stock if the Fund fails to
satisfy the 1940 Act's asset coverage
requirements could jeopardize the Fund's
ability to meet the distribution
requirements. The Fund presently intends,
however, to purchase or redeem Preferred
Stock to the extent necessary in order to
maintain compliance with such asset
coverage requirements. See "Taxation" for
a more complete discussion of these and
other Federal income tax considerations.
Management
and Fees Gabelli Funds, LLC serves as the Fund's
investment adviser and is compensated for
its services and its related expenses at
an annual rate of 1.00% of the Fund's
average weekly net assets. The Investment
Adviser is responsible for administration
of the Fund and currently utilizes and
pays the fees of a third party
administrator. Notwithstanding the
foregoing, the Investment Adviser will
waive the portion of its investment
advisory fee attributable to an amount of
assets of the Fund equal to the aggregate
stated value of the Series B Preferred
for any calendar year in which the net
asset value total return of the Fund
allocable to the common stock, including
distributions and the advisory fee
subject to potential waiver, is less than
the stated dividend rate of the Series B
Preferred (prorated during the year the
Series B Preferred is issued and the
final year the Series B Preferred is
outstanding).
Repurchase of Common
Stock and Anti-takeover
Provisions
The Fund is authorized, subject to
maintaining required asset coverage on
the Preferred Stock, to repurchase its
common stock on the open market when the
shares are trading at a discount of 10%
or more (or such other percentage as its
Board of Directors may determine from
time to time) from their net asset value.
In addition, certain provisions of the
Fund's Charter and By Laws may be
regarded as "anti-takeover" provisions.
Pursuant to these provisions, only one of
three classes of directors is elected
each year, and the affirmative vote of
the holders of 66 2/3% of the outstanding
shares of each class of stock of the Fund
is necessary to authorize the conversion
of the Fund from a closed-end to an
open-end investment company and an
affirmative vote of 66 2/3% of each class
of the outstanding voting shares of the
Fund may be necessary to authorize
certain business transactions with any
beneficial owner of more than 5% of the
outstanding shares of the Fund. The
overall effect of these provisions is to
render more difficult the accomplishment
of a merger with, or the assumption of
control by, a principal stockholder.
These provisions may have the effect of
depriving Fund stockholders of an
opportunity to sell their shares at a
premium to the prevailing market price.
See "Certain Provisions of the Charter
and By Laws."
Custodian, Transfer Agent
and Dividend-Disbursing
Agent Boston Safe Deposit and Trust Company
serves as the Fund's custodian. With
respect to the Series B Preferred, State
Street Bank and Trust Company serves as
transfer and dividend-disbursing agent
and registrar and as agent to provide
notice of redemption and certain voting
rights. See "Custodian, Transfer Agent
and Dividend-Disbursing Agent."
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially
all of its net capital gains and net investment income. The Fund operates
as a regulated investment company under the Internal Revenue Code of 1986,
as amended, (the "Code") and distributions by a regulated investment
company generally retain their character as capital gain or ordinary income
when received by its preferred and common stockholders. Distributions of
short-term capital gain are taxed at ordinary income rates. Thus, the
stated __% dividends paid by the Fund to holders of the Series B Preferred
may, for Federal income tax purposes, consist of varying proportions of
long-term capital gain, short-term capital gain, ordinary income and/or
returns of capital.
Capital gain on assets held longer than 12 months generally is
currently taxable to individuals at a maximum rate of 20%. Net investment
income and short-term capital gain of the Fund are currently taxable to
individuals at a maximum rate of 39.1%.
Although the Fund is not managed using a tax-focused investment
strategy and does not seek to achieve any particular distribution
composition, individual investors in the Series B Preferred would, under
current Federal income tax law, realize a tax savings on their investment
to the extent that distributions by the Fund to its stockholders are
composed of long-term capital gain taxed at a lower rate. In contrast,
preferred stock dividends distributed by corporations that are not
regulated investment companies are generally comprised, for Federal income
tax purposes, only of ordinary income.
Over the past one, three and five fiscal years ending December 31,
2000, the distributions of taxable income by the Fund consisted of 85%,
88%, and 86% long-term capital gains. The Fund has no reason to expect that
these percentages will decrease materially in the future although it cannot
provide any assurances in this regard.
The Federal income tax characteristics of the Fund and the
taxation of its stockholders are described more fully under "Taxation."
ASSUMPTIONS
The following tables show examples of the pure ordinary income
equivalent yield that would be generated by the stated dividend rate on the
Series B Preferred, assuming distributions for Federal income tax purposes
consisting of different proportions of long-term capital gain and ordinary
income (including short-term capital gain) for an individual in the 39.1%
and 30.5% Federal marginal income tax brackets. In reading these tables, you
should understand that a number of factors could affect the actual
composition for Federal income tax purposes of the Fund's distributions
each year. Such factors include (i) the Fund's investment performance for
any particular year, which may result in distributions of varying
proportions of long-term capital gain, ordinary income and/or return of
capital, and (ii) revocation or revision of the Internal Revenue Service
revenue ruling requiring the proportionate allocation of types of income
among holders of various classes of a regulated investment company's
capital stock.
These tables are for illustrative purposes only and cannot be taken as
an indication of the actual composition for Federal income tax
purposes of the Fund's future distributions.
Series B Preferred Series B Preferred
Annual Annual
Dividend Rate Dividend Rate
----------------------- ------------------
7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Percentage of Series B Preferred
Stated Annual Dividend Comprised
of Tax Equivalent Yield for an Tax Equivalent Yield for an
-------------------------------- Individual in the 39.1% Individual in the 30.5%
Long-Term Ordinary Federal Income Tax Bracket Federal Income Tax Bracket(1)
Capital Gains Income -------------------------- --------------------------
------------- --------
83.3% 16.7% 8.83% 9.14% 9.46% 7.88% 8.16% 8.44%
75.0% 25.0% 8.65% 8.96% 9.26% 7.79% 8.07% 8.35%
66.7% 33.3% 8.46% 8.77% 9.07% 7.71% 7.98% 8.26%
50.0% 50.0% 8.10% 8.39% 8.68% 7.53% 7.80% 8.07%
33.3% 66.7% 7.73% 8.01% 8.28% 7.35% 7.61% 7.88%
25.0% 75.0% 7.55% 7.82% 8.09% 7.26% 7.52% 7.78%
16.7% 83.3% 7.37% 7.63% 7.89% 7.18% 7.43% 7.69%
0.0% 100.0% 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
------------------------
(1) Annual taxable income levels corresponding to the 2001 Federal
marginal tax brackets are as follows:
2001 Federal Income
Tax Bracket(2) Single Joint
------------------- ------ -----
39.1% over $ 297,300 over $297,300
35.5% over $136,750 - $297,300 over $166,450 - $297,300
30.5% over $65,550 - $136,750 over $109,250 - $166,450
27.5% over $27,050 - $65,550 over $45,200 - $109,250
15.0% over $6,000 - $27,050 over $12,000 - $45,200
10.0% up to and including $6,000 up to and including $12,000
Your Federal marginal income tax rates may exceed the rates shown
in the above tables due to the reduction, or possible elimination,
of the personal exemption deduction for high-income taxpayers and
an overall limit on itemized deductions. Income may be subject to
certain state, local and foreign taxes. If you pay alternative
minimum tax, equivalent yields may be lower than those shown
above. The tax rates shown above do not apply to corporate
taxpayers.
(2) The Economic Growth and Tax Relief Reconciliation Act of 2001,
effective for taxable years beginning after December 31, 2000, creates a
new 10 percent income tax bracket and reduces the tax rates applicable to
ordinary income over a six year phase-in period. Beginning in the taxable
year 2006, ordinary income will be subject to a 35% maximum rate,
with approximately proportionate reductions in the other ordinary
rates.
FINANCIAL HIGHLIGHTS
The selected data set forth below is for shares of common stock
outstanding for the periods presented. The financial information was
derived from and should be read in conjunction with the Financial
Statements of the Fund incorporated by reference into this prospectus and
the SAI. The financial information for each of the five years ended
December 31, 2000 has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose unqualified report on such financial
statements is included in the SAI.
Year Ended December 31,
------------------------------------------------------------------------
2000(a) 1999(a) 1998(a) 1997(a) 1996(a)
------- ------- ------- ------- -------
Operating Performance:
Net asset value, beginning of period......... $12.75 $11.47 $11.56 $ 9.77 $ 9.95
Net investment income........................ 0.05 0.04 0.07 0.08 0.11
Net realized and unrealized gain (loss) (0.51) 3.25 1.09 2.75 0.71
on investmentsTotal from investment operations... (0.46) 3.29 1.16 2.83 0.82
Increase (decrease) in net asset
value from Equity Trust share transactions.... -- -- -- -- --
Offering expenses charged to capital surplus.... -- -- (0.04) -- --
Distributions to Common Stock Shareholders:
Net investment income......................... (0.04) (0.03)(c) (0.06) (0.08) (0.11)
In excess of net investment income............ -- -- -- (0.00)(d) --
Net realized gain on investments.............. (1.25) (1.21)(c) (1.10) (0.92) (0.78)
In excess of net realized gains on investments (0.02) -- -- (0.01) (0.00)(d)
Paid-in capital............................... -- (0.68)(c) -- (0.03) (0.11)
Distributions to Preferred Stock Shareholders:
Net investment income......................... (0.00)(d) (0.00)(d) (0.00)(d) -- --
Net realized gain on investments ............. (0.09) (0.09) (0.05) -- --
Total distributions........................... (1.40) (2.01) (1.21) (1.04) (1.00)
Net asset value, end of period................... $10.89 $12.75 $11.47 $11.56 $ 9.77
Market value, end of period................... $11.44 $12.56 $11.56 $11.69 $ 9.38
Net asset value total return**................ (4.39)% 29.49% 9.55% 30.46% 9.00%
Total investment return*...................... 1.91% 26.57% 9.23% 37.46% 11.00%
Ratios to Average Net Assets Available to Common
Stock Shareholders and Supplemental Data:
Net assets, end of period (in 000's)......... $1,318,263 $1,503,641 $1,352,190 $1,210,570 $1,015,437
Net assets attributable to common shares, end
of period (in 000's)....................... $1,184,041 $1,368,981 $1,217,190 $1,210,570 $1,015,437
Ratio of net investment income to average net
assets attributable to common stock........ 0.42% 0.34% 0.60% 0.76% 1.07%
Ratio of operating expenses to average total net
assets attributable to common stock ....... 1.14% 1.27% 1.15% 1.14% 1.18%
Ratio of operating expenses to average total net
assets(e).................................. 1.03% 1.15% 1.09% 1.14% 1.18%
Portfolio turnover rate....................... 32.1% 38.0% 39.8% 39.2% 18.9%
Preferred Stock:
Liquidation value, end of period (in 000's).... $ 134,223 $ 134,660 $ 135,000 -- --
Total shares outstanding (in 000's)............ 5,369 5,386 5,400 -- --
Asset coverage................................. 972% 1,117% 1,001% -- --
Liquidation preference per share............... $ 25.00 $ 25.00 $ 25.00 -- --
Average market value(f)........................ $ 22.62 $ 24.43 $ 25.63 -- --
------------------------
See footnotes on following page.
FINANCIAL HIGHLIGHTS (Cont.)
Year Ended December 31,
--------------------------------------------------
1995(a) 1994(a) 1993(a) 1992 1991
------- ------- ------- ---- ----
Operating Performance:
Net asset value, beginning of period......... $ 9.46 $11.23 $10.58 $10.61 $10.49
Net investment income........................ 0.13 0.14 0.14 0.19 0.27
Net realized and unrealized gain (loss) 1.74 (0.08) 2.13 1.21 1.37
on investments
Total from investment operations............. 1.87 0.06 2.27 1.40 1.64
Increase (decrease) in net asset
value from Equity Trust share transactions... (0.37) -- (0.50) (0.36) (0.42)
Offering expenses charged to capital surplus. (0.01) -- (0.01) (0.01) (0.01)
Distributions to Common Stock Shareholders:
Net investment income......................... (0.13) (0.14)(b) (0.11) (0.19) (0.27)
In excess of net investment income............ -- -- -- -- --
Net realized gain on investments ............. (0.47) (0.37)(b) (0.77) (0.38) (0.14)
In excess of net realized gain on investments. (0.02) -- (0.02) -- --
Paid-in capital............................... (0.38) (1.32)(b) (0.21) (0.49) (0.68)
Distributions to Preferred Stock Shareholders:
Net investment income......................... -- -- -- -- --
Net realized gain on investments ............. -- -- -- -- --
Total distributions......................... (1.00) (1.83) (1.11) (1.06) (1.09)
Net asset value, end of period.............. $ 9.95 $ 9.46 $11.23 $10.58 $10.61
Market value, end of period.................. $ 9.375 $ 9.625 $12.125 $10.250 $10.125
Net asset value total return**............... 20.60% 0.50% 22.40% 14.20% 16.20%
Total investment return*..................... 11.70% (5.10)% 36.50% 15.90% 10.90%
Ratios to Average Net Assets Available to Common
Stock Shareholders and Supplemental Data:
Net assets, end of period (in 000's)......... $1,034,091 $825,193 $937,773 $725,263 $595,151
Net assets attributable to common shares,
end of period (in 000's)................... $1,034,091 $825,193 $937,773 $725,263 $595,151
Ratio of net investment income to average net
assets attributable to common stock........ 1.26% 1.29% 1.25% 1.88% 2.34%
Ratio of operating expenses to average total
net assets(e).............................. 1.21% 1.19% 1.20% 1.22% 1.24%
Portfolio turnover rate...................... 25.1% 22.2% 24.4% 12.5% 11.2%
Preferred Stock:
Liquidation value, end of period (in 000's).... -- -- -- -- --
Total shares outstanding (in 000's)............ -- -- -- -- --
Asset coverage................................. -- -- -- -- --
Liquidation preference per share............... -- -- -- -- --
Average market value(f)........................ -- -- -- -- --
------------------------
* Based on market value per share, adjusted for reinvestment of distributions, including the
effect of shares issued pursuant to rights offering, assuming full subscription by shareholder.
** Based on net asset value per share, adjusted for reinvestment of distributions, including the
effect of shares issued pursuant to rights offering, assuming full subscription by shareholder.
(a) Per share amounts have been calculated using the monthly average shares outstanding method.
(b) A distribution equivalent to $0.75 per share for The Gabelli Global Multimedia Trust Inc.
spin-off from net investment income, realized short-term gains, and paid-in capital were
$0.064, $0.031, and $0.655, respectively.
(c) A distribution equivalent to $0.75 per share for the Gabelli Utility Trust spin-off from net
investment income, realized short-term gains, realized long-term gains, and paid-in capital
were $0.01029, $0.07453, $0.34218 and $0.32300, respectively.
(d) Amount represents less than $0.005 per share.
(e) Amounts are attributable to both common and preferred stock assets. Prior to 1998, there was
no preferred stock outstanding.
(f) Based on weekly prices.
The following table provides information about the Fund's Series A
Preferred since its issuance in June 1998. The information has been audited
by PricewaterhouseCoopers LLP, independent accountants.
Involuntary
Liquidation Average
Year ended Shares Asset Coverage Preference Market
December 31, Outstanding Per Share Per Share Value Per Share
------------ ----------- --------- --------- ---------------
2000 5,368,900 $ 245.54 $25.00 $22.62
1999 5,386,400 $ 279.16 $25.00 $24.43
1998 5,400,000 $ 250.41 $25.00 $25.63
For purposes of the foregoing table, the Asset Coverage Per Share
is calculated by dividing the total value of the Fund's assets on December
31 of the relevant year by the number of shares of Series A Preferred
outstanding on that date. Involuntary Liquidation Preference Per Share
refers to the amount holders of Series A Preferred are entitled to receive
per share in the event of liquidation of the Fund prior to the holders of
common stock being entitled to receive any amounts in respect of the assets
of the Fund. The Average Market Value Per Share is the average of the
weekly closing prices of the Series A Preferred on the New York Stock
Exchange each week during the relevant year.
USE OF PROCEEDS
The net proceeds of the Offering are estimated at $_______, after
deduction of the underwriting discounts and estimated offering expenses
payable by the Fund. The Investment Adviser expects that it will be able to
invest the proceeds of the Offering according to the Fund's investment
objectives and policies within six months after the completion of the
Offering. Pending such investment, the Fund will hold the proceeds in high
quality short-term debt securities and instruments.
THE FUND
The Fund, incorporated in Maryland on May 20, 1986, is a
non-diversified, closed-end management investment company registered under
the 1940 Act. The Fund's common stock is traded on the New York Stock
Exchange under the symbol "GAB." The Fund recently completed a Rights
Offering for 18,114,735 shares of common stock at a per share purchase
price of $7.00. The Fund's Series A Preferred is traded on the New York
Stock Exchange under the symbol "GAB Pr".
The Fund's primary investment objective is long-term growth of
capital. The Fund seeks to achieve its objective by investing primarily in
a portfolio of equity securities which include the common stock, preferred
stock, convertible securities, options and warrants of foreign and domestic
companies selected by the Investment Adviser. Income is the secondary
investment objective of the Fund. Under normal market conditions, the Fund
will invest at least 65% of its total assets in equity securities.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is long-term growth
of capital. Income is a secondary objective of the Fund. The Fund attempts
to achieve its objectives by investing primarily in a portfolio of equity
securities consisting of common stock, preferred stock, convertible or
exchangeable securities and warrants and rights to purchase such securities
selected by the Investment Adviser. The Investment Adviser selects
investments on the basis of fundamental value and, accordingly, the Fund
typically invests in the securities of companies that are believed by the
Investment Adviser to be priced lower than justified in relation to their
underlying assets. Other important factors in the selection of investments
include favorable price/earnings and debt/equity ratios and strong
management.
The Fund's secondary investment objective is income, which the
Fund seeks to achieve, in part, by investing up to 10% of its total assets
in a portfolio consisting primarily of high-yielding, fixed-income
securities, such as corporate bonds, debentures, notes, convertible
securities, preferred stocks and domestic and foreign government
obligations. Generally, debt securities purchased by the Fund will be rated
in the lower rating categories of recognized statistical rating agencies,
such as securities rated "CCC" or lower by Standard & Poor's Ratings
Services or "Caa" or lower by Moody's, or will be nonrated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions and are often referred to
in the financial press as "junk bonds."
The Fund's investment objectives of long-term growth of capital
and income are fundamental policies and may not be changed without
shareholder approval.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Investment Adviser
normally will consider the following factors, among others: (1) the
Investment Adviser's own evaluations of the private market value, cash
flow, earnings per share and other fundamental aspects of the underlying
assets and business of the company, (2) the potential for capital
appreciation of the securities; (3) the interest or dividend income
generated by the securities; (4) the prices of the securities relative to
other comparable securities; (5) whether the securities are entitled to the
benefits of call protection or other protective covenants (e.g., events of
acceleration or events of default for failure to comply with certain
financial ratios or to satisfy other financial covenants or benchmarks);
(6) the existence of any anti-dilution protections or guarantees of the
security; and (7) the diversification of the portfolio of the Fund as to
issuers. The Investment Adviser's investment philosophy with respect to
equity securities seeks to identify securities of companies that are
selling in the public market at a discount to their private market value,
which the Investment Adviser defines as the value informed purchasers are
willing to pay to acquire assets with similar characteristics. The
Investment Adviser also normally evaluates the issuer's free cash flow and
long-term earnings trends. Finally, the Investment Adviser looks for a
catalyst -- something in the company's industry or indigenous to the
company or country itself that will surface additional value.
INVESTMENT PRACTICES
Foreign Securities. The Fund may invest up to 35% of its total
assets in foreign securities. Among the foreign securities in which the
Fund may invest are those issued by companies located in developing
countries, which are countries in the initial stages of their
industrialization cycles. Investing in the equity and debt markets of
developing countries involves exposure to economic structures that are
generally less diverse and less mature, and to political systems that can
be expected to have less stability, than those of developed countries. The
markets of developing countries historically have been more volatile than
the markets of the more mature economies of developed countries, but often
have provided higher rates of return to investors. The Fund may also invest
in debt securities of foreign governments.
Temporary Investments. Although under normal market conditions at
least 65% of the Fund's total assets will consist of equity securities,
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 Fund may also
invest up to 10% of the market value of its total assets during temporary
defensive periods in shares of money market mutual funds that invest
primarily in U.S. Government Securities and repurchase agreements in
respect of those securities. For a further description of such
transactions, see "Investment Objectives and Policies -- Investment
Practices" in the SAI. Such actions on the part of the Fund may adversely
affect its ability to achieve its investment objectives.
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities issued by U.S. and foreign corporations,
governments and agencies that are rated below investment grade by primary
rating services such as S&P and Moody's. These high-yield, higher-risk
securities are commonly known as "junk bonds." These debt securities are
predominantly speculative and involve major risk exposure to adverse
conditions.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with banks, registered broker-dealers and government
securities dealers approved by the Investment Adviser under the supervision
of the Board of Directors. The Fund will not enter into repurchase
agreements with the Investment Adviser or any of its affiliates. 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, thereby
determining the yield during its holding period. Thus, repurchase
agreements may be seen to be loans by the Fund collateralized by the
underlying debt obligation. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the holding
period. The value of the underlying securities will be at least equal at
all times to the total amount of the repurchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party
to a repurchase agreement defaults on its obligations and the Fund is
delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period in which it seeks to
assert these rights. The Investment Adviser, acting under the supervision
of the Fund's Board of Directors, 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.
Other Investments. The Fund is permitted to invest in special
situations, illiquid securities, warrants, options and other rights and
futures contracts, engage in forward currency transactions and enter into
forward commitments for the purchase or sale of securities, including on a
"when issued" or "delayed delivery" basis. See the SAI for a discussion of
these investments and techniques and the risks associated with them.
LEVERAGING
As provided in the 1940 Act, the Fund may issue debt or preferred
stock so long as the Fund's net assets exceed 300% of the amount of the
debt outstanding and exceed 200% of the amount of preferred stock and debt
outstanding. Leverage entails two primary risks. The first risk is that the
use of leverage magnifies the impact on the common stockholders 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. The second risk is that the cost of
leverage will exceed the return on the securities acquired with the
proceeds of leverage, thereby diminishing rather than enhancing the return
to common stockholders. These two risks would generally make the Fund's
total return to common stockholders more volatile to the extent it utilizes
leverage. In addition, the Fund may be required to sell investments in
order to meet dividend or interest payments on the debt or preferred stock
when it may be disadvantageous to do so.
If the Fund is utilizing leverage, a decline in net asset value
could affect the ability of the Fund to make common stock 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." Finally, if the asset coverage for preferred stock or
debt securities declines to less than the level required under the 1940 Act
or the terms of the preferred stock or debt (as a result of market
fluctuations or otherwise), the Fund may be required to sell a portion of
its investments to redeem the preferred stock or repay the debt when it may
be disadvantageous to do so.
Further information on the investment objectives and policies of
the Fund are set forth in the SAI.
INVESTMENT RESTRICTIONS
The Fund operates under certain restrictions that may not be
changed without shareholder approval. For a description of such
restrictions, see "Investment Restrictions" in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations
associated with investing in the Fund.
PREFERRED STOCK
There are a number of risks associated with an investment in
Series B Preferred. The market price for the Series B Preferred will be
influenced by changes in interest rates, the perceived credit quality of
the Series B Preferred and other factors. The Series B Preferred is subject
to redemption under specified circumstances and investors may not be able
to reinvest the proceeds of any such redemption in an investment providing
the same or a better rate than that of the Series B Preferred. Subject to
such circumstances, the Series B Preferred is perpetual. The credit rating
on the Series B Preferred could be reduced or withdrawn while an investor
holds shares, and the credit rating does not eliminate or mitigate the
risks of investing in the Series B Preferred. A reduction or withdrawal of
the credit rating would likely have an adverse effect on the market value
of the Series B Preferred. The Series B Preferred is not an obligation of
the Fund. The Series B Preferred would be junior in respect of dividends
and liquidation preference to any indebtedness incurred by the Fund.
Although unlikely, precipitous declines in the value of the Fund's assets
could result in the Fund having insufficient assets to redeem all of the
Series B Preferred for the full redemption price.
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"
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:
o 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 or similar trades or businesses or related trades or
businesses, and
o 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.
The investments of the Fund in U.S. Government Securities are not
subject to the foregoing limitations. 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.
LOWER RATED SECURITIES
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
o potentially greater sensitivity to general economic or
industry conditions
o potential lack of attractive resale opportunities
(illiquidity)
o additional expenses to seek recovery from issuers who
default
The market value of lower-rated securities may be more volatile
than the market value of higher-rated securities and generally tends to
reflect the market's perception of the creditworthiness of the issuer and
short-term market developments to a greater extent than more highly rated
securities, which reflect primarily 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.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Investment
Practices" in the SAI. For a description of the ratings categories of
certain recognized statistical ratings agencies, see Appendix A to this
prospectus.
FOREIGN SECURITIES
The Fund may invest up to 35% of its total assets in foreign
securities. The risks which the Fund faces when it invests in securities of
foreign companies and foreign governments include:
o fluctuations in exchange rates between the U.S. dollar
and foreign currencies
o unavailable or deficient key information about an issuer,
security or market
o lack of uniform financial reporting standards and other
regulatory requirements
o expropriations, capital or currency controls, punitive
taxes or nationalizations
o economic policy changes, social and political
instability, military action and war
o changed circumstances in dealings between nations
o greater volatility and illiquidity of foreign securities
o costs incurred in connection with conversion between
various currencies
o higher foreign brokerage commissions
o possible extended settlement period
o revaluations of currencies
o transfer taxes or transaction charges
o greater difficulty in protecting and enforcing the Fund's
rights
Each of the above risks is more pronounced with respect to the
Fund's investments in securities of companies and governments in the
world's emerging (less developed) markets. For a further description of the
Fund's investments in foreign securities, see "Investment Objectives and
Policies -- Certain Practices -- Foreign Securities."
The Fund may purchase sponsored American Depository Receipts of
U.S. denominated securities of foreign issuers, which shall not be included
in the Fund's 35% foreign securities investment limitation. ADRs are
receipts issued by United States banks or trust companies in respect of
securities of foreign issuers held on deposit for use in the United States
securities markets. While ADRs may not necessarily be denominated in the
same currency as the securities into which they may be converted, many of
the risks associated with foreign securities may also apply to ADRs.
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.
ILLIQUIDITY PRIOR TO EXCHANGE LISTING
Prior to the Offering, there has been no public market for the
Series B Preferred. Application has been made to list the Series B
Preferred on the New York Stock Exchange. However, during an initial period
which is not expected to exceed 30 days after the date of this prospectus,
the Series B Preferred will not be listed on any securities exchange.
During such period, the underwriters intend to make a market in the Series
B Preferred; however, they have no obligation to do so. Consequently, an
investment in the Series B Preferred may be illiquid during such period.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the
direction of the Fund's Board of Directors, and the day-to-day operations
of the Fund are conducted through or under the direction of the officers of
the Fund. Although the Fund is a Maryland corporation, Karl Otto Pohl, one
of its Directors, is a resident of Germany, and substantially all of his
assets are located outside of the United States. Mr. Pohl has not
authorized an agent for service of process in the United States.
Consequently, it may be difficult for investors to effect service of
process upon him within the United States or to enforce, in United States
courts, judgments against him obtained in such courts predicated on the
civil liability provisions of the United States securities laws. In
addition, there is doubt as to the enforceability in German courts of
liabilities predicated solely upon the United States securities laws,
whether or not such liabilities are based upon judgments of courts in the
United States. For certain information regarding the Directors and officers
of the Fund, see "Management of the Fund" in the SAI.
INVESTMENT ADVISER
The Investment Adviser, whose principal business address is One
Corporate Center, Rye, New York 10580, is a New York limited liability
company which also serves as investment adviser to other closed-end
investment companies and open-end investment companies with aggregate
assets in excess of $10.3 billion as of March 31, 2001. The Investment
Adviser is a registered investment adviser under the Investment Advisers
Act of 1940. Mr. Mario J. Gabelli may be deemed a "controlling person" of
the Investment Adviser on the basis of his controlling interest in the
parent company of the Investment Adviser. The Investment Adviser has
several affiliates that provide investment advisory services: GAMCO
Investors, Inc. acts as investment adviser for individuals, pension trusts,
profit-sharing trusts and endowments, and had assets under management of
approximately $10.7 billion under its management as of March 31, 2001;
Gabelli Advisers, Inc. acts as investment adviser to the Gabelli Westwood
Funds with assets under management of approximately $494 million as of
March 31, 2001; Gabelli Securities, Inc. acts as general partner or
investment manager to certain alternative investments products, consisting
primarily of risk arbitrage and merchant banking limited partnerships and
offshore companies, with assets under management of approximately $473
million as of March 31, 2001; and Gabelli Fixed Income, LLC acts as
investment adviser for the three portfolios of The Treasurer's Fund and
separate accounts having assets under management of approximately $1.7
billion as of March 31, 2001.
The Investment Adviser has sole investment discretion for the Fund
with respect to the Fund's portfolio under the supervision of the Fund's
Board of Directors and in accordance with the Fund's stated policies. The
Investment Adviser will select investments for the Fund and will place
purchase and sale orders on behalf of the Fund. For its services, the
Investment Adviser is paid a fee computed daily and paid monthly at an
annual rate of 1.00% of the average weekly net assets of the Fund. The
Investment Adviser is responsible for administration of the Fund and
currently utilizes and pays the fees of a third party administrator.
Notwithstanding the foregoing, the Investment Adviser will waive the
portion of its investment advisory fee attributable to an amount of assets
of the Fund equal to the aggregate stated value of the Series B Preferred
for any calendar year in which the net asset value total return of the Fund
allocable to the common stock, including distributions and the advisory fee
subject to potential waiver, is less than the stated dividend rate of the
Series B Preferred (prorated during the year the Series B Preferred is
issued and the final year the Series B Preferred is outstanding). For
additional information regarding the Investment Adviser, see "The
Investment Adviser" in the SAI.
Non-U.S. shareholders should note that there may be difficulty
enforcing any legal rights against the Investment Adviser because it is
resident only in the U.S. and all of its assets are situated in the U.S.
PORTFOLIO MANAGEMENT
Mario J. Gabelli, who is Chief Investment Officer of the
Investment Adviser, has managed the Fund's assets since its inception. In
addition, over the past five years, Mr. Gabelli has served as Chairman of
the Board and Chief Executive Officer of Gabelli Asset Management Inc.;
Chief Investment Officer of GAMCO Investors, Inc.; Chairman of the Board
and Chief Executive Officer of Lynch Corporation, a diversified
manufacturing company, and Lynch Interactive Corporation, a multimedia and
communications services company; and Director of Spinnaker Industries,
Inc., a manufacturing company.
SUB-ADMINISTRATOR
The Investment Adviser has certain administrative responsibilities
to the Fund under its Advisory Agreement with the Fund. The Investment
Adviser has retained PFPC, Inc. as Sub-Administrator to provide certain
administrative services necessary for the Fund's operations other than
those performed by the Investment Adviser under its Advisory Agreement.
These services include, but are not limited to, supplying the Investment
Adviser with office facilities, statistical and research data, data
processing services, clerical, accounting and bookkeeping services,
internal audit and regulatory administration services, the preparation and
distribution of materials for meeting of the Fund's Board of Directors,
compliance testing of the Fund's activities and the preparation of
stockholder reports, tax returns and other regulatory filings. For such
services by the Sub-Administrator, the Investment Adviser pays the
Sub-Administrator a monthly fee based upon the aggregate average daily net
assets of certain funds advised by the Investment Adviser, including the
Fund, as follows: .0275% on aggregate net assets under administration of
$0-$10 billion, .0125% on aggregate net assets under administration of
$10-$15 billion and .0100% on aggregate net assets under administration
over $15 billion, which together with services rendered, is subject to
re-negotiation if net assets under administration exceed $20 billion. The
Investment Adviser also reimburses the Sub-Administrator for certain
out-of-pocket expenses incurred by the Sub-Administrator as a result of its
duties under the sub-administrative agreement. The Sub-Administrator has
its principal office located at 3200 Horizon Drive, King of Prussia,
Pennsylvania 19406.
PAYMENT OF EXPENSES
For purposes of the calculation of the fees payable to the
Investment Adviser by the Fund, average weekly net assets of the Fund are
determined at the end of each month on the basis of its average net assets
for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the end of a week with the net
assets at the end of the prior week.
The Investment Adviser will be obligated to pay expenses
associated with providing the services contemplated by the Advisory
Agreement including compensation of and office space for its officers and
employees connected with investment and economic research, trading and
investment management and administration of the Fund, as well as the fees
of all Directors of the Fund who are affiliated with the Investment
Adviser. The Fund pays all other expenses incurred in its operation
including, among other things, expenses for legal and independent
accountants' services, costs of printing proxies, stock certificates and
shareholder reports, rating agency fees, charges of the custodian, any
subcustodian and transfer and dividend paying agent, Securities and
Exchange Commission fees, fees and expenses of unaffiliated Directors,
accounting and pricing costs, membership fees in trade associations,
fidelity bond coverage for its officers and employees, directors' and
officers' errors and omission insurance coverage, interest, brokerage
costs, taxes, stock exchange listing fees and expenses, expenses of
qualifying its shares for sale in various states, litigation and other
extraordinary or non-recurring expenses, and other expenses properly
payable by the Fund.
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
practice, see the SAI under "Portfolio Transactions."
DIVIDEND AND DISTRIBUTION POLICY
DISTRIBUTION POLICY
The Fund's policy is to make quarterly distributions of $0.27 per
share at the end of each of the first three calendar quarters of each year
to holders of its common stock. The Fund's distribution in December for
each calendar year is an adjusting distribution (equal to the sum of 2.5%
of the net asset value of the Fund as of the last day of the four preceding
calendar quarters less the aggregate distributions of $0.81 per share made
for the most recent three calendar quarters) in order to meet the Fund's
10% pay-out goal.
The dividend policy of the Fund may be modified from time to time
by the Board of Directors. As a regulated investment company under the
Code, the Fund will not be subjected to U.S. Federal income tax on its net
investment income that it distributes to shareholders, provided that at
least 90% of its net investment income for the taxable year is distributed
to its shareholders.
The Fund, along with other closed-end registered investment
companies advised by the Investment Adviser has obtained an exemption from
Section 19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund
to make periodic distributions of long-term capital gains provided that the
Fund maintains distribution policies with respect to the common stock and
preferred stock calling for periodic distributions over a specified period
of time in an amount equal to a fixed dollar amount or percentage of the
Fund's average net asset value or market price per share of common stock
or, in the case of the preferred stock, in accordance with its terms. If
the total distributions required by the proposed periodic pay-out policy
exceed the Fund's net investment income and net capital gains, the excess
will be treated as a return of capital. If the Fund's net investment
income, net short-term capital gains and net long-term capital gains for
any year exceed the amount required to be distributed under the proposed
periodic pay-out policy, the Fund generally intends to pay such excess once
a year, but may, in its discretion, retain and not distribute net long-term
capital gains to the extent of such excess.
DESCRIPTION OF SERIES B PREFERRED
The following is a brief description of the terms of the Series B
Preferred. This description does not purport to be complete and is
qualified by reference to the Articles Supplementary, the form of which is
filed as an exhibit to the Fund's Registration Statement. For complete
terms of the Series B Preferred, including definitions of terms used in
this prospectus, please refer to the actual terms of the Series B
Preferred, which are set forth in the Articles Supplementary.
GENERAL
Under the Articles Supplementary, the Fund is authorized to issue
up to 10,000,000 shares of preferred stock as Series B Preferred. No fractional
shares of Series B Preferred will be issued. As of March 31, 2001, there
were 5,368,900 shares of Series A Preferred outstanding. The Board of
Directors reserves the right to issue additional shares of preferred stock,
including Preferred Stock, from time to time, subject to the restrictions
in the Articles Supplementary and the 1940 Act. The shares of Series B
Preferred will, upon issuance, be fully paid and nonassessable and will
have no preemptive, exchange or conversion rights. Any shares of Series B
Preferred repurchased or redeemed by the Fund will be classified as
authorized but unissued preferred stock. The Board of Directors may by
resolution classify or reclassify any authorized but unissued capital stock
of the Fund from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or terms or conditions of redemption. The Fund will not issue any
class of stock senior to the shares of Preferred Stock.
RATING AGENCY GUIDELINES
Moody's has established various requirements in connection with
the Fund's receipt and maintenance of a rating for the Series B Preferred
of 'aaa' by Moody's. Moody's, a nationally-recognized securities rating
organization, issues ratings for various securities reflecting the
perceived creditworthiness of such securities. The requirements utilized
for both the Series A and Series B Preferred have been developed by Moody's
in connection with issuances of asset-backed and similar securities,
including debt obligations and various types of preferred stocks. The
requirements are designed to ensure that assets underlying outstanding debt
or preferred stock will be sufficiently varied and will be of sufficient
quality and amount to justify investment-grade ratings. The requirements do
not have the force of law but are being adopted by the Fund in order for
the above-described rating for the Series B Preferred, which may be relied
upon by investors in determining whether to purchase the Series B Preferred
and at what price in relation to other fixed income securities. The
requirements provide a set of tests for portfolio composition and asset
coverage that supplement (and in some cases are more restrictive than) the
applicable asset coverage requirements of the 1940 Act. Moody's current
guidelines are included in the Articles Supplementary and are referred to
in this prospectus as the "Rating Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain a
level of asset coverage that is at least equal to a Basic Maintenance
Amount set by Moody's. In general terms, the Basic Maintenance Amount (as
of a particular valuation date) is a dollar amount equal to the sum of:
o the total liquidation preference of all outstanding
shares of Preferred Stock;
o the amount of any indebtedness for borrowed money;
o the unpaid dividends due or accruing in respect of such
shares over the next 70 days; and
o current and other liabilities of the Fund due or accruing
over the next 90 days,
reduced by:
o the Fund's cash and
o certain of the Fund's high-grade investments.
In determining asset coverage, the Rating Agency Guidelines give no credit
for certain securities or for shares of a particular issuer in excess of
specified issuer diversification and industry concentration limitations and
apply specified discounts to all other securities (except certain money
market securities) that range from 5% to 75% of the market value of such
securities.
Moody's discounts are based on factors including the sensitivity
of the market value of the relevant asset to changes in interest rates, the
liquidity and depth of the market for the relevant asset, the historical
volatility of common stock prices in general and within particular industry
groups, the credit quality of the relevant asset (for example, the lower
the rating of a corporate debt obligation, the higher the related discount
factor), the frequency with which the relevant asset is marked to market
and the amount of time the Fund may take to cure a failure to meet the
Basic Maintenance Amount test. The Moody's discount percentage relating to
any asset of the Fund, the assets eligible for inclusion in the calculation
of adjusted assets for the purpose of meeting the Basic Maintenance Amount,
and the Basic Maintenance Amount and the definitions and methods of
calculation relating thereto may be changed from time to time by the Board
of Directors, provided that, among other things, such changes will not
impair the rating then assigned to the Series B Preferred by the Moody's.
This feature will permit the Fund to respond to changes required or
permitted by Moody's from time to time without requiring a vote of
stockholders and should enhance the ability of the Fund to earn an
incremental return for the holders of its common stock without impairing
the rating of the Series B Preferred. For a detailed description of these
provisions, which are (or are related to) the Basic Maintenance Amount and
Adjusted Value, see the description in the Articles Supplementary.
If the Fund fails to maintain asset coverage at least equal to the
Basic Maintenance Amount and such failure is not cured by the applicable
cure date, the Fund will be required to redeem some or all of the Preferred
Stock. See "Description of Series B Preferred -- Redemption --
Mandatory Redemption Relating to Asset Coverage Requirements." The
Investment Adviser does not believe that compliance with the Rating Agency
Guidelines will have an adverse effect on its management of the Fund's
portfolio or on the achievement of the Fund's investment objectives. It is
the Fund's present intention to continue to comply with the Rating Agency
Guidelines.
On or before the fifth Business Day after each quarterly valuation
date, the Fund is required to deliver to Moody's a report setting forth
whether the Fund was in compliance with the Rating Agency Guidelines asset
coverage requirements as of the relevant valuation date. Within ten
Business Days after delivery of such report to Moody's and on one other
occasion chosen annually at random by Fund's independent accountants, the
Fund will deliver letters prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in, and certain
other matters relating to, its most recent report.
The Fund may, but is not required to, adopt any modifications to
the Rating Agency Guidelines that may hereafter be established by Moody's.
Failure to adopt such modifications, however, may result in a change in
Moody's rating or a withdrawal of a rating altogether. In addition, Moody's
may, at any time, change or withdraw such rating. However, failure to
comply with the Rating Agency Guidelines included in the Articles
Supplementary would require the Fund to redeem all or part of the Preferred
Stock if such failure to comply is not cured within the specified time
periods.
A preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock obligations. The rating on
the Series B Preferred is not a recommendation to purchase, hold or sell
such shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. Nor do Moody's requirements address
the likelihood that a holder of Series B Preferred will be able to sell
such shares. The rating is based on current information furnished to
Moody's by the Fund and the Investment Adviser and information obtained
from other sources. The rating may be changed, suspended or withdrawn as a
result of changes in, or the unavailability of, such information.
DIVIDENDS
Holders of shares of Series B Preferred will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out
of funds legally available therefor, cumulative cash dividends, at the
annual rate of __% of the liquidation preference of $25 per share,
payable quarterly on March 26, June 26, September 26 and December 26 in
each year or, if any such day is not a Business Day, the next succeeding
Business Day (the "Dividend Payment Date"), commencing on September 26,
2001, to the persons in whose names the shares of Series B Preferred are
registered at the close of business on the fifth preceding Business Day.
Dividends on the shares of Series B Preferred will accumulate from
the date on which such shares are issued; provided, however, that any
shares of Series B Preferred issued within 30 days of the original issue
date of the series, will accumulate dividends from the series' original
date of issue.
No dividends will be declared or paid or set apart for payment on
shares of Series B Preferred for any dividend period or part thereof unless
full cumulative dividends have been or contemporaneously are declared and
paid on all outstanding shares of Preferred Stock through the most recent
dividend payment date thereof. If full cumulative dividends are not paid on
the Preferred Stock, all dividends on the shares of Preferred Stock will be
paid pro rata to the holders of the shares of Preferred Stock in proportion
to the respective amounts of dividends accumulated but unpaid on each such
Series. Holders of Series B Preferred will not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends. No interest, or sum of money in lieu of interest,
will be payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Preferred Stock are outstanding, the
Board of Directors of the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares or rights to purchase shares of stock ranking
junior to the Preferred Stock as to dividends and upon liquidation) in
respect of the common stock or any other stock of the Fund ranking junior
to the Preferred Stock as to dividends and upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any
shares of its common stock or any other stock of the Fund ranking junior to
the Preferred Stock as to dividends and upon liquidation (except by
conversion into or exchange for stock of the Fund ranking junior to the
Preferred Stock as to dividends and upon liquidation), unless, in each
case:
o immediately after such transaction, the Fund will meet
the asset coverage requirements set forth both in the
Rating Agency Guidelines and under the 1940 Act (see "--
Rating Agency Guidelines" above and "-- Asset Maintenance
Requirements" below);
o full cumulative dividends on all shares of Preferred
Stock due on or prior to the date of the transactions
have been declared and paid (or sufficient cash or cash
equivalents to cover such payment have been deposited
with the Dividend-Disbursing Agent); and
o the Fund has redeemed the full number of shares of
Preferred Stock required to be redeemed by any provision
for mandatory redemption contained in the Articles
Supplementary.
ASSET MAINTENANCE REQUIREMENTS
The Fund will be required to satisfy two separate asset
maintenance requirements under the terms of the Articles Supplementary. The
Moody's requirements are summarized under "-- Rating Agency Guidelines"
above. The 1940 Act requirements are summarized below.
The Fund will be required under the Articles Supplementary to
maintain as of the last Business Day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of
at least 200% (or such higher or lower percentage as may be required at the
time under the 1940 Act) with respect to all outstanding senior securities
of the Fund which are stock, including the Series B Preferred. If the Fund
fails to maintain the asset coverage required under the 1940 Act on such
dates and such failure is not cured within 60 days, the Fund will be
required under certain circumstances to redeem shares of Preferred Stock
sufficient to satisfy such asset coverage. See "-- Redemption" below.
If the shares of Series B Preferred offered hereby had been issued
and sold as of December 31, 2000, the asset coverage required under the 1940
Act immediately following such issuance and sale (after giving effect to
the deduction of the underwriting discounts and estimated offering expenses
for such shares of $5,670,825), would have been computed as follows:
value of Fund assets less liabilities not constituting senior
securities ($1,477,592,589) / senior securities representing
indebtedness plus liquidation preference of each class of
preferred stock $299,222,500 = 494%
REDEMPTION
Mandatory Redemption Relating to Asset Coverage Requirements. The
Fund will be required to redeem, at a redemption price equal to $25 per
share plus accumulated and unpaid dividends through the date of redemption
(whether or not earned or declared), shares of Preferred Stock (to the
extent permitted under the 1940 Act and Maryland law) in the event that:
o the Fund fails to maintain the asset coverage
requirements specified under the 1940 Act and such
failure is not cured on or before 60 days following such
failure; or
o the Fund fails to maintain the asset coverage
requirements as calculated in accordance with the Rating
Agency Guidelines as of any valuation date, and such
failure is not cured on or before the 7th day after such
valuation date.
The number of shares of Preferred Stock that will be redeemed in
the case of a mandatory redemption will equal the minimum number of
outstanding shares of Preferred Stock the redemption of which, if such
redemption had occurred immediately prior to the opening of business on the
applicable cure date, would have resulted in the relevant asset coverage
requirement having been met or, if the required asset coverage cannot be so
restored, all of the shares of Preferred Stock. In the event that shares of
Preferred Stock are redeemed due to a failure to satisfy the 1940 Act asset
coverage requirements, the Fund may, but is not required to, redeem a
sufficient number of shares of Preferred Stock so that the Fund's assets
exceed the asset coverage requirements under the 1940 Act after the
redemption by 10% (that is, 220% asset coverage). In the event that shares
of Preferred Stock are redeemed due to a failure to satisfy the Rating
Agency Guidelines, the Fund may, but is not required to, redeem a
sufficient number of shares of Preferred Stock so that the Fund's adjusted
assets (as determined in accordance with the Rating Agency Guidelines)
after redemption exceed the Rating Agency Guidelines' asset coverage
requirements by up to 10%.
If the Fund does not have funds legally available for the
redemption of, or is otherwise unable to redeem, all the shares of
Preferred Stock to be redeemed on any redemption date, the Fund will redeem
on such redemption date that number of shares for which it has legally
available funds, or is otherwise able to redeem ratably from each holder
whose shares are to be redeemed, and the remainder of the shares required
to be redeemed will be redeemed on the earliest practicable date on which
the Fund will have funds legally available for the redemption of, or is
otherwise able to redeem, such shares upon written notice of redemption.
If fewer than all shares of the Preferred Stock are to be
redeemed, the Fund, at its discretion will select the series from which
shares will be redeemed. If fewer than all of the shares of a series of
Preferred Stock are to be redeemed, such redemption will be made pro rata
from each holder of such shares in accordance with the respective number of
shares of such series held by each such holder on the record date for
such redemption. If fewer than all shares of the Preferred Stock held by
any holder are to be redeemed, the notice of redemption mailed to such
holder will specify the number of shares to be redeemed from such holder.
Optional Redemption. Prior to __, 2006, the shares of Series B
Preferred are not subject to any optional redemption by the Fund unless
such redemption is necessary, in the judgment of the Fund, to maintain the
Fund's status as a regulated investment company under the Code. Commencing
__, 2006 and thereafter, the Fund may at any time redeem shares of Series
B Preferred in whole or in part at the redemption price. Such redemptions
are subject to the limitations of the 1940 Act and Maryland law.
Redemption Procedures. A notice of redemption will be given to the
holders of record of Preferred Stock selected for redemption not less than
30 or more than 45 days prior to the date fixed for the redemption. Each
notice of redemption will state (i) the redemption date, (ii) the number of
shares of Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such
shares, (iv) the redemption price, (v) the place or places where such
shares are to be redeemed, (vi) that dividends on the shares to be redeemed
will cease to accrue on such redemption date and (vii) the provision of the
Articles Supplementary under which the redemption is being made. No defect
in the notice of redemption or in the mailing thereof will affect the
validity of the redemption proceedings, except as required by applicable
law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of
the Fund (whether voluntary or involuntary), holders of shares of Series B
Preferred then outstanding will be entitled to receive out of the assets of
the Fund available for distribution to stockholders, after satisfying
claims of creditors but before any distribution or payment of assets is
made to holders of the common stock or any other class of stock of the Fund
ranking junior to the Preferred Stock as to liquidation payments, a
liquidation distribution in the amount of $25 per share, plus an amount
equal to all unpaid dividends accrued to and including the date fixed for
such distribution or payment (whether or not earned or declared by the Fund
but excluding interest thereon), and such holders will be entitled to no
further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. If, upon any liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary or
involuntary, the assets of the Fund available for distribution among the
holders of all outstanding shares of Preferred Stock and any other
outstanding class or series of preferred stock of the Fund ranking on a
parity with the Preferred Stock as to payment upon liquidation, will be
insufficient to permit the payment in full to such holders of Preferred
Stock and other parity preferred stock of the amounts due upon liquidation
with respect to such shares, then such available assets will be distributed
among the holders of Series B Preferred and such other Preferred Stock and
other parity preferred stock ratably in proportion to the respective
preferential amounts to which they are entitled. Unless and until the
liquidation payments due to holders of the Series B Preferred and such
other Preferred Stock and other parity preferred stock have been paid in
full, no dividends or distributions will be made to holders of the common
stock or any other stock of the Fund ranking junior to the Preferred Stock
and other parity preferred stock as to liquidation.
VOTING RIGHTS
Except as otherwise stated in this prospectus and as otherwise
required by applicable law, holders of shares of Series B Preferred, along
with holders of shares of Series A Preferred and any other preferred stock,
will be entitled to one vote per share on each matter submitted to a vote
of stockholders and will vote together with holders of shares of common
stock and of any other preferred stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders
of shares of Series B Preferred, Series A Preferred and any other preferred
stock, voting together as a single class, will be entitled at all times to
elect two of the Fund's directors, and the remaining directors will be
elected by holders of shares of common stock and holders of shares of
Series B Preferred, Series A Preferred and any other preferred stock,
voting together as a single class. In addition, if at any time dividends on
outstanding shares of Series B Preferred, Series A Preferred and/or any
other preferred stock are unpaid in an amount equal to at least two full
years' dividends thereon, then the number of directors constituting the
Board of Directors automatically will be increased by the smallest number
that, when added to the two directors elected exclusively by the holders of
shares of Preferred Stock and any other preferred stock as described above,
would constitute a majority of the Board of Directors as so increased by
such smallest number. Such additional directors will be elected by the
holders of Series B Preferred, Series A Preferred and any other preferred
stock, voting together as a single class, at a special meeting of
stockholders which will be called and held as soon as practicable. The
terms of office of the persons who are directors at the time of that
election will continue. If the Fund thereafter pays, or declares and sets
apart for payment in full, all dividends payable on all outstanding shares
of Preferred Stock and any other preferred stock for all past dividend
periods, the additional voting rights of the holders of shares of Preferred
Stock and any other preferred stock as described above will cease, and the
terms of office of all of the additional or replacement directors elected
by the holders of shares of Preferred Stock and any other preferred stock
(but not of the directors with respect to whose election the holders of
shares of common stock were entitled to vote or the two directors the
holders of shares of Preferred Stock and any other preferred stock have the
right to elect as a separate class in any event) will terminate at the
earliest time permitted by law.
So long as shares of the Series B Preferred are outstanding, the
Fund will not, without the affirmative vote of the holders of a majority
(as defined in the 1940 Act) of the shares of Preferred Stock outstanding
at the time, voting separately as one class, amend, alter or repeal the
provisions of the Fund's Charter, whether by merger, consolidation or
otherwise, so as to materially adversely affect any of the contract rights
expressly set forth in the Charter of holders of shares of the Preferred
Stock or any other preferred stock. Also, to the extent permitted under
the 1940 Act, in the event shares of more than one series of Preferred
Stock are outstanding, the Corporation shall not approve any of the actions
set forth in the preceding sentence which materially adversely affect the
contract rights expressly set forth in the Charter of a holder of shares of
a series of Preferred Stock (such as the Series B Preferred Stock)
differently than those of a holder of shares of any other series of
Preferred Stock without the affirmative vote of the holders of at least a
majority of the shares of Preferred Stock of each series materially
adversely affected and outstanding at such time (each such materially
adversely affected series voting separately as a class). Unless a higher
percentage is provided for under the Charter or applicable provisions of
Maryland General Corporation Law, the affirmative vote of a majority of the
votes entitled to be cast by holders of outstanding shares of the Series B
Preferred, Series A Preferred and any other preferred stock, voting
together as a single class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a
vote of security holders under Section 13(a) of the 1940 Act, including,
among other things, changes in the Fund's investment objective or changes
in the investment restrictions described as fundamental policies under
"Investment Objectives and Policies" and "Investment Restrictions" in the
prospectus and the SAI. For purposes of this paragraph, except as otherwise
required under the 1940 Act, the phrase "vote of the holders of a majority of
the outstanding shares of Preferred Stock" means, in accordance with
Section 2(a)(42) of the 1940 Act, the vote at the annual or a special
meeting of the stockholders of the Fund duly called (A) of 67% or more
of the shares of Preferred Stock present at such meeting, if the holders of
more than 50% of the outstanding shares of Preferred Stock are present or
represented by proxy or (B) more than 50% of the outstanding shares of
Preferred Stock, whichever is less. The class vote of holders of shares of
the Series B Preferred, Series A Preferred and any other preferred stock
described above in each case will be in addition to a separate vote of the
requisite percentage of shares of common stock, Preferred Stock and any
other preferred stock, voting together as a single class, that may be
necessary to authorize the action in question.
Under applicable Maryland law, the holders of Preferred Stock may
take action or consent to any action without holding a meeting by the
written consent of the stockholders entitled to cast not less than the
minimum number of votes that would be necessary to authorize or take the
action at a stockholders meeting if the Fund gives notice of the action to
each stockholder not late than 10 days after the effective time of the
action. Also, the calculation and the elements and definitions of the terms
of the Rating Agency Guidelines may be modified by action of the Board of
Directors without further action by the stockholders if the Board
determines that such modification is necessary to prevent a reduction in
rating of the shares of Preferred Stock by Moody's or is in the best
interests of the holders of shares of common stock and is not adverse to
the holders of Preferred Stock in view of advice to the Fund by Moody's
that such modification would not adversely affect its then current rating
of the shares of Series B Preferred Stock.
The foregoing voting provisions will not apply to any shares of
Series B Preferred if, at or prior to the time when the act with respect to
which such vote otherwise would be required will be effected, such shares
will have been (i) redeemed or (ii) called for redemption and sufficient
cash or cash equivalents provided to the Dividend-Disbursing Agent to
effect such redemption. The holders of Series B Preferred will have no
preemptive rights or rights to cumulative voting.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF
ADDITIONAL PREFERRED STOCK
So long as any shares of Series B Preferred are outstanding and
subject to compliance with the Fund's investment objectives, policies and
restrictions, the Fund may issue and sell one or more series of a class of
senior securities of the Fund representing indebtedness under the 1940 Act
and/or otherwise create or incur indebtedness, provided that the Fund will,
immediately after giving effect to the incurrence of such indebtedness and
to its receipt and application of the proceeds thereof, have an "asset
coverage" for all senior securities of the Fund representing indebtedness,
as defined in the 1940 Act, of at least 300% of the amount of all
indebtedness of the Fund then outstanding and no such additional
indebtedness will have any preference or priority over any other
indebtedness of the Fund upon the distribution of the assets of the Fund or
in respect of the payment of interest. Any possible liability resulting
from lending and/or borrowing portfolio securities, entering into reverse
repurchase agreements, entering into futures contracts and writing options,
to the extent such transactions are made in accordance with the investment
restrictions of the Fund then in effect, will not be considered to be
indebtedness limited by the Articles Supplementary.
So long as any shares of Series B Preferred are outstanding,
subject to receipt of approval from Moody's, and subject to compliance with
the Fund's investment objectives, policies and restrictions, the Fund may
issue and sell shares of one of more other series of preferred stock in
addition to the shares of Series B Preferred, provided that the Fund will,
immediately after giving effect to the issuance of such additional
preferred stock and to its receipt and application of the proceeds thereof,
have an "asset coverage" for all senior securities of the Fund which are
stock, as defined in the 1940 Act, of at least 200% of the sum of the
liquidation preference of the shares of Preferred Stock and all other
preferred stock of the Fund then outstanding and all indebtedness of the
Fund constituting senior securities and no such additional preferred stock
will have any preference or priority over any other preferred stock of the
Fund upon the distribution of the assets of the Fund or in respect of the
payment of dividends.
REPURCHASE OF SERIES B PREFERRED
The Fund is a closed-end investment company and, as such, holders
of Series B Preferred do not, and will not, have the right to redeem their
shares of the Fund. The Fund, however, may repurchase shares of the Series
B Preferred when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and
regulations thereunder and other applicable requirements.
BOOK-ENTRY
Shares of Series B Preferred will initially be held in the name of
Cede & Co ("Cede"), as nominee for The Depository Trust Company ("DTC").
The Fund will treat Cede as the holder of record of the Series B Preferred
for all purposes. In accordance with the procedures of DTC, however,
purchasers of Series B Preferred will be deemed the beneficial owners of
shares purchased for purposes of dividends, voting and liquidation rights.
Purchasers of Series B Preferred may obtain registered certificates by
contacting the Transfer Agent (as defined below).
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
Common Stock. The Fund, which was incorporated under the laws of
the State of Maryland on May 20, 1986, is authorized to issue 200,000,000
shares of capital stock of which 184,000,000 shares are currently classified
as common stock, par value $.001 per share. Each share of common stock has
equal voting, dividend, distribution and liquidation rights. The Fund's
capital stock is subject to reclassification from time to time by the Board
of Directors. The shares of common stock outstanding are fully paid and
nonassessable. Shares of the common stock are not redeemable and have no
preemptive, conversion or cumulative voting rights. The Fund's shares of
common stock are listed and traded on the New York Stock Exchange under the
symbol "GAB."
Preferred Stock. Currently, 16,000,000 shares of the Fund's capital
stock are authorized as preferred stock, par value $.001 per share. The
terms of such preferred stock may be fixed by the Board of Directors and
would materially limit and/or qualify the rights of the holders of the
Fund's common stock. As of December 31, 2000, the Fund had outstanding
5,368,900 shares of Series A Preferred, which, along with the Series B
Preferred being issued in connection with this prospectus, are senior
securities of the Fund. The Series A Preferred is the same class as the
Series B Preferred and is ranked on a parity with the Series B Preferred as
to dividend and liquidation preference. Dividends on the Series A Preferred
accrue at an annual rate of 7.25% of the liquidation preference of $25 per
share, are cumulative from the date of original issuance thereof and are
payable quarterly on March 26, June 26, September 26 and December 26 in
each year. The Series A Preferred is listed and traded on the New York
Stock Exchange under the symbol "GAB Pr."
The Series A Preferred is rated "aaa" by Moody's and the Fund is
required to meet identical asset coverage requirements with respect to the
Series A Preferred as are described in this prospectus for the Series B
Preferred.
As with the Series B Preferred, the Series A Preferred is subject
to mandatory redemption in whole or in part at its redemption price if the
Fund fails to maintain either of the minimum asset coverages required by
Moody's or the 1940 Act. Commencing June 9, 2003 and thereafter, the Fund
at its option may redeem the Series A Preferred in whole or in part for
cash at a price equal to its redemption price. Prior to June 9, 2003, the
Series A Preferred may be redeemed, at the option of the Fund, for a cash
price equal to its redemption price, only to the extent necessary for the
Fund to continue to qualify for tax treatment as a regulated investment
company.
All shares of Series A Preferred are fully paid and nonassessable.
The following table shows the number of shares of (i) capital
stock authorized, (ii) capital stock held by the Fund for its own account
and (iii) capital stock outstanding for each class of authorized securities
of the Fund as of March 31, 2001.
AMOUNT HELD BY
FUND FOR ITS AMOUNT
CLASS OF STOCK AMOUNT AUTHORIZED OWN ACCOUNT OUTSTANDING
-------------- --------------- --------------- -------------
Common Stock........ 184,000,000 shares N/A 126,803,143 shares
Preferred Stock..... 16,000,000 shares N/A 5,368,900 shares*
_______________
* Does not include the Series B Preferred Shares being offered pursuant to
this prospectus.
TAXATION
The following is a description of certain U.S. Federal income tax
consequences to a stockholder of acquiring, holding and disposing of
Preferred Stock of the Fund. The discussion reflects applicable tax laws of
the United States as of the date of this prospectus, which tax laws may be
changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S.
Federal, state, local and foreign tax concerns affecting the Fund and its
stockholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine
the tax consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has 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. As a regulated investment company, the Fund will
not be subject to U.S. Federal income tax on the portion of its net
investment income (i.e., its investment company taxable income as defined
in the Code without regard to the deduction for dividends paid) and its net
capital gain (i.e., the excess of its net realized long-term capital gain
over its net realized short-term capital loss) which it distributes to its
stockholders in each taxable year, provided that it distributes to its
stockholders at least 90% of the sum of its net investment income and any
tax-exempt income for such taxable year.
Qualification as a regulated investment company requires, among
other things, that the Fund: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies or other income (including gains from
options, futures or forward contracts) derived from its business of
investing in stock, securities or currencies and (b) diversify its holdings
so that, at the end of each quarter of each taxable year, subject to
certain exceptions, (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. government securities,
securities of other 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 assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's assets is invested in the securities (other than
U.S. government securities or the securities of other regulated investment
companies) of any one issuer or any two or more issuers that the Fund
controls and which are determined to be engaged in the same or similar
trades or businesses or related trades or businesses.
If the Fund were unable to satisfy the 90% distribution
requirement or otherwise were to fail to qualify to be taxed as a regulated
investment company in any year, the Fund would be subject to tax in such
year on all of its taxable income, whether or not it made any
distributions. To re-qualify to be taxed as a regulated investment company
in a subsequent year, the Fund would be required to distribute to preferred
stockholders and common stockholders its earnings and profits attributable
to non-regulated investment company 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 regulated investment company
for a period greater than one taxable year, then the Fund would be required
to recognize and pay tax on any net built-in gains (the excess of aggregate
gains, including items of income, over aggregate losses that would have
been realized if the Fund had been liquidated) or, alternatively, to elect
to be subject to taxation on such built-in gains recognized for a period
of ten years, in order to qualify as a regulated investment company in a
subsequent year.
Under the Code, amounts not distributed by a regulated investment
company on a timely basis in accordance with a calendar year distribution
requirement are subject to a 4% excise tax. To avoid the tax, the Fund must
distribute during each calendar year an amount at least equal to the sum of
(1) 98% of its ordinary income for the calendar year, (2) 98% of its
capital gain net income (both long-term and short-term) for the one year
period ending on October 31 of such year or, in the case of a fund (such as
the Fund) with a fiscal year ending in November or December that makes an
election, the end of its fiscal year, and (3) all ordinary income and
capital gain net income for previous years that were not previously
distributed or subject to tax under Subchapter M. While the Fund intends to
distribute its ordinary income and capital gain net income in a manner that
will minimize imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's ordinary income and capital gain net
income will be distributed to avoid entirely the imposition of the tax. In
such event, the Fund will be liable for the tax only on the amount by which
it does not meet the foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of its
Articles Supplementary and the 1940 Act, the Fund will be required to
suspend distributions to the holders of the common stock until the asset
coverage is restored. See "Description of Series B Preferred -- Dividends"
and "Description of Capital Stock and Other Securities." Such a suspension
of distributions might prevent the Fund from distributing 90% of its net
investment income, as is required in order to avoid Fund-level Federal
income taxation on the Fund's distributions, or might prevent it from
distributing enough income and capital gain to avoid completely the
imposition of the excise tax. Upon any failure to meet the asset coverage
requirements of its Articles Supplementary or the 1940 Act, the Fund may,
and in certain circumstances will, be required to partially redeem the
shares of Preferred Stock in order to restore the requisite asset coverage
and avoid the adverse consequences to the Fund and its stockholders of
failing to qualify as a regulated investment company. If asset coverage
were restored, the Fund would again be able to pay dividends and would
generally be able to avoid Fund-level Federal income taxation on the income
that it distributes.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund are taxable to stockholders whether
such dividends are paid in cash or paid in additional shares of stock under
the Fund's plan for the automatic reinvestment of dividends. Dividends paid
by the Fund from its net investment income are taxable to stockholders as
ordinary income. Dividends paid from net capital gain (including gains or
losses from certain transactions in warrants, rights, futures and options)
and properly designated by the Fund as capital gain dividends are taxable
to stockholders as long-term capital gains, regardless of the length of
time the stockholder has owned Fund shares. 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
by the stockholder (or credited to the stockholder as an undistributed
capital gain) with respect to such shares. 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).
Capital gain dividends may be taxed at a lower rate than ordinary
income dividends for certain non-corporate taxpayers. See "Tax Attributes
of Preferred Stock Dividends."
Not later than 60 days after the close of its taxable year, the
Fund will provide its stockholders with a written notice designating the
amounts of any ordinary income dividends or capital gain dividends. If the
Fund pays a dividend in January which was declared in the previous October,
November or December to stockholders of record on a specified date in one
of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its stockholders on December 31 of
the year in which such dividend was declared.
Stockholders may be entitled to offset their capital gain
dividends with capital losses. There are a number of statutory provisions
affecting when capital losses may be offset against capital gains, and
limiting the use of losses from certain investments and activities.
Accordingly, stockholders with capital losses are urged to consult their
tax advisers.
Gain or loss, if any, recognized on the sale of other disposition
of shares of the Fund, including, without limitation, a redemption by the
Fund, will be taxed as a capital gain or loss if the shares are capital
assets in the stockholder's hands and will be taxed as long-term or short-
term gain or loss, as the case may be. A loss realized on a sale or
exchange of shares of the Fund will be disallowed if other Fund shares of
the same class are acquired 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.
The Code provides that capital gain recognized on the termination
of a position held as part of a "conversion transaction" will be treated as
ordinary income, to the extent the recognized gain does not exceed the
interest that would have accrued on the net investment in the conversion
transaction at an interest rate prescribed by the Code. A "conversion
transaction," for these purposes, is a transaction substantially all of the
return from which is attributable to the time value of the net investment
in the transaction, and which is marketed as producing capital gains, but
having the characteristics of a loan. Although there are no regulations
construing this provision, the conversion transaction rules would not apply
to an investment in the Series B Preferred because dividends paid with
respect to the Series B Preferred will not constitute gain which is
recognized on the disposition or other termination of any position which
was held as part of a conversion transaction.
Ordinary income dividends (but not capital gain dividends) paid to
stockholders who are non-resident aliens or foreign entities will be
subject to a 30% United States withholding tax under existing provisions of
the Code applicable to foreign individuals and entities unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty law. Non-resident stockholders are urged to consult their own tax
advisers concerning the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate
such taxes.
Under certain provisions of the Code, some stockholders may be
subject to a withholding tax on ordinary income dividends, capital gain
dividends and redemption payments ("backup withholding"). A stockholder,
however, may generally avoid becoming subject to this requirement by filing
an appropriate form with the payor (i.e., the financial institution or
brokerage firm where the stockholder maintains his or her account),
certifying under penalties of perjury that such stockholder's taxpayer
identification number is correct and that such stockholder (i) has never
been notified by the IRS that he or she is subject to backup withholding,
(ii) has been notified by the IRS that he or she is no longer subject to
backup withholding, or (iii) is exempt from backup withholding. Corporate
stockholders and certain other stockholders are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from payments made to a
stockholder may be credited against such stockholder's Federal income tax
liability.
At the time of a stockholder's purchase, the market price of the
Fund's common stock or Preferred Stock may reflect undistributed net
investment income or net capital gain. A subsequent distribution of these
amounts by the Fund will be taxable to the stockholder even though the
distribution economically is a return of part of the stockholder's
investment. Investors should carefully consider the tax implications of
acquiring shares just prior to a distribution, as they will receive a
distribution that would nevertheless be taxable to them.
Since the Fund may invest in foreign securities, its income from
such securities may be subject to non-U.S. taxes. The Fund will not invest
more than 35% of its total assets in foreign securities. Accordingly, the
Fund will not be eligible to elect to "pass-through" to stockholders of the
Fund the ability to use the foreign tax deduction or foreign tax credit for
foreign taxes paid with respect to qualifying taxes. In order to make such
an election, at least 50% of the Fund's total assets would be required to
be invested in foreign securities at the close of the Fund's fiscal year.
Designation of Capital Gain Dividends to Preferred Stock. The IRS
has taken the position in Revenue Ruling 89-81 that if a regulated
investment company has two classes of stock, it may designate distributions
made to each class in any year as consisting of no more than such class's
proportionate share of particular types of income, such as long-term
capital gain. A class's proportionate share of a particular type of income
is determined according to the percentage of total dividends paid by the
regulated investment company during such year that was paid to such class.
Consequently, the Fund will designate distributions made to the common
stock and Preferred Stock and any other preferred stock as consisting of
particular types of income in accordance with the classes' proportionate
shares of such income. Because of this rule, the Fund is required to
allocate a portion of its net capital gain and ordinary investment income
and dividends qualifying for the dividends received deduction to holders of
common stock, Preferred Stock and any other preferred stock. The amount of
net capital gain, ordinary investment income and dividends qualifying for
the dividends received deduction allocable among holders of the common
stock, the Preferred Stock and any other preferred stock will depend upon
the amount of such net capital gain and ordinary investment income and
dividends qualifying for the dividends received deduction realized by the
Fund and the total dividends paid by the Fund on shares of common stock,
Preferred Stock and any other preferred stock during a taxable year.
The Fund believes that under current law the manner in which the
Fund intends to allocate net capital gain, ordinary investment income and
dividends qualifying for the dividends received deduction between shares of
common stock and Preferred Stock will be respected for Federal income tax
purposes. However, the Fund has not requested and will not request direct
guidance from the IRS specifically addressing whether the Fund's method of
allocation will be respected for Federal income tax purposes, and it is
possible that the IRS could disagree with the Fund and attempt to
reallocate the Fund's net capital gain, ordinary investment income and
dividends qualifying for the dividends received deduction.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations presently in
effect. A more complete discussion of the tax rules applicable to the Fund
can be found in the SAI which is incorporated by reference into this
prospectus. For the complete provisions applicable to both stockholders and
the Fund, 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.
CERTAIN PROVISIONS OF THE CHARTER AND BY LAWS
The Fund presently has provisions in its Charter and By Laws which
could have the effect of limiting, in each case:
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 Directors or shareholders to amend
the Charter and By Laws or effectuate changes in the Fund's
management.
These provisions may be regarded as "anti-takeover" provisions. The Board
of Directors of the Fund is divided into three classes, each having a term
of no more than three years. Each year the term of one class of Directors
will expire. Accordingly, only those Directors in one class may be changed
in any one year, and it would require two years to change a majority of the
Board of Directors. Such system of electing Directors may have the effect
of maintaining the continuity of management and, thus, make it more
difficult for the shareholders of the Fund to change the majority of
Directors. See "Management of the Fund" in the SAI. A Director of the Fund
may be removed, but only with cause and by a vote of a majority of the
votes entitled to be cast for the election of Directors of the Fund.
In addition, the affirmative vote of the holders of 66 2/3% of the
Fund's outstanding shares of each class is required to authorize the
conversion of the Fund from a closed-end to an open-end investment company
or generally to authorize any of the following transactions:
o the merger or consolidation of the Fund with any entity;
o the issuance of any securities of the Fund for cash to
any entity or person;
o the sale, lease or exchange of all or any substantial
part of the assets of the Fund to any entity or person
(except assets having an aggregate fair market value of
less than $1,000,000); or
o the 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 $1,000,000);
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares
of any class of capital stock of the Fund. However, such vote would not be
required when, under certain conditions, the Board of Directors approves
the transaction. Reference is made to the Charter and By Laws of the Fund,
on file with the Securities and Exchange Commission.
The provisions of the Charter and By Laws 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 Board of
Directors has determined that the foregoing voting requirements, which are
generally greater than the minimum requirements under Maryland law and the
1940 Act, are in the best interests of the shareholders generally.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Boston Safe Deposit and Trust Company, located at One Boston
Place, Boston, Massachusetts 02019, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement, the
Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon the average
weekly value of the total assets of the Fund, plus certain charges for
securities transactions.
State Street Bank and Trust Company, located at Two Heritage
Drive, Quincy, Massachusetts 02171, serves as the Fund's dividend-disbursing
agent, as agent under the Fund's dividend reinvestment plan and as transfer
agent and registrar for shares of the Fund.
UNDERWRITING
Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Gabelli & Company, Inc are acting as representatives of
the underwriters named below. Subject to the terms and conditions stated in
the underwriting agreement dated the date of this prospectus, each
underwriter named below has agreed to purchase, and the Fund has agreed to
sell to that underwriter, the number of shares of Series B Preferred set
forth opposite the underwriter's name.
Underwriter Number
----------- of Shares
---------
Salomon Smith Barney Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Gabelli & Company, Inc. _______
Total
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of Series B Preferred included in this
offering are subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the shares if
they purchase any of the shares.
The underwriters propose to offer some of the shares of Series B
Preferred directly to the public at the public offering price set forth on
the cover page of this prospectus and some of the shares to dealers at the
public offering price less a concession not to exceed $ per share. The
underwriters may allow, and dealers may reallow, a concession not to exceed
$ per share on sales to other dealers. If all of the shares are not sold at
the initial offering price, the representatives may change the public
offering price and the other selling terms.
The underwriting discount of $_____ per share is equal to ___% of
the initial offering price. Investors must pay for any shares of Series B
Preferred on or before _________.
Prior to the Offering, there has been no public market for the
Series B Preferred. Application has been made to list the Series B
Preferred on the New York Stock Exchange. However, during an initial period
which is not expected to exceed 30 days after the date of this prospectus,
the Series B Preferred will not be listed on any securities exchange.
During such period, the underwriters intend to make a market in the Series
B Preferred; however, they have no obligation to do so. Consequently, an
investment in the Series B Preferred may be illiquid during such period.
In connection with the offering, certain of the underwriters may
purchase and sell shares of Series B Preferred in the open market. These
transactions may include short sales and stabilizing transactions. Short
sales involve syndicate sales of shares in excess of the number of shares
to be purchased by the underwriters in the offering, which creates a
syndicate short position. Stabilizing transactions consist of bids for or
purchases of shares in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate
member when the underwriters repurchase shares originally sold by that
syndicate member in order to cover syndicate short positions or make
stabilizing purchases.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of the stock. They may also cause
the price of the Series B Preferred to be higher than the price that would
otherwise exist in the open market in the absence of these transactions.
The underwriters may conduct these transactions on the New York Stock
Exchange or in the over-the-counter market, or otherwise. If the
underwriters commence any of these transactions, they may discontinue them
at any time.
The underwriters have performed investment banking and advisory
services for the Fund from time to time for which they have received
customary fees and expenses. The underwriters may, from time to time,
engage in transactions with and perform services for the Fund in the
ordinary course of their business.
The underwriters have acted in the past and may continue to act
from time to time during and subsequent to the completion of the offering
of Series B Preferred hereunder as a broker or dealer in connection with
the execution of portfolio transactions for the Fund.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli
Securities, Inc., which is a majority-owned subsidiary of the parent
company of the Investment Adviser which is, in turn, indirectly
majority-owned by Mario J. Gabelli. As a result of these relationships, Mr.
Gabelli, the Fund's President and Chief Investment Officer, may be deemed
to be a "controlling person" of Gabelli & Company, Inc.
The Fund has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make because of
any of those liabilities.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Series B Preferred will be passed on by Miles & Stockbridge P.C.,
Baltimore, Maryland. Certain legal matters will be passed on by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York, special counsel to the
Fund in connection with the offering of the Series B Preferred, and by
Simpson Thacher & Bartlett, New York, New York, counsel to the
underwriters. Skadden, Arps, Slate, Meagher & Flom LLP and Simpson Thacher
& Bartlett will each rely as to matters of Maryland law on the opinion of
Miles & Stockbridge P.C.
EXPERTS
The audited financial statements of the Fund as of December 31,
2000 have been incorporated by reference into the SAI in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing. The report of
PricewaterhouseCoopers LLP is included in the SAI. PricewaterhouseCoopers LLP
is located at 1177 Avenue of the Americas, New York, New York 10036.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act and in
accordance therewith files reports and other information with the
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;
Seven World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Chicago, Illinois 60661. 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 stock and Series A Preferred are listed on the
New York Stock Exchange, and reports, proxy statements and other
information concerning the Fund and filed with the Securities and Exchange
Commission by the Fund can be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a Registration Statement filed
by the Fund with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act. This prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to
the Registration Statement and related exhibits for further information
with respect to the Fund and the Series B Preferred offered hereby. Any
statements contained herein concerning the provisions of any document are
not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Securities and Exchange Commission. Each such
statement is qualified in its entirety by such reference. The complete
Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by its rules and regulations
or free of charge through the Securities and Exchange Commission's web site
(http://www.sec.gov).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance
or achievements of the Fund to be materially different from any future
results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, those listed under "Risk Factors" and elsewhere in this prospectus.
As a result of the foregoing and other factors, no assurance can be given
as to the future results, levels of activity or achievements, and neither
the Fund nor any other person assumes responsibility for the accuracy and
completeness of such statements.
TABLE OF CONTENTS OF SAI
An SAI dated , 2001 has been filed with the Securities and
Exchange Commission and is incorporated by reference in this prospectus. An
SAI may be obtained without charge by writing to the Fund at its address at
One Corporate Center, Rye, New York 10580-1434 or by calling the Fund
toll-free at (800) GABELLI (422-3554). The Table of Contents of the SAI is
as follows:
PAGE
INVESTMENT OBJECTIVES AND POLICIES ....................... B-2
INVESTMENT RESTRICTIONS................................... B-14
MANAGEMENT OF THE FUND.................................... B-16
PORTFOLIO TRANSACTIONS ................................... B-24
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN............................ B-25
TAXATION ................................................. B-27
MOODY'S DISCOUNT FACTORS ................................. B-32
NET ASSET VALUE........................................... B-36
BENEFICIAL OWNERS......................................... B-37
GENERAL INFORMATION....................................... B-38
FINANCIAL STATEMENTS...................................... B-40
================================================
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 shall, under any circumstances, create any
implication that there has been no change in the affairs of the Fund since
the date hereof or that the information contained herein is correct as of
any time subsequent to its date. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other
than the securities to which it relates. This prospectus does not
constitute an offer to sell or the solicitation of an offer to buy such
securities in any circumstance in which such an offer or solicitation is
unlawful.
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than in Aaa
Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future Uncertainty of position characterizes bonds in
this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small. Moody's applies numerical modifiers
(1, 2, and 3) with respect to the bonds rated "Aa" through "B."
The modifier 1 indicates that the company ranks in the higher end
of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company
ranks in the lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation, and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated C 1 is reserved for income
bonds on which no interest is being paid and debt rated D is in payment
default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other obligations
that S&P believes may experience high variability in expected returns due
to noncredit risks created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that
there is insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of policy.
You should rely only on the information contained in or
incorporated by reference into this Prospectus. Neither the Fund nor the
underwriters have authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. Neither the Fund nor the
underwriters are making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this Prospectus is accurate as of the
date on the front cover of this Prospectus only.
------------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.................................................. 1
Tax Attributes of Preferred Stock Dividends......................... 6
Financial Highlights................................................ 8
Use of Proceeds..................................................... 11
The Fund............................................................ 11
Investment Objectives and Policies.................................. 11
Risk Factors and Special
Considerations................................................. 14
Management of the Fund.............................................. 17
Portfolio Transactions.............................................. 19
Dividend and Distribution Policy.................................... 19
Description of Series B Preferred................................... 20
Description of Capital Stock and Other
Securities..................................................... 27
Taxation............................................................ 27
Certain Provisions of the Charter and
By Laws........................................................ 31
Custodian, Transfer Agent and
Dividend-Disbursing Agent...................................... 32
Underwriting........................................................ 33
Legal Matters....................................................... 34
Experts............................................................. 34
Additional Information.............................................. 34
Special Note Regarding Forward-Looking Statements................... 35
Table of Contents of SAI............................................ 36
Appendix A.......................................................... A-1
===============================================================================
6,600,000 Shares
THE GABELLI EQUITY TRUST INC.
% Tax Advantaged Series B Cumulative Preferred Stock
------------------
PROSPECTUS
_______, 2001
_________
Salomon Smith Barney Inc.
Merrill Lynch & Co.
Gabelli & Company, Inc.
Subject to Completion, Dated , 2001
THE GABELLI EQUITY TRUST INC.
-------------------
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Equity Trust Inc. (the "Fund") is a non-diversified,
closed-end management investment company that seeks long-term growth of
capital by investing primarily in a portfolio of equity securities selected
by Gabelli Funds, LLC, the investment adviser to the Fund. Income is a
secondary investment objective. It is the policy of the Fund, under normal
market conditions, to invest at least 65% of its total assets in 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 _______ __, 2001. This SAI does not include any information that
a prospective investor should consider before purchasing shares of the
Fund, and 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 1-800-GABELLI (1-800-422-3554) or (914) 921-5070.
This SAI incorporates by reference the entire prospectus.
-------------------
TABLE OF CONTENTS
Page
-------------------------------------------------------------------------------
Investment Objectives and Policies.........................................B-2
Investment Restrictions....................................................B-14
Management of the Fund.....................................................B-16
Portfolio Transactions.....................................................B-24
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan...........B-25
Taxation...................................................................B-27
Moody's Discount Factors...................................................B-32
Net Asset Value............................................................B-36
Beneficial Owners..........................................................B-37
General Information........................................................B-38
Financial Statements.......................................................B-40
The prospectus and this SAI omit certain of the information
contained in the registration statement filed with the Securities and
Exchange Commission, Washington, D.C. The registration statement may be
obtained from the Securities and Exchange Commission upon payment of the
fee prescribed, or inspected at the Securities and Exchange Commission's
office at no charge.
This SAI is dated _______, __, 2001.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is long-term growth of
capital. Income is a secondary objective. Under normal market conditions,
the Fund will invest at least 65% of its total assets in equity securities.
See "Investment Objectives and Policies" in the prospectus.
INVESTMENT PRACTICES
Special Situations. Subject to the Fund's policy of investing at
least 65% of its total assets in companies on the basis of fundamental
value, the Fund from time to time may, as a non-principal investment
strategy, invest in companies that are determined by Gabelli Funds, LLC
(the "Investment Adviser") to possess "special situation" characteristics.
In general, a special situation company is a company whose securities are
expected to increase in value solely by reason of a development
particularly or uniquely applicable to the company. Developments that may
create special situations include, among others, a liquidation,
reorganization, recapitalization or merger, material litigation,
technological breakthrough or new management or management policies. The
principal risk associated with investments in special situation companies
is that the anticipated development thought to create the special situation
may not occur and the investment therefore may not appreciate in value or
may decline in value.
Temporary Investments. Although under normal market conditions at
least 65% of the Fund's assets will consist of equity securities, including
common stock, preferred stock, convertible securities, options and
warrants, when a temporary defensive posture is believed by the Investment
Adviser to be warranted ("temporary defensive periods"), the Fund may hold
without limitation 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 United
States government, its agencies or instrumentalities ("U.S. Government
Securities"); commercial paper rated A-1 or higher by Standard & Poor's
Ratings Services ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("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. For a description of such ratings, see Appendix A to
the prospectus. The Fund may also invest up to 10% of the market value of
its total assets during temporary defensive periods in shares of money
market mutual funds that invest primarily in U.S. Government Securities and
repurchase agreements in respect of those securities. Money market mutual
funds are investment companies and the investments by the Fund in those
companies are subject to certain other limitations. See "Investment
Restrictions." As a shareholder in a mutual fund, the Fund will bear its
ratable share of the fund's expenses, including management fees, and will
remain subject to payment of the fees to the investment advisers with
respect to assets so invested.
Lower Rated Securities. The Fund may invest up to 10% of its total
assets in fixed-income securities rated in the lower rating categories of
recognized statistical rating agencies, such as securities rated "CCC" or
lower by S&P or "Caa" or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions and are often referred to
in the financial press as "junk bonds."
Generally, such lower rated securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher
rated securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the 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 lower rated securities and comparable unrated securities
generally present a higher degree of credit risk. The risk of loss due to
default by these issuers is significantly greater because such lower rated
securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, the Investment Adviser, in
evaluating the creditworthiness of an issue, whether rated or unrated, will
take various factors into consideration, which may include, as applicable,
the issuer's financial resources, its sensitivity to economic conditions
and trends, the operating history of and the community support for the
facility financed by the issue, the ability 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 market value to respond to changes in the economy
or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a
typical 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 bonds 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.
The Fund may invest in securities of issuers in default. The Fund
will invest in securities of issuers in default only when the Investment
Adviser believes that such issuers will honor their obligations 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 appreciate.
In addition to using recognized rating agencies and other sources,
the Investment Adviser also performs its own analysis 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 not change their ratings of a
particular issue or 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 certain lower rated and comparable unrated
securities has in the past experienced a major economic recession. The
recession adversely affected the value of such securities as well as the
ability of certain issuers of such securities to repay principal and pay
interest thereon. The market for those securities could react in a similar
fashion in the event of any future economic recession.
As a result of all these factors, the net asset value of the Fund,
to the extent it invests in high yield bonds, is expected to be more
volatile than the net asset value of funds which invest solely in higher
rated debt securities.
Options. 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 to sell the security or currency to the
writer and obligating the writer to purchase the underlying security or
currency from the holder.
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 instrument 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 (1) equal to or less than the exercise price of the call written or
(2) 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 held 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 held with its custodian, or else holds a put on the
same instrument as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation
by effecting a closing purchase transaction. This is accomplished by
purchasing an option of the same series as the option previously written.
However, once it has been assigned an exercise notice, the Fund will 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 a
closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from writing the
option or is more than the premium paid to purchase the option; the Fund
will realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the option or is
less than the premium paid to purchase the option. Since call option prices
generally reflect increases in the price of the underlying security, any
loss resulting from the repurchase of a call option may also be wholly or
partially offset by unrealized appreciation of the underlying security.
Other principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current market price
and price volatility of the underlying security and the time remaining
until the expiration date. Gains and losses on investments in options
depend, in part, on the ability of the Investment Adviser to predict
correctly the effect of these factors. The use of options cannot serve as a
complete hedge since the price movement of securities underlying the
options will not necessarily follow the price movements of the portfolio
securities subject to the hedge.
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular
option. In such event, it might not be possible to effect closing
transactions in particular options, so that the Fund would have to exercise
its options in order to realize any profit and would incur brokerage
commissions upon the exercise of call options and upon the subsequent
disposition of underlying securities for the exercise of put options. If
the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase
and sell call and put options on securities indices. A stock index reflects
in a single number the market value of many different stocks. Relative
values are assigned to the stocks included in an index and the index
fluctuates with changes in the market values of the stocks. The options
give the holder the right to receive a cash settlement during the term of
the option based on the difference between the exercise price and the value
of the index. By writing a put or call option on a securities index, the
Fund is obligated, in return for the premium received, to make delivery of
this amount. The Fund may offset its position in the stock index options
prior to expiration by entering into a closing transaction on an exchange
or it may let the option expire unexercised.
The Fund also may buy or sell and call options on foreign
currencies. A put option on a foreign currency gives the purchaser of the
option the right to sell a foreign currency at the exercise price until the
option expires. A call option on a foreign currency gives the purchaser of
the option the right to purchase the currency at the exercise price until
the option expires. Currency options traded on U.S. or other exchanges may
be subject to position limits which may limit the ability of the Fund to
reduce foreign currency risk using such options. Over-the-counter options
differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller and
generally do not have as much market liquidity as exchange-traded options.
Over-the-counter options are illiquid securities.
Use of options on securities indices entails the risk that trading
in the options may be interrupted if trading in certain securities included
in the index is interrupted. The Fund will not purchase these options
unless the Investment Adviser is satisfied with the development, depth and
liquidity of the market and the Investment Adviser believes the options can
be closed out.
Price movements in the portfolio of the Fund may not correlate
precisely with movements in the level of an index and, therefore, the use
of options on indexes cannot serve as a complete hedge and will depend, in
part, on the ability of the Investment Adviser to predict correctly
movements in the direction of the stock market generally or of a particular
industry. Because options on securities indexes require settlement in cash,
the Investment Adviser may be forced to liquidate portfolio securities to
meet settlement obligations.
Although the Investment Adviser will attempt to take appropriate
measures to minimize the risks relating to the Fund's writing of put and
call options, there can be no assurance that the Fund will succeed in any
option writing program it undertakes.
Futures Contracts and Options on Futures. The Fund will not enter
into futures contracts or options on futures contracts unless (i) the
aggregate initial margins and premiums do not exceed 5% of the fair market
value of its assets and (ii) the aggregate market value of its outstanding
futures contracts and the market value of the currencies and futures
contracts subject to outstanding options written by the Fund, as the case
may be, do not exceed 50% of the market value of its total assets. It is
anticipated that these investments, if any, will be made by the Fund solely
for the purpose of bona fide 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 assets
underlying the contract at a specified price at a specified future time. A
"purchaser" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the assets underlying the
contract at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis
rather than by the sale and delivery of the assets underlying the futures
contracts.
No consideration will be paid or received by the Fund upon the
purchase or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker an amount of cash or cash equivalents
equal to approximately 1% to 10% of the contract amount (this amount is
subject to change by the exchange or board of trade on which the contract
is traded and brokers or members of such board of trade may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract. Subsequent
payments, known as "variation margin," to and from the broker will be made
daily as the price of the index or security underlying the futures contract
fluctuates. At any time prior to the expiration of a 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 to the expiration of the option.
Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account
attributable to that contract, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option
on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option purchased is fixed at
the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value
of the option does change daily and that change would be reflected in the
net assets of the Fund.
Futures and options on futures entail certain risks, including but
not limited to the following: no assurance that futures contracts or
options on futures can be offset at favorable prices, possible reduction of
the yield of the Fund due to the use of hedging, possible reduction in
value of both the securities hedged and the hedging instrument, possible
lack of liquidity due to daily limits on price fluctuations, imperfect
correlation between the contracts and the securities being hedged, losses
from investing in futures transactions that are potentially unlimited and
the segregation requirements described below.
In the event the Fund sells a put option or enters into long
futures contracts, under current interpretations of the Investment Company
Act of 1940, as amended (the "1940 Act") an amount of cash or liquid
securities equal to the market value of the contract must be deposited and
maintained in a segregated account with the custodian of the Fund to
collateralize the positions, thereby ensuring that the use of the contract
is unleveraged. For short positions in futures contracts and sales of call
options, the Fund may establish a segregated account (not with a futures
commission merchant or broker) with cash or liquid securities that, when
added to amounts deposited with a futures commission merchant or a broker
as margin, equal the market value of the instruments or currency underlying
the futures contract or call options, respectively (but are not less than
the stock price of the call option or the market price at which the short
positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may
purchase or sell interest rate futures contracts to take advantage of or to
protect the Fund against fluctuations in interest rates affecting the value
of debt securities which the Fund holds or intends to acquire. For example,
if interest rates are expected to increase, the Fund might sell futures
contracts on debt securities, the values of which historically have a high
degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an
equivalent value of the Fund's portfolio securities. If interest rates
increase, the value of the Fund's portfolio securities will decline, but
the value of the futures contracts to the Fund will increase at
approximately an equivalent rate thereby keeping the net asset value of the
Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities with longer
maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a
risk management technique allows the Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts
when it is expected that interest rates may decline. The purchase of
futures contracts for this purpose constitutes a hedge against increases in
the price of debt securities (caused by declining interest rates) which the
Fund intends to acquire. Since fluctuations in the value of appropriately
selected futures contracts should approximate that of the debt securities
that will be purchased, the Fund can take advantage of the anticipated rise
in the cost of the debt securities without actually buying them.
Subsequently, the Fund can make its intended purchase of the debt
securities in the cash market and currently liquidate its futures position.
To the extent the Fund enters into futures contracts for this purpose, it
will maintain in a segregated asset account with the Fund's custodian,
assets sufficient to cover the Fund's obligations with respect to such
futures contracts, which will consist of cash or other liquid securities
from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value
of the initial margin deposited by the Fund with its custodian with respect
to such futures contracts.
The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to
declining interest rates.
The purchase of a put option on a futures contract is similar to
the purchase of protective put options on portfolio securities. The Fund
will purchase a put option on a futures contract to hedge the Fund's
portfolio against the risk of rising interest rates and consequent
reduction in the value of portfolio securities.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which 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 which the Fund intends
to purchase. If a put or call option the Fund has written is exercised, the
Fund will incur a loss which will be reduced by the amount of the premium
it received. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from options on futures it has written may to
some extent be reduced or increased by changes in the value of its
portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency
futures contracts and options thereon are similar to the interest rate
futures contracts and options thereon discussed previously. By entering
into currency futures and options thereon, the Fund will seek to establish
the rate at which it will be entitled to exchange U.S. dollars for another
currency at a future time. By selling currency futures, the Fund will seek
to establish the number of dollars it will receive at delivery for a
certain amount of a foreign currency. In this way, whenever the Fund
anticipates a decline in the value of a foreign currency against the U.S.
dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or
all of the securities held in its portfolio that are denominated in that
currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus, if the Fund intends to buy securities in
the future and expects the U.S. dollar to decline against the relevant
foreign currency during the period before the purchase is effected, the
Fund can attempt to "lock in" the price in U.S. dollars of the securities
it intends to acquire.
The purchase of options on currency futures will allow the Fund,
for the price of the premium and related transaction costs it must pay for
the option, to decide whether or not to buy (in the case of a call option)
or to sell (in the case of a put option) a futures contract at a specified
price at any time during the period before the option expires. If the
Investment Adviser, in purchasing an option, has been correct in its
judgment concerning the direction in which the price of a foreign currency
would move as against the U.S. dollar, the Fund may exercise the option and
thereby take a futures position to hedge against the risk it had correctly
anticipated or close out the option position at a gain that will offset, to
some extent, currency exchange losses otherwise suffered by the Fund. If
exchange rates move in a way the Fund did not anticipate, however, the Fund
will have incurred the expense of the option without obtaining the expected
benefit; any such movement in exchange rates may also thereby reduce rather
than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases
or sales of securities index futures contracts are used for hedging
purposes to attempt to protect the Fund's current or intended investments
from broad fluctuations in stock or bond prices. For example, the Fund may
sell securities index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the
Fund's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole
or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market
advance, it may purchase securities index futures contracts in order to
gain rapid market exposure that may, in part or entirely, offset increases
in the cost of securities that the Fund intends to purchase. As such
purchases are made, the corresponding positions in securities index futures
contracts will be closed out. The Fund may write put and call options on
securities index futures contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts and
Options on Futures Contracts. Subject to the guidelines of the Board of
Directors, the Fund may engage in transactions in futures contracts and
options hereon only for bona fide hedging, yield enhancement and risk
management purposes, in each case in accordance with the rules and
regulations of the CFTC, and not for speculation.
Regulations of the CFTC applicable to the Fund permit the Fund's
futures and options on futures transactions to include (i) bona fide
hedging transactions without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) non-hedging transactions,
provided that the Fund not enter into such non-hedging transactions if,
immediately thereafter, the sum of the amount of initial margin deposits on
the Fund's existing futures positions and option premiums would exceed 5%
of the market value of the Fund's liquidating value, after taking into
account unrealized profits and unrealized losses on any such transactions.
Forward Currency Exchange Contracts. The Fund may engage in
currency transactions otherwise than on futures exchanges to protect
against future changes in the level of future currency exchange rates. The
Fund will conduct such currency exchange transactions either on a spot,
i.e., cash, basis at the rate then prevailing in the currency exchange
market or on a forward basis, by entering into forward contracts to
purchase or sell currency. A forward contract on foreign currency involves
an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days agreed upon by the parties from the
date of the contract, at a price set on the date of the contract. The risk
of shifting of a forward currency contract will be substantially the same
as a futures contract having similar terms. The Fund's dealing in forward
currency exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or
sale of forward currency with respect to specific receivables or payables
of the Fund generally arising in connection with the purchase or sale of
its portfolio securities and accruals of interest receivable and Fund
expenses. Position hedging is the forward sale of currency with respect to
portfolio security positions denominated or quoted in that currency or in a
currency bearing a high degree of positive correlation to the value of that
currency.
The Fund may not position hedge with respect to a particular
currency for an amount greater than the aggregate market value (determined
at the time of making any sale of forward currency) of the securities held
in its portfolio denominated or quoted in, or currently convertible into,
such currency. If the Fund enters into a position hedging transaction, the
Fund's custodian or subcustodian will place cash or other liquid securities
in a segregated account of the Fund in an amount equal to the value of the
Fund's total assets committed to the consummation of the given forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so
that the value of the account will, at all times, equal the amount of the
Fund's commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may
either sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligations to deliver the
currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency which it
is obligated to delivery. If the Fund retains the portfolio security and
engages in an offsetting transaction, the Fund, at the time of execution of
the offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices. Should forward prices
decline during the period between the Fund's entering into a forward
contract for the sale of a currency and the date it enters into an
offsetting contract for the purchase of the currency, the Fund will realize
a gain to the extent the price of the currency it has agreed to purchase is
less than the price of the currency it has agreed to sell. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The cost to the Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward
transactions in currency exchange are usually conducted on a principal
basis, no fees or commissions are involved. The use of foreign currency
contracts does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved
in the future. In addition, although forward currency contracts limit the
risk of loss due to a decline in the value of the hedged currency, they
also limit any potential gain that might result if the value of the
currency increases.
If a decline in any currency is generally anticipated by the
Investment Adviser, the Fund may not be able to contract to sell the
currency at a price above the level to which the currency is anticipated to
decline.
Special Risk Considerations Relating to Futures and Options
Thereon. The Fund's ability to establish and close out positions in futures
contracts and options thereon will be subject to the development and
maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there
appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option
thereon at any particular time. In the event no liquid market exists for a
particular futures contract or option thereon in which the Fund maintains a
position, it will not be possible to effect a closing transaction in that
contract or to do so at a satisfactory price and the Fund would have to
either make or take delivery under the futures contract or, in the case of
a written option, wait to sell the underlying securities until the option
expires or is exercised or, in the case of a purchased option, exercise the
option. In the case of a futures contract or an option thereon which the
Fund has written and which the Fund is unable to close, the Fund would be
required to maintain margin deposits on the futures contract or option
thereon and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon and
forward contracts by the Fund is subject to the ability of the Investment
Adviser to predict correctly movements in the direction of interest and
foreign currency rates. If the Investment Adviser's expectations are not
met, the Fund will be in a worse position than if a hedging strategy had
not been pursued. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would adversely affect
the price of securities in its portfolio and the price of such securities
increases instead, the Fund will lose part or all of the benefit of the
increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may have
to sell securities to meet the requirements. These sales may be, but will
not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous
to do so.
Additional Risks of Foreign Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts. Options, futures contracts and
options thereon and forward contracts on securities and currencies may be
traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political, legal and economic factors, (ii)
lesser availability than in the U.S. of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in the foreign markets during non-business hours in the U.S.,
(iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (v) lesser trading
volume.
Exchanges on which options, futures and options on futures are
traded may impose limits on the positions that the Fund may take in certain
circumstances.
Risks of Currency Transactions. Currency transactions are also
subject to risks different from those of other portfolio transactions.
Because currency control is of great importance to the issuing governments
and influences economic planning and policy, purchases and sales of
currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency,
and manipulation, or exchange restrictions imposed by governments. These
forms of governmental action can result in losses to the Fund if it is
unable to deliver or receive currency or monies in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring
transaction costs.
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 may only enter into a forward commitment with the intention of
actually acquiring the security, the Fund may sell the security before the
settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to
market fluctuation, and no interest (or dividends) accrues to the Fund
prior to the settlement date. The Fund will segregate with its custodian
cash or liquid securities in an aggregate amount at least equal to the
amount of its outstanding forward commitments.
Restricted and Illiquid Securities. The Fund may invest up to a
total of 10% of its net assets in securities that are subject to
restrictions on resale and securities the markets for which are illiquid,
including repurchase agreements with more than seven days to maturity.
Illiquid securities include securities the disposition of which is subject
to substantial legal or contractual restrictions. The sale of illiquid
securities often requires more time and results in higher brokerage charges
or dealer discounts and other selling expenses than does the sale of
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower
than similar securities that are not subject to restrictions on resale.
Unseasoned issuers are companies (including predecessors) that have
operated less than three years. The continued liquidity of such securities
may not be as well assured as that of publicly traded securities, and
accordingly the Board of Directors will monitor their liquidity. The Board
will review pertinent factors such as trading activity, reliability of
price information and trading patterns of comparable securities in
determining whether to treat any such security as liquid for purposes of
the foregoing 10% test. To the extent the Board treats such securities as
liquid, temporary impairments to trading patterns of such securities may
adversely affect the Fund's liquidity.
In accordance with pronouncements of the Securities and Exchange
Commission, the Fund may invest in restricted securities that can be traded
among qualified institutional buyers under Rule 144A under the Securities
Act of 1933 without registration under the Securities Act and may treat
them as liquid for purposes of the foregoing 10% test if such securities
are found to be liquid. The Board of Directors has adopted guidelines and
delegated to the Investment Adviser, subject to the supervision of the
Board of Directors, the function of determining and monitoring the
liquidity of particular Rule 144A securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that cannot be changed without the affirmative vote of
the holders of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act). 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 elimination of any security from the portfolio.
The Fund may not:
1. Invest 25% or more of its total assets, taken at
market value at the time of each investment, in the securities of
issuers in any particular industry. This restriction does not
apply to investments in U.S. Government Securities.
2. Purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization, if more than 10% of the market value of the total
assets of the Fund would be invested in securities of other
investment companies, more than 5% of the market value of the
total assets of the Fund would be invested in the securities of
any one investment company or the Fund would own more than 3% of
any other investment company's securities; provided, however, this
restriction shall not apply to securities of any investment
company organized by the Fund that are to be distributed pro rata
as a dividend to its shareholders.
3. Purchase or sell commodities or commodity contracts
except that the Fund may purchase or sell futures contracts and
related options thereon if immediately thereafter (i) no more than
5% of its total assets are invested in margins and premiums and
(ii) the aggregate market value of its outstanding futures
contracts and market value of the currencies and futures contracts
subject to outstanding options written by the Fund do not exceed
50% of the market value of its total assets. The Fund may not
purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued
by companies which invest in real estate or interests therein.
4. Purchase any securities on margin or make short sales,
except that the Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio
securities.
5. Make loans of money, except by the purchase of a
portion of publicly distributed debt obligations in which the Fund
may invest, and repurchase agreements with respect to those
obligations, consistent with its investment objectives and
policies. The Fund reserves the authority to make loans of its
portfolio securities to financial intermediaries in an aggregate
amount not exceeding 20% of its total assets. Any such loans may
only be made upon approval of, and subject to any conditions
imposed by, the Board of Directors of the Fund. Because these
loans would at all times be fully collateralized, the risk of loss
in the event of default of the borrower should be slight.
6. Borrow money, except that the Fund may borrow from
banks and other financial institutions on an unsecured basis, in
an amount not exceeding 10% of its total assets, to finance the
repurchase of its shares. The Fund also may borrow money on a
secured basis from banks as a temporary measure for extraordinary
or emergency purposes. Temporary borrowings may not exceed 5% of
the value of the total assets of the Fund at the time the loan is
made. The Fund may pledge up to 10% of the lesser of the cost or
value of its total assets to secure temporary borrowings. The Fund
will not borrow for investment purposes. Immediately after any
borrowing, the Fund will maintain asset coverage of not less than
300% with respect to all borrowings. While the borrowing of the
Fund exceeds 5% of its respective total assets, the Fund will make
no further purchases of securities, although this limitation will
not apply to repurchase transactions as described above.
7. Issue senior securities, except to the extent
permitted by applicable law.
8. Underwrite securities of other issuers except insofar
as the Fund may be deemed an underwriter under the Securities Act
in selling portfolio securities; provided, however, this
restriction shall not apply to securities of any investment
company organized by the Fund that are to be distributed pro rata
as a dividend to its shareholders.
9. Invest more than 10% of its total assets in illiquid
securities, such as repurchase agreements with maturities in
excess of seven days, or securities that at the time of purchase
have legal or contractual restrictions on resale.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund
rests with its Board of Directors. The Board of Directors approves all
significant agreements between the Fund and the companies that furnish the
Fund with services, including agreements with the Investment Adviser,
Boston Safe Deposit and Trust Company, the Fund's custodian (the
"Custodian"), and State Street Bank and Trust Company, 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 Directors and Officers of
the Fund are set forth in the following table, together with their
positions with the Fund and their principal business occupations during the
past five years and their affiliations, if any, with the Investment Adviser
or the Fund's Administrator. Directors who are "interested persons" of the
Fund, as defined by the 1940 Act, are indicated by an asterisk. Preferred
Stock directors are indicated by a "+".
As of December 31, 2000 the Directors and Officers of the Fund as
a group beneficially owned 1,315,482 shares of the Fund equaling 1.21% of
the Fund's outstanding shares.
Position with Principal Occupation
Name and Business Address (Age) the Fund During Past Five Years
-------------------------------- ----------------- ------------------------
Dr. Thomas E. Bratter (61) Director Director, President
One Corporate Center and Founder, The
Rye, New York 10580-1434 John Dewey Academy
(residential college
preparatory
therapeutic high
school).(7)(16)
+Anthony J. Colavita (65) Director President and
One Corporate Center Attorney at Law in
Rye, New York 10580-1434 the law firm of
Anthony J. Colavita,
P.C. since
1961.(1)(2)(3)(4)(5)(6)
(7)(8)(9)(10)(11)(12)
(13)(14)(15)(16)(17)(18)
(19)
+James P. Conn (63) Director Former Managing
One Corporate Center Director and Chief
Rye, New York 10580-1434 Investment Officer
of Financial
Security Assurance
Holdings Ltd.
(1992-1998);
Director of
Meditrust
Corporation (real
estate investment
trust) and First
Republic
Bank.(1)(7)(10)(16)(18)
Frank J. Fahrenkopf, Jr. (61) Director President and Chief
One Corporate Center Executive Officer of
Rye, New York 10580-1434 the American Gaming
Association since
June 1995; Partner
of Hogan and Hartson
(law firm); Chairman
of International
Trade Practice
Group; Co-Chairman
of the Commission on
Presidential
Debates; Former
Chairman of the
Republican National
Committee.(7)(16)
*Mario J. Gabelli (58) President, Chairman of the
One Corporate Center Director, and Chief Board and Chief
Rye, New York 10580-1434 Investment Officer Investment Officer
of Gabelli Asset
Management Inc. and
Chief Investment
Officer of Gabelli
Funds, LLC and GAMCO
Investors, Inc.;
Chairman of the
Board and Chief
Executive Officer of
Lynch Corporation
(diversified
manufacturing
company) and Lynch
Interactive
Corporation (a
multimedia and
services company);
Director of
Spinnaker
Industries, Inc.
(manufacturing
company).(1)(2)(3)(5)(6)
(7)(8)(9)(10)(11)(12)
(13)(14)(15)(16)(17)
*Karl Otto Pohl (71) Director Member of the
One Corporate Center Shareholder
Rye, New York 10580-1434 Committee of Sal
Oppenheim Jr. & Cie
(private investment
bank); Director of
Gabelli Asset
Management Inc.
(investment
management), Zurich
Allied (insurance
company), and
TrizecHahn Corp.
(real estate
company); Former
President of the
Deutsche Bundesbank
and Chairman of its
Central Bank Council
(1980-1991).
(1)(2)(3)(5)(6)(7)(8)(9)
(10)(11)(12) (13)(14)
(15)(16)(17)(18)(19)
Anthony R. Pustorino (75) Director Certified Public
One Corporate Center Accountant;
Rye, New York 10580-1434 Professor of
Accounting, Pace
University since
1965.(1)(3)(4)(5)(6)(7)
(10)(13)(16)(17)(19)
Salvatore J. Zizza (55) Director Chairman of The
One Corporate Center Bethlehem Corp.;
Rye, New York 10580-1434 Board Member of
Hollis Eden
Pharmaceuticals;
Former Executive
Vice President of
FMG Group (a
healthcare
provider); Former
President and Chief
Executive Officer of
the Lehigh Group
Inc. (an electrical
supply wholesaler);
Former Chairman of
the Executive
Committee and
Director of Binnings
Buildings Products,
Inc. until 1997;
Adviser to The
Gabelli Growth
Fund.(1)(5)(7)(10)(16)
Bruce N. Alpert (49) Vice President and Executive Vice
One Corporate Center Treasurer President and Chief
Rye, New York 10580-1434 Operating Officer of
Gabelli Funds, LLC
since 1988; Director
and President of
Gabelli Advisers,
Inc., and an officer
of all mutual funds
managed by Gabelli
Funds, LLC and its
affiliates.
James E. McKee (37) Secretary Vice President,
One Corporate Center General Counsel and
Rye, New York 10580-1434 Secretary of Gabelli
Asset Management,
Inc. since 1999 and
GAMCO Investors,
Inc. since 1993;
Secretary of all
mutual funds managed
by Gabelli Funds,
LLC and its
affiliates.
Carter W. Austin (34) Vice President Vice President of
One Corporate Center Gabelli Funds, LLC
Rye, New York 10580-1434 since 1996.
Previously, Director
of Business
Development, for
Links Club
International (an
affiliate of the PGA
Tour).
---------------------------
* "Interested person" of the Fund, as defined in the 1940 Act. Mr.
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 a Director of the parent company of the
Investment Adviser.
(1) Trustee of The Gabelli Asset Fund
(2) Trustee of The Gabelli Blue Chip Value Fund
(3) Director of Gabelli Capital Series Fund, Inc.
(4) Director of Comstock Funds, Inc.
(5) Director of The Gabelli Convertible Securities Fund, Inc.
(6) Director of Gabelli Equity Series Funds, Inc.
(7) Director of The Gabelli Global Multimedia Trust Inc.
(8) Director of Gabelli Global Series Funds, Inc.
(9) Director of Gabelli Gold Fund, Inc.
(10) Trustee of The Gabelli Growth Fund
(11) Director of Gabelli International Growth Fund, Inc.
(12) Director of The Gabelli Investor Funds, Inc.
(13) Trustee of The Gabelli Mathers Fund
(14) Trustee of The Gabelli Money Market Funds
(15) Trustee of The Gabelli Utilities Fund
(16) Trustee of The Gabelli Utility Trust
(17) Director of The Gabelli Value Fund Inc.
(18) Trustee of The Gabelli Westwood Funds
(19) Director of The Treasurer's Fund, Inc.
The Board of Directors of the Fund is divided into three classes,
with a class having a term of no more than three years. Each year the term
of office of one class of directors expires. See "Certain Provisions of the
Charter and By Laws" in the prospectus.
The Fund and the Investment Adviser have adopted a code of ethics
(the "Code of Ethics") under Rule 17J-1 of the 1940 Act. The Code of Ethics
permits personnel, subject to the Code of Ethics and its restrictive
provisions, to invest in securities, including securities that may be
purchased or held by the Fund. The Code of Ethics can be reviewed and
copied at the United States Securities and Exchange Commission's Public
Reference Room in Washington, D.C. Information on the operations of the
Reference Room may be obtained by calling the Securities and Exchange
Commission at (202) 742-8090. The Code of Ethics is also available on the
EDGAR database on the Securities and Exchange Commission's Internet Site at
http://www.sec.gov. Copies of the Code of Ethics may also be obtained,
after paying a duplicating fee, by electronic request at the following
e-mail address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commission's Public Reference Room Section, Washington, D.C.
20549-0102.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the
Investment Adviser a fee of $12,000 per year plus $1,500 per Directors'
meeting attended and $500 per meeting by telephone, together with each
Director's actual out-of-pocket expenses relating to attendance at such
meetings. The aggregate remuneration (exclusive of reimbursed personal
expenses) accrued by the Fund during the year ended December 31, 2000
amounted to $133,967.
The following table shows certain compensation information for the
Directors of the Fund for the year ended December 31, 2000. Officers and
Directors of the Fund who are employed by the Investment Adviser received
no compensation or expense reimbursement from the Fund.
Aggregate Compensation Total Compensation From Fund
Name of from and Fund Complex Paid to
Director/Officers Fund Directors/Officers*
----------------- ------ --------------------
Mario J. Gabelli $ 0 $ 0 (17)
Dr. Thomas E. Bratter $ 18,000 $ 31,000 (3)
Anthony J. Colavita $ 17,467 $ 129,967 (19)
James P. Conn $ 18,000 $ 52,000 (6)
Frank J. Fahrenkopf, Jr. $ 18,000 $ 31,000 (3)
Karl Otto Pohl $ 0 $ 0 (19)
Anthony R. Pustorino $ 23,000 $ 121,500 (12)
Salvatore J. Zizza $ 18,000 $ 55,000 (6)
Carter W. Austin $ 134,167 $ 134,167 (1)
------------------------
* Represents the total compensation paid to such persons during the
calendar year ended December 31, 2000 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 parenthetical number represents the
number of such investment companies and portfolios from which such
person received compensation.
LIMITATION OF OFFICERS' AND DIRECTOR, LIABILITY
The By Laws of the Fund provide that the Fund will indemnify its
Directors and officers and may indemnify its employees or agents against
liabilities and expenses incurred in connection with litigation in which
they may be involved because of their offices with the Fund, to the fullest
extent permitted by law. In addition, the Charter of the Fund provides that
the Fund's Directors and officers will not be liable to shareholders for
money damages, except in limited instances. However, nothing in the Charter
or the By Laws protects or indemnifies a Director, 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 active or deliberate
dishonesty which is material to the cause of action or to the extent that
the person received an improper benefit or profit in money, property or
services to the extent of such money, property or services. In addition,
indemnification is not permitted for any act or omission committed in bad
faith which is material to the cause of action or, with respect to any
criminal proceeding, if the person had reasonable cause to believe that the
act or omission was unlawful. In addition, indemnification may not be
provided in respect of any proceeding in which the person had been adjudged
to be liable to the Fund.
THE INVESTMENT ADVISER
The Investment Adviser is a New York limited liability company
that also serves as Investment Adviser to other closed-end investment
companies and open-end investment companies with aggregate assets in excess
of $10.3 billion as of March 31, 2001. The Investment Adviser is a
registered investment adviser under the 1940 Act. Mr. Mario J. Gabelli may
be deemed a "controlling person" of the Investment Adviser on the basis of
his controlling interest in the parent company of the Investment Adviser.
The Investment Adviser has several affiliates that provide investment
advisory services: GAMCO Investors, Inc. ("GAMCO") a wholly-owned
subsidiary of the Investment Adviser acts as investment adviser for
individuals, pension trusts, profit-sharing trusts and endowments, and had
assets under management of approximately $10.7 billion under its management
as of March 31, 2001; Gabelli Advisers, Inc. acts as to the Gabelli
Westwood Funds with assets under management of approximately $494 million
as of March 31, 2001; Gabelli Securities, Inc. acts as general partner
or investment manager to certain alternative investments products,
consisting primarily of risk arbitrage and merchant banking limited
partnerships and offshore companies, with assets under management of
approximately $473 million as of March 31, 2001; and Gabelli Fixed
Income, LLC acts as investment adviser for the three portfolios of The
Treasurer's Fund and separate accounts having assets under management of
approximately $1.7 billion as of March 31, 2001.
Affiliates of the Investment Adviser may, in the ordinary course
of their business, acquire for their own account or for the accounts of
their advisory clients, significant (and possibly controlling) positions in
the securities of companies that may also be suitable for investment by the
Fund. The securities in which the Fund might invest may thereby be limited
to some extent. For instance, many companies in the past several years have
adopted so-called "poison pill" or other defensive measures designed to
discourage or prevent the completion of non-negotiated offers for control
of the company. Such defensive measures may have the effect of limiting the
shares of the company which might otherwise be acquired by the Fund if the
affiliates of the Investment Adviser or their advisory accounts have or
acquire a significant position in the same securities However, the
Investment Adviser does not believe that the investment activities of its
affiliates will have a material adverse effect upon the Fund in seeking to
achieve its investment objectives. Securities purchased or sold pursuant to
contemporaneous orders entered on behalf of the investment company accounts
of the Investment Adviser or the advisory accounts managed by its
affiliates for their unaffiliated clients are allocated pursuant to
principles believed to be fair over time and not disadvantageous to any
such accounts. The Investment Adviser may on occasion give advice or take
action with respect to other clients that differ 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. In addition,
portfolio companies or their officers or directors may be minority
shareholders of the Investment Adviser or its affiliates
Pursuant to an Advisory Agreement (the "Advisory Agreement"), the
Investment Adviser manages the portfolio of the Fund in accordance with its
stated investment objectives and policies, makes investment decisions for
the Fund, places orders to purchase and sell securities on behalf of the
Fund and manages its other business and affairs, all subject to the
supervision and direction of the Fund's Board of Directors. In addition,
under the Advisory Agreement, the Investment Adviser oversees the
administration of all aspects of the Fund's business and affairs and
provides, or arranges for others to provide, at the Investment Adviser's
expense, certain enumerated services, including maintaining the Fund's
books and records, preparing reports to the Fund's 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, are considered to be an expense of the
Fund under its Advisory Agreement.
The Advisory Agreement combines investment advisory and
administrative responsibilities in one agreement. The Investment Adviser
has in turn retained PFPC, Inc. to act as sub-administrator to the Fund.
See "Management of the Fund -- Sub-Administrator" in the prospectus.
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. The fees payable under the Advisory
Agreement are higher than the fees payable by most registered investment
companies. Notwithstanding the foregoing, the Investment Adviser will waive
the portion of its investment advisory fee attributable to an amount of
assets of the Fund equal to the aggregate stated value of the Series B
Preferred for any calendar year in which the total return of the Fund,
including distributions and the advisory fee subject to potential waiver,
allocable to common stock is less than the stated dividend rate of the
Series B Preferred. The Investment Adviser has a similar arrangement in
effect with respect to the Series A Preferred.
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 the word "Gabelli."
The Advisory Agreement was initially approved by the Board of
Directors at a meeting held on July 17, 1986 and was approved most recently
by the Board of Directors on May 17, 2000. The Advisory Agreement is
terminable without penalty by the Fund on not more than sixty days' written
notice when authorized by the Board of Directors of the Fund, by the
holders of a majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act, or by the Investment Adviser. The Advisory
Agreement will automatically terminate in the event of its assignment, as
defined in the 1940 Act. The Advisory Agreement provides that, unless
terminated, it will remain in effect so long as continuance of the Advisory
Agreement is approved annually by the Board of Directors of the Fund, or
the shareholders of the Fund and in either case, by a majority vote of the
Directors who are not parties to the Advisory Contract or "interested
persons" as defined in the 1940 Act of any such person cast in person at a
meeting called specifically for the purpose of voting on the continuance of
the Advisory Agreement.
For each of the years ended December 31, 1998, December 31, 1999
and December 31, 2000, the Investment Adviser was paid $12,272,654,
$14,000,719 and $13,085,773, respectively, for advisory and administrative
services rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is responsible for placing purchase and sale
orders and the allocation of brokerage on behalf of the Fund. Transactions
in equity securities are in most cases effected on U.S. stock exchanges and
involve the payment of negotiated brokerage commissions. In general, there
may be no stated commission in the case of certain debt securities and
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. ("Gabelli & Company") may execute transactions in
the over-the counter markets on an agency basis and receive a stated
commission therefrom. To the extent consistent with applicable provisions
of the 1940 Act and the rules and exemptions adopted by the Securities and
Exchange Commission thereunder, as well as other regulatory requirements,
the Fund's Board of Directors has determined that portfolio transactions
may be executed through Gabelli & Company and its broker-dealer affiliates
if, in the judgment of the Investment Adviser, the use of those broker-
dealers is likely to result in price and execution at least as favorable as
those of other qualified broker-dealers, and if, in particular
transactions, those broker-dealers charge the Fund a rate consistent with
that charged to comparable unaffiliated customers in similar transactions.
The Fund has no obligation 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 the price, size of order,
difficulty of execution and operational facilities of the firm involved and
the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund
does not necessarily pay the lowest commission available
For the fiscal years ended December 31, 1998, December 31, 1999
and December 31, 2000, the Fund paid a total of $836,479, $1,137,510 and
$847,808, respectively, in brokerage commissions, of which Gabelli &
Company, Inc. and its affiliates received $362,737, $554,925 and $586,533,
respectively. The amount received by Gabelli & Company, Inc. and its
affiliates from the Fund in respect of brokerage commissions for the fiscal
year ended December 31, 2000 represented approximately 68% of the aggregate
dollar amount of brokerage commissions paid by the Fund for such period and
approximately 78% of the aggregate dollar amount of transactions by the
Fund for such period.
Subject to obtaining the best price and execution, brokers who
provide supplemental research, market and statistical information to the
Investment Adviser or its affiliates may receive orders for transactions by
the Fund. The term "research, market and statistical information" includes
advice as to the value of securities, and advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Advisory Agreement and the
expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Such information
may be useful to the Investment Adviser and its affiliates in providing
services to clients other than the Fund, and not all such information is
used by the Investment Adviser in connection with the Fund. Conversely,
such information provided to the Investment Adviser and its affiliates by
brokers and dealers through whom other clients of the Investment Adviser
and its affiliates effect securities transactions may be useful to the
Investment Adviser in providing services to the Fund.
Although investment decisions for the Fund are made independently
from those of the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made by
those other accounts. When the same securities are purchased for or sold by
the Fund and any of such other accounts, it is the policy of the Investment
Adviser and its affiliates to allocate such purchases and sales in the
manner deemed fair and equitable to all of the accounts, including the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan (the "Plan"), a stockholder whose shares of the Fund's
common stock is registered in his own name will have all distributions
reinvested automatically by State Street Bank and Trust Company ("State
Street"), which is agent under the Plan, unless the stockholder elects to
receive cash. Distributions with respect to shares registered in the name
of a broker-dealer or other nominee (that is, in "street name") will be
reinvested by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee or the
stockholder elects to receive distributions in cash. Investors who own
common stock registered in street name should consult their broker-dealers
for details regarding reinvestment. All distributions to investors who do
not participate in the Plan will be paid by check mailed directly to the
record holder by State Street as dividend disbursing agent.
Under the Plan, whenever the market price of the common stock is
equal to or exceeds net asset value at the time shares are valued for
purposes of determining the number of shares equivalent to the cash
dividend or capital gains distribution, participants in the Plan are issued
shares of common stock, valued at the greater of (i) the net asset value as
most recently determined or (ii) 95% of the then current market price of
the common stock. The valuation date is the dividend or distribution
payment date or, if that date is not a New York Stock Exchange trading day,
the next preceding trading day. If the net asset value of the common stock
at the time of valuation exceeds the market price of the common stock,
participants will receive shares from the Fund, valued at market price. If
the Fund should declare a dividend or capital gains distribution payable
only in cash, State Street will buy the common stock for such Plan in the
open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts, except that State Street will endeavor to terminate
purchases in the open market and cause the Fund to issue shares at net
asset value if, following the commencement of such purchases, the market
value of the common stock exceeds net asset value.
Participants in the Plan have the option of making additional cash
payments to State Street, monthly, for investment in the shares as
applicable. Such payments may be made in any amount from $250 to $10,000.
State Street 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.
State Street will charge each stockholder who participates $0.75, plus a
pro rata share of the brokerage commissions. Brokerage charges for such
purchases are expected to be less than the usual brokerage charge for such
transactions. It is suggested that participants send voluntary cash
payments to State Street in a manner that ensures that State Street 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 State Street at least 48 hours
before such payment is to be invested.
State Street maintains all stockholder accounts in the Plan and
furnishes written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax records.
Shares in the account of each Plan participant will be held by State Street
in noncertificated form in the name of the participant. A Plan participant
may send its share certificates to State Street so that the shares
represented by such certificates will be held by State Street in the
participant's stockholder account under the Plan.
In the case of stockholders such as banks, brokers or nominees,
which hold shares for others who are the beneficial owners, State Street
will administer the Plan on the basis of the number of shares certified
from time to time by the stockholder as representing the total amount
registered in the stockholder's name and held for the account of beneficial
owners who participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the 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
Plan members at least 90 days before the record date for such dividend or
distribution. The Plan also may be amended or terminated by State Street on
at least 90 days' written notice to the Plan participants.
TAXATION
The following discussion is a brief summary of certain additional
United States Federal income tax considerations affecting the Fund and its
stockholders. No attempt is made to present a detailed explanation of all
Federal, state, local and foreign tax concerns, and the discussions set
forth here and in the prospectus do not constitute tax advice. Investors
are urged to consult their own tax advisers with any specific questions
relating to Federal, state, local and foreign taxes. The discussion
reflects applicable tax laws of the United States as of the date of this
SAI, which tax laws may be changed or subject to new interpretations by the
courts or the Internal Revenue Service (the "IRS") retroactively or
prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as a
regulated investment company (a "RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the Fund
will not be subject to U.S. Federal income tax on the portion of its net
investment income (i.e., its investment company taxable income as defined
in the Code without regard to the deduction for dividends paid) and on its
net capital gain (i.e., the excess of its net realized long-term capital
gain over its net realized short-term capital loss), if any, which it
distributes to its stockholders in each taxable year, provided that an
amount equal to at least 90% of the sum of its net investment income and
any net tax-exempt income for the taxable year is distributed to its
stockholders.
Qualification as a RIC requires, among other things, that the
Fund: (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stock, securities or
currencies and (b) diversify its holdings so that, at the end of each
quarter of each taxable year, subject to certain exceptions, (i) at least
50% of the market value of the Fund's assets is represented by cash, cash
items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities
(other than U.S. government securities or the securities of other RICs) of
any one issuer or any two or more issuers that the Fund controls and which
are determined to be engaged in the same or similar trades or businesses or
related trades or businesses.
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution
requirement or otherwise were to fail to qualify as a RIC in any year, it
would be taxed in the same manner as an ordinary corporation and
distributions to the Fund's stockholders would not be deductible by the
Fund in computing its taxable income. To qualify again to be taxed as a RIC
in a subsequent year, the Fund would be required to distribute to Preferred
Stockholders and common stockholders its earnings and profits attributable
to non-RIC years reduced by an interest charge on 50% of such earnings and
profits payable by the Fund to the IRS. In addition, if the Fund failed to
qualify as a RIC for a period greater than one taxable year, then the Fund
would be required to recognize and pay tax on any net built-in gains (the
excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if the Fund had been liquidated) or,
alternatively, to elect to be subject to taxation on such built-in gains
recognized for a period of ten years, in order to qualify as a RIC in a
subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis
in accordance with a calendar year distribution requirement are subject to
a 4% excise tax. To avoid the tax, the Fund must distribute during each
calendar year, an amount at least equal to the sum of (1) 98% of its
ordinary income for the calendar year, (2) 98% of its capital gain net
income (both long-term and short-term) for the one year period ending on
October 31 of such year, (unless, as in the case of the Fund, an election
is made by a fund with a November or December year-end to use the fund's
fiscal year), and (3) all ordinary income and capital gain net income for
previous years that were not previously distributed or subject to tax under
Subchapter M. A distribution will be treated as paid during the calendar
year if it is paid during the calendar year or declared by the Fund in
October, November or December of the year, payable to stockholders of
record on a date during such a month and paid by the Fund during January of
the following year. Any such distributions paid during January of the
following year will be deemed to be received on December 31 of the year the
distributions are declared, rather than when the distributions are
received. While the Fund intends to distribute its ordinary income and
capital gain net income in the manner necessary to minimize imposition of
the 4% excise tax, there can be no assurance that sufficient amounts of the
Fund's ordinary income and capital gain net income will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be
long-term capital gain or loss if the securities have been held by the Fund
for more than one year. Gain or loss on the sale of securities held for one
year or less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar denominated bonds
and other similar debt instruments and on any non-U.S. dollar denominated
futures contracts, options and forward contracts that are not section 1256
contracts (as defined below) generally will be treated as net investment
income and loss.
If the Fund invests in stock of a passive foreign investment
company (a "PFIC"), the Fund may be subject to Federal income tax on a
portion of any "excess distribution" with respect to, or gain from the
disposition of, such stock even if such income is distributed as a taxable
dividend by the Fund to its stockholders. The tax would be determined by
allocating such distribution or gain ratably to each day of the Fund's
holding period for the stock. The amount so allocated to any taxable year
of the Fund prior to the taxable year in which the excess distribution or
disposition occurs would be taxed to the Fund at the highest marginal
Federal corporate income tax rate in effect for the year to which it was
allocated, and the tax would be further increased by an interest charge.
The amount allocated to the taxable year of the distribution or disposition
would be included in the Fund's net investment income and, accordingly,
would not be taxable to the Fund to the extent distributed by the Fund as a
taxable dividend to stockholders.
If the Fund invests in stock of a PFIC, the Fund may be able to
elect to treat the PFIC as a "qualified electing fund," in lieu of being
taxable in the manner described in the above paragraph and to include
annually in income its pro rata share of the ordinary earnings and net
capital gain (whether or not distributed) of the PFIC. In order to make
this election, the Fund would be required to obtain annual information from
the PFICs in which it invests, which may be difficult to obtain.
Alternatively, the Fund may elect to mark-to-market at the end of each
taxable year all shares that it hold in PFICs. If it makes this election,
the Fund would recognize as ordinary income any increase in the value of
such shares over their adjusted basis and as ordinary loss any decrease in
such value to the extent it does not exceed prior increases.
The Fund may invest in debt obligations purchased at a discount
with the result that the Fund may be required to accrue income for Federal
income tax purposes before amounts due under the obligations are paid. The
Fund may also invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"). A portion of the interest payments on
such high yield securities may be treated as dividends for Federal income
tax purposes.
As a result of investing in stock of PFICs or securities purchased
at a discount or any other investment that produces income that is not
matched by a corresponding cash distribution to the Fund, the Fund could be
required to include in current income, income it has not yet received. Any
such income would be treated as income earned by the Fund and therefore
would be subject to the distribution requirements of the Code. This might
prevent the Fund from distributing 90% of its net investment income as is
required in order to avoid Fund-level Federal income taxation, or might
prevent the Fund from distributing enough ordinary income and capital gain
net income to avoid completely the imposition of the excise tax. To avoid
this result, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its stockholders.
If the Fund does not meet the asset coverage requirements of the
1940 Act and the Articles Supplementary, the Fund will be required to
suspend distributions to the holders of the common stock until the asset
coverage is restored. Such a suspension of distributions might prevent the
Fund from distributing 90% of its net investment income as is required in
order to avoid Fund-level Federal income taxation, or might prevent the
Fund from distributing enough income and capital gain net income to avoid
completely imposition of the excise tax. Upon any failure to meet the asset
coverage requirements of the 1940 Act or the Articles Supplementary, the
Fund may, and in certain circumstances will, be required to partially
redeem the shares of Preferred Stock in order to restore the requisite
asset coverage and avoid the adverse consequences to the Fund and its
stockholders of failing to qualify as a RIC. If asset coverage were
restored, the Fund would again be able to pay dividends and would generally
be able to avoid Fund-level Federal income taxation on the income that it
distributes.
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures
contracts are "section 1256 contracts." Any gains or losses on section 1256
contracts are generally considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, section 1256 contracts held by the
Fund at the end of each taxable year are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were realized
and the resulting gain or loss is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses
are realized. Further, the Fund may be required to capitalize, rather than
deduct currently, any interest expense on indebtedness incurred or
continued to purchase or carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions may be determined under rules
that vary according to the election(s) made. The rules applicable under
certain of the elections accelerate the recognition of gain or loss from
the affected straddle positions.
Because application of the straddle rules may affect the character
and timing of the Fund's gains, losses and deductions, the amount which
must be distributed to stockholders, and which will be taxed to
stockholders as ordinary income or long-term capital gain, may be increased
or decreased substantially as compared to a fund that did not engage in
such hedging transactions.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from
such securities may be subject to non-U.S. taxes. It is anticipated that
the Fund will not invest more than 35% of its total assets in foreign
securities. Accordingly, the Fund will not be eligible to elect to "pass-
through" to stockholders of the Fund the ability to use the foreign tax
deduction or foreign tax credit for foreign taxes paid with respect to
qualifying taxes. In order to make such an election, at least 50% of the
Fund's total assets would be required to be invested in foreign securities.
TAXATION OF STOCKHOLDERS
The Fund will determine either to distribute or to retain for
reinvestment all or part of its net capital gain. If any such gains are
retained, the Fund will be subject to a tax of 35% of such amount. In that
event, the Fund expects to designate the retained amount as undistributed
capital gains in a notice to its stockholders, each of whom (i) will be
required to include in income for tax purposes as long-term capital gains
its share of such undistributed amounts, (ii) will be entitled to credit
its proportionate share of the tax paid by the Fund against its Federal
income tax liability and to claim refunds to the extent that the credit
exceeds such liability, and (iii) will increase its basis in its shares of
the Fund by an amount equal to 65% of the amount of undistributed capital
gains included in such stockholder's gross income.
Distributions of ordinary income are taxable to a U.S. stockholder
as ordinary income, whether paid in cash or shares. Ordinary income
dividends paid by the Fund may qualify for the dividends received deduction
available to corporations, but only to the extent that the Fund's income
consists of qualified dividends received from U.S. corporations. The amount
of any dividend distribution eligible for the dividends received deduction
will be designated by the Fund in a written notice to stockholders within
60 days of the close of the taxable year. Distributions of net capital gain
designated as capital gain dividends ("Capital Gain Dividends"), if any,
are taxable as long-term capital gains, whether paid in cash or in shares,
regardless of how long the stockholder has held the Fund's shares, and are
not eligible fo the dividends received deduction.
Stockholders receiving distributions in the form of newly issued
shares will have a basis in such shares of the Fund equal to the fair
market value of such shares on the distribution date. If the net asset
value of shares is reduced below a stockholder's cost as a result of a
distribution by the Fund, such distribution will be taxable even though it
represents a return of invested capital. The price of shares purchased at
any time may reflect the amount of a forthcoming distribution. Those
purchasing shares just prior to a distribution will receive a distribution
which will be taxable to them even though it represents in part a return of
invested capital.
Upon a sale or exchange of shares, a stockholder will realize a
taxable gain or loss depending upon his or her basis in the shares. Such
gain or loss will be treated as long-term capital gain or loss if the
shares have been held for more than one year. Any loss realized on a sale
or exchange will be disallowed to the extent the shares disposed of are
replaced within a 61-day period beginning 30 days before and ending 30
days after the date that the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Any loss realized by a stockholder on the sale of Fund shares held
by the stockholder for six months or less will be treated for tax purposes
as a long-term capital loss to the extent of any Capital Gain Dividends
received by the stockholder (or credited to the stockholder as an
undistributed capital gain) with respect to such shares.
Ordinary income dividends and Capital Gain Dividends also may be
subject to state and local taxes. Stockholders are urged to consult their
own tax advisers regarding specific questions about the U.S. Federal,
state, local or foreign tax consequences to them of investing in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold Federal income tax on all
taxable distributions and redemption proceeds payable to non-corporate
stockholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against such stockholder's Federal income tax liability.
The foregoing is a general and abbreviated summary of the
applicable provisions of the Code and Treasury regulations presently in
effect. For the complete provisions, reference should be made to the
pertinent Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to change by
legislative, judicial or administrative action, either prospectively or
retroactively. Persons considering an investment in Series B Preferred
should consult their own tax advisers regarding the purchase, ownership and
disposition of Series B Preferred.
MOODY'S DISCOUNT FACTORS
The following table identifies the Moody's Discount Factors used
to discount particular Moody's eligible assets for a two-week exposure
period.
Moody's Discount
Type of Moody's Eligible Asset: Factor:
------------------------------- ------
Short Term Money Market Instruments (other than U.S. Government Obligations set forth
below) and other commercial paper:
Demand or time deposits, certificates of deposit and bankers' acceptances includible in 1.00
Moody's Short Term Money Market Instruments.............................................
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 Moody's Short Term Money Market Instruments if
term is less than 30 days and counterparty is rated at least A2......................... 1.00
Other repurchase obligations.............................................................. *
U.S. Common Stock and Common Stock of foreign issuers for which ADRs are Traded................ 3.00
Common Stock of foreign issuers (in existence for at least five years) for which no ADRs
are traded..................................................................................... 4.00
Convertible preferred stocks................................................................... 3.00
Preferred stocks:
Auction rate preferred stocks............................................................. 3.50
Other preferred stocks issued by issuers in the financial and industrial industries....... 1.62
Other preferred stocks issued by issuers in the utilities industry........................ 1.40
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 evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 with remaining terms to
maturity of:
1 year or less............................................................................ 1.10
2 years or less........................................................................... 1.13
3 years or less........................................................................... 1.18
4 years or less........................................................................... 1.21
5 years or less........................................................................... 1.23
7 years or less........................................................................... 1.27
10 years or less.......................................................................... 1.30
15 years or less.......................................................................... 1.31
20 years or less.......................................................................... 1.32
30 years or less.......................................................................... 1.33
Corporate evidences of indebtedness rated Aa3 with remaining terms to
maturity of:
1 year or less............................................................................ 1.15
2 years of less........................................................................... 1.20
3 years or less........................................................................... 1.23
4 years or less........................................................................... 1.27
5 years or less........................................................................... 1.29
7 years or less........................................................................... 1.33
10 years or less.......................................................................... 1.36
15 years or less.......................................................................... 1.37
20 years or less.......................................................................... 1.38
30 years or less.......................................................................... 1.39
Corporate evidences of indebtedness rated A3 with remaining terms to maturity
of:
1 year or less............................................................................ 1.20
2 years or less........................................................................... 1.26
3 years or less........................................................................... 1.29
4 years or less........................................................................... 1.33
5 years or less........................................................................... 1.35
7 years or less........................................................................... 1.39
10 years or less.......................................................................... 1.42
15 years or less.......................................................................... 1.43
20 years or less.......................................................................... 1.45
30 years or less.......................................................................... 1.45
Corporate evidences of indebtedness rated at least Baa3 with remaining terms of maturity of:
1 year or less............................................................................ 1.25
2 years or less........................................................................... 1.31
3 years or less........................................................................... 1.35
4 years or less........................................................................... 1.38
5 years or less........................................................................... 1.41
7 years or less........................................................................... 1.45
10 years or less.......................................................................... 1.48
15 years or less.......................................................................... 1.50
20 years or less.......................................................................... 1.51
30 years or less.......................................................................... 1.52
Corporate evidences of indebtedness rated at least Ba3 with remaining terms of maturity of:
1 year or less............................................................................ 1.36
2 years or less........................................................................... 1.42
3 years or less........................................................................... 1.46
4 years or less........................................................................... 1.50
5 years or less........................................................................... 1.53
7 years or less........................................................................... 1.57
10 years or less.......................................................................... 1.61
15 years or less.......................................................................... 1.62
20 years or less.......................................................................... 1.64
30 years or less.......................................................................... 1.64
Corporate evidences of indebtedness rated at least B1 and B2 with remaining terms of
maturity of:
1 year or less............................................................................ 1.46
2 years or less........................................................................... 1.53
3 years or less........................................................................... 1.57
4 years or less........................................................................... 1.61
5 years or less........................................................................... 1.65
7 years or less........................................................................... 1.70
10 years or less.......................................................................... 1.73
15 years or less.......................................................................... 1.75
20 years or less.......................................................................... 1.76
30 years or less.......................................................................... 1.77
Convertible corporate evidences of indebtedness with senior debt
securities rated Aa3 issued by the following type of issuers:
Utility................................................................................... 1.28
Industrial................................................................................ 1.75
Financial................................................................................. 1.53
Transportation............................................................................ 2.13
Convertible corporate evidences of indebtedness with senior debt
securities rated A3 issued by the following type of issuers:
Utility................................................................................... 1.33
Industrial................................................................................ 1.80
Financial................................................................................. 1.58
Transportation............................................................................ 2.18
Convertible corporate evidences of indebtedness with senior debt
securities rated Baa3 issued by the following type of issuers:
Utility................................................................................... 1.48
Industrial................................................................................ 1.95
Financial................................................................................. 1.73
Transportation............................................................................ 2.33
Convertible corporate bonds with senior debt securities rated Ba3 issued by the following
type of issuers:
Utility................................................................................... 1.49
Industrial................................................................................ 1.96
Financial................................................................................. 1.74
Transportation............................................................................ 2.34
Convertible corporate bonds with senior debt securities rated B1 or B2
issued by the following type of issuers:
Utility................................................................................... 1.59
Industrial................................................................................ 2.06
Financial................................................................................. 1.84
Transportation............................................................................ 2.44
* Discount Factor applicable to underlying assets
NET ASSET VALUE
The net asset value of the Fund's common shares is computed based
on the market value of the securities it holds and determined daily as of
the close of regular trading on the New York Stock Exchange and reported in
financial newspapers of general circulation as of the last day of each
week.
Portfolio securities which are traded only on stock exchanges are
valued at the last sale price as of the close of regular trading on the day
the securities are being valued, or lacking any sales, at the mean between
closing bid and asked prices. Securities traded in the over-the-counter
market which are Nasdaq National Market securities are valued at the last
sale price as of the close of regular trading on the day the securities are
being valued. Other over-the-counter securities are valued at the most
recent bid prices as obtained from one or more dealers that make markets in
the securities. Portfolio securities which are traded both in the over-the
counter market and on a stock exchange are valued according to the broadest
and most representative market, as determined by the Investment Adviser.
Securities traded primarily on foreign exchanges are valued at the closing
values of such securities on their respective exchanges as of the day the
securities are being valued. Securities and assets for which market
quotations are not readily available are valued at fair value as determined
in good faith by or under the direction of the Board of Directors of the
Fund. Short-term investments that mature in 60 days or less are valued at
amortized cost, unless the Board of Directors of the Fund determines that
such valuation does not constitute fair value.
Net asset value per share is calculated by dividing the value of
the securities held plus any cash or other assets minus all liabilities,
including accrued expenses, and less the liquidation value of any preferred
stock outstanding 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 March 5, 2001 Title of Class Nature of Ownership Percent of Class
----------------------- -------------- ------------------- ----------------
Cede & Co.* Common 107,471,126 (record) 85.75%
P.O. Box 20
Bowling Green Station Preferred 5,313,885 (record) 98.98%
New York, NY 10274
Salomon Smith Barney Inc.** Common 20,802,318 (record) 16.41%
333 W. 34th Street
New York, NY 10001 Preferred 1,535,922 (record) 28.61%
Charles Schwab & Co., Inc.** Common 7,097,715 (record) 5.60%
c/o ADP Proxy Services
51 Mercedes Way
Edgewood, NY 11717
A.G. Edwards & Sons, Inc.** Common 12,549,337 (record) 9.90%
125 Broad Street, 40th Fl.
New York, NY 10004
Prudential Securities Inc.** Common 6,916,745 (record) 5.45%
c/o ADP Proxy Services
51 Mercedes Way Preferred 431,570 (record) 8.04%
Edgewood, NY 11717
Merrill Lynch** Common 6,774,328 (record) 5.34%
4 Corporate Place
Corporate Park 287 Preferred 279,889 (record) 5.21%
Piscataway, NJ 08855
Paine Webber Inc.** Preferred 825,162 (record) 15.37%
1000 Harbor Blvd.
Weehawken, NJ 07087
National Financial Services Corp.** Preferred 588,048 (record) 10.95%
200 Liberty Street
New York, NY 10281
* A nominee partnership of The Depository Trust Company.
** Shares held at The Depository Trust Company.
As of December 31, 2000, the Directors and Officers of the Fund as
a group beneficially owned approximately 1.21% of the outstanding shares of
the Fund's common stock.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
The Depository Trust Company ("DTC") will act as securities
depository for the shares of Series B Preferred offered pursuant to the
prospectus. The information in this section concerning DTC and DTC's
book-entry system is based upon information obtained from DTC. The
securities offered hereby initially will be issued only as fully-registered
securities registered in the name of Cede & Co. (as nominee for DTC). One
or more fully-registered global security certificates initially will be
issued, representing in the aggregate the total number of securities, and
deposited with DTC.
DTC is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC holds securities that
its participants deposit with DTC. DTC also facilities the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement
of securities certificates. Direct DTC participants include securities
brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations. Access to the DTC system is also available to
others such as securities brokers and dealers, banks and trust companies
that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly through other entities.
Purchases of securities within the DTC system must be made by or
through direct participants, which will receive a credit for the securities
on DTC's records. The ownership interest of each actual purchaser of a
security, a beneficial owner, is in turn to be recorded on the direct or
indirect participants' records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are
expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the
direct or indirect participants through which the beneficial owners
purchased securities. Transfers of ownership interests in securities are to
be accomplished by entries made on the books of participants acting on
behalf of beneficial owners. Beneficial owners will not receive
certificates representing their ownership interests in securities, except
as provided herein.
DTC has no knowledge of the actual beneficial owners of the
securities being offered pursuant to this prospectus; DTC's records reflect
only the identity of the direct participants to whose accounts such
securities are credited, which may or may not be the beneficial owners. The
participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by
direct participants and indirect participants to beneficial owners will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Payments on the securities will be made to DTC. DTC's practice is
to credit direct participants' accounts on the relevant payment date in
accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment
date. Payments by participants to beneficial owners will be governed by
standing instructions and customary practices and will be the
responsibility of such participant and not of DTC or the Fund, subject to
any statutory or regulatory requirements as may be in effect from time to
time. Payment of dividends to DTC is the responsibility of the Fund,
disbursement of such payments to direct participants is the responsibility
of DTC, and disbursement of such payments to the beneficial owners is the
responsibility of direct and indirect participants. Furthermore each
beneficial owner must rely on the procedures of DTC to exercise any rights
under the Securities.
Beneficial owners may obtain certificates representing the
securities by contacting State Street Bank and Trust Company, which acts as
transfer agent for the Fund's shares.
DTC may discontinue providing its services as securities
depository with respect to the securities at any time by giving reasonable
notice to the Fund. Under such circumstances, in the event that a successor
securities depository is not obtained, certificates representing the
Securities will be printed and delivered.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New
York, New York 10036 is special counsel to the Fund in connection with the
offering of the Series B Preferred.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York 10036, has been selected as independent accountants for the Fund.
As the Fund's independent accountants PricewaterhouseCoopers LLP is
responsible for auditing the Fund's financial statements in accordance with
Generally Accepted Accounting Principles. PricewaterhouseCoopers LLP also
prepares a report of its findings thereon and presents its findings to the
Fund's Board of Directors. PricewaterhouseCoopers LLP also reviews the
Fund's state and Federal income tax returns prepared by the Fund's
Administrator. For its services, PricewaterhouseCoopers LLP charges fees
which are paid by the Fund.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to
the Fund's Shareholders for the fiscal year ended December 31, 2000, is
also incorporated herein by reference from the Fund's Annual Report to
Shareholders filed with the Securities and Exchange Commission on March 7,
2001. The report of PricewaterhouseCoopers LLP in respect of those
financial statements is attached hereto. All other portions of the Annual
Report to Shareholders are not incorporated herein by reference and are not
part of the Registration Statement. A copy of the Annual Report to
Shareholders may be obtained without charge by writing to the Fund at its
address at One Corporate Center, Rye, New York 10580-1434 or by calling the
Fund toll-free at 800-GABELLI (422-3554).
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Gabelli Equity Trust Inc.
In our opinion, the statement of assets and liabilities, including the
portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights appearing on pages 12
through 25 of the December 31, 2000 Annual Report to Shareholders of The
Gabelli Equity Trust Inc. (the "Equity Trust") present fairly, in all
material respects, the financial position of the Equity Trust at December
31, 2000, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in
the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Equity Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 2000 by correspondence with the custodian and brokers, provide
a reasonable basis for our opinion.
We have also previously audited, in accordance with auditing standards
generally accepted in the United States of America, the statements of
assets and liabilities, including the portfolio of investments, of the
Equity Trust at December 31, 1999 and 1998, and the related statements of
operations for the years ended December 31, 1999 and 1998 and the statement
of changes in net assets for the year ended December 31, 1998 (none of
which are presented in the December 31, 2000 Annual Report to
Shareholders); and we expressed unqualified opinions on those financial
statements. In our opinion, the information set forth in the senior
securities table for the Equity Trust's Series A Preferred shares for each
of the three years in the period ended December 31, 2000, appearing on page
13 of the Equity Trust's Registration Statement on Form N-2, is fairly
stated, in all material respects, in relation to the financial statements
from which it has been derived.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
February 14, 2001
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Financial Statements included in Part A (Prospectus) of this
Registration Statement and Amendment:
(a) Financial Highlights for each of the years ended December 31,
1991-2000.
Financial Statements included in Part B (Statement of Additional
Information) of this Registration Statement and Amendment:
(b) Portfolio of Investments, December 31, 2000.(1)
(c) Statement of Assests and Liabilities, December 31, 2000(1)
(d) Statement of Operations for the Year Ended December 31, 2000.(1)
(e) Statement of Changes in Net Assets.(1)
(f) Notes to Financial Statements.(1)
(g) Report of Independent Accountants.
(2) (a) (1) Articles of Incorporation(2)
(2) (A) Articles Supplementary relating to 7.25% Tax
Advantaged Cumulative Preferred Stock(2)
(B) Form of Articles of Amendment to The Gabelli Equity
Trust Inc. relating to the 7.25% Tax Advantaged
Cumulative Preferred Stock(3)
(3) Articles Supplementary relating to ___% Tax Advantaged
Series B Cumulative Preferred Stock(3)
(b) Amended and Restated By Laws as of May 16, 2001(3)
(c) Not Applicable
(d) Specimen Stock Certificate:
___ % Tax Advantaged Series B Cumulative Preferred Stock(3)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan(2)
(f) Not Applicable
(g) Investment Advisory Agreement between the Fund and Gabelli Funds
LLC(4)
(h) Form of Underwriting Agreement(6)
(i) Not Applicable
(j) Custodial Contract between the Fund and Boston Safe Deposit and
Trust Company(2)
(k) (1) Registrar, Transfer Agency and Service Agreement between
the Fund and State Street Bank and Trust Company(4)
(2) Transfer Agent and Registrar Services Fee Agreement between
the Fund and State Street Bank and Trust Company(4)
(l) Opinion and Consent of Counsel(6)
(m) Not Applicable
(n) Consent of PricewaterhouseCoopers LLP(7)
(o) Not Applicable
(p) Purchase Agreement between the Fund and The Gabelli Equity Trust
Inc. (2)
(q) Not Applicable
(r) Code of Ethics(5)
(s) Power of Attorney (3)
---------
(1) Incorporated by reference from the Registrant's Annual Report for the year
ended December 31, 2000, File No. 811-4700, as filed with the
Securities and Exchange Commission on March 7, 2001.
(2) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos.
333-45951 and 811-4700; as filed with the Securities and Exchange
Commission on February 10, 1998 (EDGAR Accession No.
0000950123-99-003497).
(3) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to the Fund's Registration Statement on Form N-2, File
Nos. 333-47012 and 811-4700, as filed with the Securities and Exchange
Commission on June 11, 2001 (EDGAR Accession No.
0000950172-01-500365).
(4) Incorporated by reference from the Registrant's Pre-Effective
Amendment No. 1 to the Fund's Registration Statement on Form N-2, File
Nos. 333-62323 and 811-4700, as filed with the Securities and Exchange
Commission on October 13, 1995 (EDGAR Accession No.
0000950123-95-002829).
(5) Incorporated by reference from the Registrant's Pre-Effective Amendment
No. 2 to the Fund's Registration Statement on Form N-2, File Nos.
333-47012 and 811-4700; as filed with the Securities and Exchange
Commission on December 12, 2000 (EDGAR Accession No.
0000950123-00-011158).
(6) Incorporated by reference from the Registrant's Pre-Effective Amendment
No. 2 to the Fund's Registration Statement on Form N-2, File Nos.
333-47012 and 811-4700; as filed with the Securities and Exchange
Commission on June 12, 2001 (EDGAR Accession No. 0000950172-01-500372).
(7) Filed herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration Statement:
Securities and Exchange Commission Registration fees.... $ 41,250
New York Stock Exchange listing fee..................... $ 47,800
Moody's rating fee...................................... $ 31,250
Printing and engraving expenses......................... $ 100,000
Auditing fees and expenses.............................. $ 50,000
Legal fees and expenses................................. $ 150,000
Blue Sky fees and expenses.............................. $ 20,000
Miscellaneous........................................... $ 10,000
Total.......................................... $ 450,300
=============
Item 27. Persons Controlled by or Under Common Control with Registrant
Insofar as the following have substantially identical boards of
directors or trustees they may be deemed with Registrant to be under common
control: The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli
Westwood Funds, each a Massachusetts Business Trust, The Gabelli Money
Market Funds, a Delaware Business Trust, The Gabelli Global Multimedia
Trust Inc., The Gabelli Value Fund Inc., The Gabelli Investor Fund, Inc.,
Gabelli Capital Series Funds, Inc., The Gabelli Global Series Funds, Inc.,
The Gabelli Convertible Securities Fund, Inc., Gabelli International Growth
Fund, Inc., Gabelli Gold Fund, Inc. and Gabelli Equity Series Funds, Inc.,
each a Maryland corporation.
Item 28. Number of Holders of Securities as of March 31, 2001
Number of
Title of Class Record Holders
-------------- --------------
Common Stock, par value $.001 per share................ 77,313
7.25% Tax Advantaged Cumulative
Preferred Stock, par value $.001 per share........... 6,428
Item 29. Indemnification
The response of this Item is incorporated by reference to the
caption "Capital Stock - Limitation of Officers' and Directors' Liability"
set forth in the prospectus.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted
to the directors, officers and controlling persons of the Fund, pursuant to
the foregoing provisions or otherwise, the Fund has been advised that in
the opinion of the Securities Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities under the Securities Act (other than payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of
the Fund in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Fund will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
Item 30. Business and Other Connections of the Investment Adviser
Registrant is fulfilling the requirement of this Item 30 to
provide a list of the officers and directors of its Investment Adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by that entity or those of
its officers and directors during the past two years, by incorporating by
reference the information contained in the Form ADV filed with the
Securities and Exchange Commission pursuant to the Investment Advisers Act
of 1940 by Gabelli Funds, LLC (SEC File No. 333-42780).
Item 31. Location of Accounts and Records
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580
(with respect to its services as Investment Adviser)
State Street Bank and Trust Company
Two Heritage Drive
Quincy, Massachusetts 02171
(with respect to its services as transfer agent, dividend
disbursing agent and registrar)
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(with respect to its services as custodian)
PFPC, Inc.
101 Federal Street
Boston, Massachusetts 02110
(with respect to its services as sub-Administrator)
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares
until the prospectus is amended, if subsequent to the
effective date of this registration statement, its net asset
value declines more than ten percent from its net asset
value, as of the effective date of the registration
statement or its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant
pursuant to Rule 497(h) will be deemed to be a part of the
Registration Statement as of the time it was declared
effective.
Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed
to be a new Registration Statement relating to the
securities offered therein, and the offering of such
securities at that time will be deemed to be the initial
bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
SAI constituting Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
Investment Company Act of 1940, the Registrant has duly caused this
amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Rye, State of New York
on the 13th day of June, 2001.
THE GABELLI EQUITY TRUST INC.
By: /s/ BRUCE N. ALPERT
-----------------------------
Bruce N. Alpert
Principal Executive Officer
Name Title Date
---- ----- ----
*
---------------------- Chairman of the Board, 13 June, 2001
Mario J. Gabelli President & Chief
Investment Officer
*
-------------------------- Director 13 June, 2001
Dr. Thomas E. Bratter
*
---------------------- Director 13 June, 2001
Anthony J. Colavita
*
---------------------- Director 13 June, 2001
James P. Conn
*
----------------------------- Director 13 June, 2001
Frank J. Fahrenkopf, Jr.
*
---------------------- Director 13 June, 2001
Karl Otto Pohl
*
---------------------- Director 13 June, 2001
Anthony R. Pustorino
*
---------------------- Director 13 June, 2001
Salvatore J. Zizza
/s/ Bruce N. Alpert
---------------------- Vice President & 13 June, 2001
Bruce N. Alpert Treasurer
/s/ Bruce N. Alpert
---------------------- 13 June, 2001
Bruce N. Alpert
as attorney in fact
* Pursuant to a Power of Attorney incorporated by reference as Exhibit S to
the Registrant's Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-2, File Nos. 333-59874 and 811-4700; as
filed with the Securities and Exchange Commission on June 11, 2001 (EDGAR
Accession No. 0000950172-01-500365).
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit Page
Number Exhibit Number
------ ------- ------
Exhibit A (1) Articles of Incorporation*..................................
(2)(A) Articles Supplementary relating to 7.25%
Tax Advantaged Cumulative Preferred Stock*..................
(B) Form of Articles of Amendment of The Gabelli Equity Trust
Inc. relating to the 7.25% Tax Advantaged Cumulative
Preferred Stock*............................................
(3) Form of Articles Supplementary relating to ___%
Tax Advantaged Series B Cumulative Preferred Stock*.........
Exhibit B Amended and Restated By Laws as of May 16, 2001*...................
Exhibit C Not Applicable.....................................................
Exhibit D Specimen Stock Certificate ___% Tax Advantaged Series B
Cumulative Preferred Stock*........................................
Exhibit E Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan*.....................................................
Exhibit F Not Applicable.....................................................
Exhibit G Investment Advisory Agreement*.....................................
Exhibit H Form of Underwriting Agreement*....................................
Exhibit I Not Applicable.....................................................
Exhibit J Custodian Agreement*...............................................
Exhibit K Not Applicable.....................................................
Exhibit L Opinion and Consent of Counsel*....................................
Exhibit M Not Applicable.....................................................
Exhibit N Consent of PricewaterhouseCoopers LLP..............................
Exhibit O Not Applicable.....................................................
Exhibit P Not Applicable.....................................................
Exhibit Q Not Applicable.....................................................
Exhibit R Code of Ethics*....................................................
Exhibit S Power of Attorney*.................................................
---------
* Previously filed and incorporated by reference.
Exhibit N
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-2 of
our report dated February 14, 2001, relating to the financial statements
and financial highlights of The Gabelli Equity Trust Inc. which appear in
the December 31, 2000 Annual Report to Shareholders of The Gabelli Equity
Trust Inc. which is also incorporated by reference into the Registration
Statement, and relating to the senior securities table for the Series A
Preferred shares which appears in such Registration Statement. We also
consent to the references to us under the headings "Financial Highlights",
"Experts", "Counsel and Independent Accountants" and "Financial Statements"
in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
June 8, 2001