<PAGE> 1
PROSPECTUS
6,000,000 SHARES
GENERAL AMERICAN INVESTORS COMPANY, INC.
7.20% TAX-ADVANTAGED CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
------------------------
The shares of 7.20% Tax-Advantaged Cumulative Preferred Stock, liquidation
preference $25 per share (the "Cumulative Preferred Stock"), to be issued by
General American Investors Company, Inc. (the "Company") will be senior
securities of the Company. Prior to the offering, there has been no public
market for the Cumulative Preferred Stock. The Company is a closed-end
diversified management investment company. The Company's principal investment
objective is long-term capital appreciation. Lesser emphasis is placed on
current income. No assurance can be given, however, that the Company's
investment objectives will be achieved.
Dividends on the Cumulative Preferred Stock offered hereby will be
cumulative from June 19, 1998 and will be payable quarterly commencing September
23, 1998, at the annual rate of 7.20% of the liquidation preference of $25 per
share.
The tax advantage associated with the Cumulative Preferred Stock arises from
the Company's status as a registered investment company and the current
requirement that dividends on the Cumulative Preferred Stock consist of ordinary
income and capital gains in proportion to which the Company earns that character
of income. Therefore, dividends paid on the Cumulative Preferred Stock are
expected to consist of varying proportions of net long-term capital gains
(consisting of 20% Rate Gain (as defined) derived from the sale of assets held
longer than 18 months and 28% Rate Gain (as defined) derived from the sale of
assets held longer than one year but less than 18 months), ordinary income and,
in unusual circumstances, return of capital. Dividends consisting of net
long-term capital gains may be taxed at a lower rate than dividends consisting
of ordinary income for certain non-corporate taxpayers. During the past one,
five, ten and twenty fiscal years ended December 31, 1997, net long-term capital
gains comprised 93%, 95%, 94% and 88%, respectively, of distributions paid by
the Company on its Common Stock. It is currently expected that dividends paid on
the Cumulative Preferred Stock will also consist primarily of net long-term
capital gains. No assurance can be given, however, as to what percentage, if
any, of the dividends paid on the Cumulative Preferred Stock will be paid out of
net long-term capital gains, which are generally taxed at lower rates for
individuals than dividends paid out of net short-term capital gains and ordinary
income, which are generally taxed at ordinary income rates.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated "aaa" by Moody's Investors Service, Inc. ("Moody's"). In connection with
the receipt of such rating, the composition of the Company's portfolio must
reflect the guidelines established by Moody's, and the Company will be required
to maintain a minimum discounted asset coverage ratio with respect to the
Cumulative Preferred Stock. See "Description of Rating Agency
Guidelines -- Rating Agency Guidelines."
The Cumulative Preferred Stock has been approved for listing on the New York
Stock Exchange, subject to notice of official issuance. Trading of the
Cumulative Preferred Stock on the New York Stock Exchange is expected to
commence within 30 days of this Prospectus. See "Underwriting."
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE CUMULATIVE PREFERRED STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================================
PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO
PUBLIC (1) COMPANY(2)
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................... $25.00 $.7875 $24.2125
- - ---------------------------------------------------------------------------------------------------------------------------
Total(2)............................ $150,000,000 $4,725,000 $145,275,000
===========================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting estimated offering expenses of $700,000 payable by the
Company.
The shares of Cumulative Preferred Stock offered hereby are offered
severally by the Underwriters, as specified herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part. It is expected that certificates for the shares of Cumulative Preferred
Stock will be ready for delivery only through the facilities of the Depository
Trust Company in New York, New York on or about June 19, 1998 against payment
therefor in immediately available funds.
------------------------
As Joint Bookrunners
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
------------------------
PAINEWEBBER INCORPORATED PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is June 16, 1998.
<PAGE> 2
The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Company for cash at a price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) (the
"Redemption Price") in the event that the Company fails to maintain a quarterly
asset coverage of at least 200% or to maintain the discounted asset coverage
required by Moody's, subject to the Company's determination to terminate
compliance with the Rating Agency Guidelines (as defined herein). Commencing
June 23, 2003 and thereafter, on any quarterly Dividend Payment Date (as defined
herein), the Company at its option may redeem the Cumulative Preferred Stock in
whole or in part for cash at a price equal to the Redemption Price. Prior to
June 23, 2003, the Cumulative Preferred Stock will be redeemable, at the option
of the Company, for cash at a price equal to the Redemption Price, only to the
extent necessary for the Company to continue to qualify for tax purposes as a
regulated investment company. See "Description of Cumulative Preferred
Stock -- Redemption" and "Description of Rating Agency Guidelines --
Redemption."
If the Company voluntarily terminates compliance with the Rating Agency
Guidelines, the dividend rate payable on the Cumulative Preferred Stock will be
increased by .375% per annum and, among other things, the Company will no longer
be required to maintain the discounted asset coverage required by Moody's. See
"Description of Rating Agency Guidelines -- Rating Agency Guidelines" and
"-- Termination of Rating Agency Guidelines."
This Prospectus sets forth concisely the information that a prospective
investor should know about the Company before investing. Investors are advised
to read this Prospectus carefully and to retain it for future reference.
Additional information about the Company, including a Statement of Additional
Information (the "SAI"), has been filed with the Securities and Exchange
Commission (the "Commission"). The SAI is available without charge and upon
request by writing to the Company at its address at 450 Lexington Avenue, Suite
3300, New York, New York 10017, or by calling the Company at (212) 916-8400 or
toll-free at (800) 436-8401. The SAI is dated the same date as this Prospectus
and is incorporated by reference in its entirety. The table of contents of the
Statement of Additional Information appears on page 36 of this Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE
PREFERRED STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following information is qualified in its entirety by, and should be
read in conjunction with, the more detailed information included elsewhere in
this Prospectus and the Statement of Additional Information. Capitalized terms
not defined in this Prospectus are defined in the Glossary that appears at the
end of this Prospectus.
The Company................... General American Investors Company, Inc., a
Delaware corporation (the "Company"), has been
engaged in business as a closed-end diversified
management investment company since October 15,
1928. The Company succeeded to a similar
business established in 1927. The Company's
outstanding common stock, par value $1.00 per
share (the "Common Stock"), is listed and
traded on the New York Stock Exchange, Inc.
("NYSE") under the symbol "GAM."
Investment Objectives and
Policies...................... The principal investment objective of the
Company is to obtain long-term capital
appreciation. Lesser emphasis is placed on
current income. No assurance can be given,
however, that the Company's investment
objectives will be achieved. See "Investment
Objectives and Policies."
Portfolio..................... As of March 31, 1998, the net assets of the
Company were $776,990,594 of which $394,832,119
was unrealized appreciation on investments. See
"Portfolio."
Management.................... The Board of Directors of the Company has
overall management responsibility for the
Company. The Company's portfolio is managed by
Spencer Davidson, President and Chief Executive
Officer of the Company. See
"Management -- Portfolio Management" herein and
"Management of the Company" in the Statement of
Additional Information.
The Offering.................. The Company is offering up to 6,000,000 shares
of 7.20% Cumulative Preferred Stock, par value
$1.00 per share, liquidation preference $25 per
share (the "Cumulative Preferred Stock"), at a
purchase price of $25.00 per share.
Dividends..................... Dividends on the Cumulative Preferred Stock at
the annual rate of 7.20% of the liquidation
preference of $25 per share, when, as and if
declared by the Board of Directors, will be
cumulative from June 19, 1998 and will be
payable, out of the Company's legally available
funds therefor, quarterly in arrears on March
23, June 23, September 23 and December 23, in
each year, commencing on September 23, 1998 to
the holders of record on the preceding March 6,
June 6, September 6 and December 6,
respectively. See "Description of Cumulative
Preferred Stock -- Dividends."
Potential Tax Benefit to
Certain Investors............. Dividends paid on the Cumulative Preferred
Stock are expected to consist of varying
proportions of net long-term capital gains
(consisting of gains attributable to the sale
of assets held longer than 18 months, which are
taxable to individuals at a maximum Federal tax
rate of 20% ("20% Rate Gain") and gains
attributable to the sale of assets held longer
than 12 months but less than 18 months, which
are taxable to individuals at a maximum Federal
tax rate of
3
<PAGE> 4
28% ("28% Rate Gain")), ordinary income and, in
unusual circumstances, return of capital. For
individual taxpayers in the 15% marginal
Federal income tax bracket, the Federal tax
rate on 20% Rate Gain is 10% and on 28% Rate
Gain is 15%. See "Tax Attributes of Preferred
Stock Dividends" and "Taxation."
Under the distribution policy adopted by the
Company, all dividends received by the holders
of the Cumulative Preferred Stock within a
given calendar year will have the same
proportions of 20% Rate Gain, 28% Rate Gain,
ordinary income and return of capital. The
amount and composition of dividends paid to
stockholders in a given calendar year will be
reported to each stockholder after the calendar
year on Form 1099-DIV.
The Company intends to allocate net long-term
capital gain and other types of income
recognized by the Company in a given taxable
year proportionately among holders of shares of
Common Stock and shares of Cumulative Preferred
Stock, in accordance with the current position
of the Internal Revenue Service (the "IRS").
Dividends to be paid by the Company on the
Cumulative Preferred Stock are expected to
consist of varying proportions of 20% Rate
Gain, 28% Rate Gain, ordinary income and, in
unusual circumstances, return of capital.
Distributions from net investment income and
short-term capital gains ("Ordinary Income")
generally are taxable to individuals at a
maximum Federal tax rate of 39.6%. During the
past one, five, ten and twenty fiscal years
ended December 31, 1997, long-term capital
gains (i.e., capital gains from the sale of
assets held longer than 12 months) comprised
93%, 95%, 94% and 88%, respectively, of
distributions paid by the Company on its Common
Stock. It is currently expected that dividends
paid on the Cumulative Preferred Stock will
also consist primarily of long-term capital
gains. Accordingly, investors in the Cumulative
Preferred Stock who are individuals may realize
a tax benefit to the extent that dividends paid
by the Company on those shares are comprised of
the less highly taxed long-term capital gains.
No assurance can be given, however, as to what
percentage, if any, of the dividends paid on
the Cumulative Preferred Stock will consist of
long-term capital gains. To the extent that
dividends on the Cumulative Preferred Stock are
not paid from such capital gains, they
generally will be paid from net investment
income and short-term capital gains and will be
taxable as ordinary income. See "Tax Attributes
of Preferred Stock Dividends."
Rating........................ It is a condition to its issuance that the
Cumulative Preferred Stock be issued with a
rating of "aaa" from Moody's Investors Service,
Inc. ("Moody's"), the highest investment grade
rating issued for preferred stock by Moody's.
The Certificate of Designations, Preferences
and Rights creating and fixing the rights and
preferences of the Cumulative Preferred Stock
(the "Certificate of Designations") contains
certain provisions which reflect guidelines
established by Moody's (the "Rating Agency
Guidelines") in order to obtain such rating on
the Cumulative Preferred Stock on June 19, 1998
(the "Date of Original Issue"). See
"Description of Rating Agency
Guidelines -- Rating Agency Guidelines."
4
<PAGE> 5
Although it is the Company's present intention
to comply with the Rating Agency Guidelines,
such that the Cumulative Preferred Stock will
continue to be rated "aaa" by Moody's, the
Board of Directors of the Company may determine
that it is not in the best interests of the
Company to continue to comply with the Rating
Agency Guidelines. If the Company voluntarily
terminates compliance with the Rating Agency
Guidelines, the dividend rate payable on the
Cumulative Preferred Stock will be increased by
.375% per annum. See "Description of Rating
Agency Guidelines -- Termination of Rating
Agency Guidelines."
Asset Coverage................ The Company will be required to maintain two
different asset maintenance requirements: the
asset coverage required by the Investment
Company Act of 1940, as amended (the "1940
Act"), and the discounted asset coverage
required by Moody's. Each asset maintenance
requirement is summarized below.
The Company will be required to maintain, as of
the last Business Day of March, June, September
and December of each year, an asset coverage of
at least 200% with respect to the Cumulative
Preferred Stock, which is the asset coverage
required by Section 18 of the 1940 Act. If the
Company had issued and sold the shares of
Cumulative Preferred Stock offered hereby as of
March 31, 1998, the asset coverage would have
been 614%. See "Description of Rating Agency
Guidelines -- Asset Maintenance."
Also, the Company will be required to maintain
a Portfolio Calculation for Moody's at least
equal to the Basic Maintenance Amount. The
discount factors and guidelines for determining
the Portfolio Calculation have been established
by Moody's in connection with the Company's
receipt of a rating on the Cumulative Preferred
Stock on their Date of Original Issue of "aaa"
from Moody's. See "Description of Rating Agency
Guidelines -- Rating Agency Guidelines."
Voting Rights................. At all times, holders of shares of Cumulative
Preferred Stock and any other Preferred Stock
will elect two members of the Company's Board
of Directors, and holders of shares of
Cumulative Preferred Stock, any other Preferred
Stock and Common Stock, voting as a single
class, will elect the remaining directors.
However, upon a failure by the Company to pay
dividends on the Cumulative Preferred Stock in
an amount equal to two full years' dividends,
holders of shares of Cumulative Preferred
Stock, voting as a separate class with any
other outstanding shares of Preferred Stock of
the Company, will have the right to elect the
smallest number of directors that would
constitute a majority of the directors until
cumulative dividends have been paid or provided
for. Holders of shares of Cumulative Preferred
Stock and any other Preferred Stock will vote
separately as a class on certain other matters,
as required under the Company's Certificate of
Designations, the 1940 Act and Delaware law.
Except as otherwise indicated in this
Prospectus and as otherwise required by
applicable law, holders of shares of Cumulative
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 any
5
<PAGE> 6
other Preferred Stock as a single class. See
"Description of Cumulative Preferred
Stock -- Voting Rights."
Mandatory Redemption.......... The Company will be required to redeem the
Cumulative Preferred Stock in the situations
discussed below.
The Cumulative Preferred Stock is subject to
mandatory redemption in whole or in part by the
Company in the event that the Company fails (i)
to maintain the quarterly asset coverage or
(ii) to maintain weekly a Portfolio Calculation
at least equal to the Basic Maintenance Amount
required by Moody's and, in each case, does not
cure such failure by the applicable Cure Date
(as defined herein), subject to the Company's
determination to terminate compliance with the
Rating Agency Guidelines. 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 (the "Redemption Price").
In the event that shares are redeemed due to a
failure to maintain the quarterly asset
coverage, the Company may redeem a sufficient
number of shares of Cumulative Preferred Stock
in order that the Asset Coverage, as defined in
the 1940 Act, of the remaining outstanding
shares of Cumulative Preferred Stock and any
other Preferred Stock after redemption is up to
225%.
In the event that shares are redeemed due to a
failure to maintain weekly a Portfolio
Calculation at least equal to the Basic
Maintenance Amount, the Company may redeem a
sufficient number of shares of Cumulative
Preferred Stock in order that the Portfolio
Calculation exceeds the Basic Maintenance
Amount of the remaining outstanding shares of
Cumulative Preferred Stock and any other
Preferred Stock by up to 10%.
The Cumulative Preferred Stock is also subject
to mandatory redemption in whole if the
Company's Board of Directors and holders of
Common Stock authorize certain transactions.
See "Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption"
and "Description of Rating Agency
Guidelines -- Redemption."
Optional Redemption........... Commencing June 23, 2003 and thereafter, on any
quarterly Dividend Payment Date (as defined
herein), the Company at its option may redeem
the Cumulative Preferred Stock, in whole or in
part, for cash at a price equal to the
Redemption Price. Prior to June 23, 2003, the
Cumulative Preferred Stock will be redeemable
at the option of the Company at the Redemption
Price only to the extent necessary for the
Company to continue to qualify for tax purposes
as a regulated investment company. See
"Description of Cumulative Preferred
Stock -- Redemption -- Optional Redemption."
Liquidation Preference........ The liquidation preference of each share of
Cumulative Preferred Stock is $25 plus an
amount equal to accumulated and unpaid
dividends (whether or not earned or declared)
to the date of distribution. See "Description
of Cumulative Preferred Stock -- Liquidation
Rights."
6
<PAGE> 7
Use of Proceeds............... The Company will use the net proceeds from the
offering of the Cumulative Preferred Stock to
purchase additional portfolio securities in
accordance with its investment objectives and
policies. See "Use of Proceeds."
Listing....................... Prior to this offering, there has been no
public market for the Cumulative Preferred
Stock. The Cumulative Preferred Stock has been
approved for listing on the NYSE, subject to
notice of official issuance. However, during an
initial period which is not expected to exceed
30 days from the date of this Prospectus, the
Cumulative Preferred Stock may not be listed on
such securities exchange. During such period,
it is expected that the Underwriters intend to
make a market in the Cumulative Preferred
Stock; however, they have no obligation to do
so. Consequently, an investment in the
Cumulative Preferred Stock may be illiquid
during such period. See "Underwriting."
Risk Factors.................. The market price for the Cumulative Preferred
Stock will be influenced by changes in interest
rates, the perceived credit quality of the
Cumulative Preferred Stock and other factors,
and may be influenced by the portion of the
Company's assets consisting of unrealized
appreciation, the relative percentage of
dividends on the Cumulative Preferred Stock
consisting of net investment income and net
realized long-term capital gains and other
factors.
As indicated above, the Cumulative Preferred
Stock is subject to redemption under specified
circumstances. Subject to such circumstances,
the Cumulative Preferred Stock is perpetual. To
the extent that the Company experiences a
substantial decline in the value of its net
assets, it may be required to redeem Cumulative
Preferred Stock to restore compliance with the
applicable asset coverage requirements.
The credit rating on the Cumulative Preferred
Stock could be reduced or withdrawn while an
investor holds shares either as a result of the
Company's termination of compliance with the
Rating Agency Guidelines or otherwise, and the
credit rating does not eliminate or mitigate
the risks of investing in the Cumulative
Preferred Stock. A reduction or withdrawal of
the credit rating may have an adverse effect on
the market value of the Cumulative Preferred
Stock.
The Cumulative Preferred Stock is not a debt
obligation of the Company. The Cumulative
Preferred Stock will be junior in respect of
dividends and liquidation preferences to any
indebtedness incurred by the Company.
Although not anticipated, precipitous declines
in the value of the Company's assets could
result in the Company having insufficient
assets to redeem all of the Cumulative
Preferred Stock for the full Redemption Price.
The tax advantage associated with the
Cumulative Preferred Stock is dependent on the
Company's recognition of long-term capital
gains. No assurance can be given as to what
percentage, if any, of the dividends paid on
the Cumulative Preferred Stock will be paid
7
<PAGE> 8
out of net long-term capital gains. See "Risk
Factors -- Preferred Stock."
The Company may invest its assets in foreign
securities. Investing in securities of foreign
companies and foreign governments, which
generally are denominated in foreign
currencies, may involve certain risk and
opportunity considerations not typically
associated with investing in domestic companies
and could cause the Company to be affected
favorably or unfavorably by changes in currency
exchange rates and revaluations of currencies.
See "Risk Factors -- Foreign Securities."
The Company is dependent upon the expertise of
Mr. Spencer Davidson in providing portfolio
management services with respect to the
Company's investments. If the Company were to
lose the services of Mr. Davidson, its
investment decisions could be adversely
affected to the extent the Company could not
appoint a successor in a timely manner. There
can be no assurance that a suitable replacement
could be found for Mr. Davidson in a timely
manner in the event of his death, resignation,
retirement or inability to act on behalf of the
Company. See "Risk Factors -- Dependence on Key
Personnel."
Federal Income Tax
Considerations................ The Company has qualified, and intends to
remain qualified, for Federal income tax
purposes, as a regulated investment company
("RIC"). Qualification requires, among other
things, compliance by the Company with certain
distribution requirements. Limitations on
distributions, which could be imposed in the
event the Company fails to satisfy the Asset
Coverage requirements under the 1940 Act on the
Cumulative Preferred Stock, could jeopardize
the Company's ability to meet the distribution
requirements. The Company presently intends,
however, to the extent possible, to purchase or
redeem Cumulative Preferred Stock, if
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.
Anti-takeover Provisions...... Certain provisions of the Company's Restated
Certificate of Incorporation (the "Restated
Certificate of Incorporation") and By-Laws may
be regarded as "anti-takeover" provisions.
Pursuant to these provisions, the affirmative
vote of the holders of 66 2/3% of the
outstanding shares of capital stock of the
Company is necessary to authorize the
conversion of the Company from a closed-end to
an open-end investment company and to authorize
a merger or consolidation of the Company with
an open-end investment company. The overall
effect of these provisions is to render more
difficult the accomplishment of a proposal to
convert the Company's status to an open-end
investment company. In addition, the
affirmative vote of the holders of 66 2/3% of
the outstanding shares of capital stock of the
Company is necessary to authorize the sale of
all or substantially all of the assets of the
Company. See "Certain Provisions of the
Restated Certificate of Incorporation and
By-Laws; Anti-Takeover Provisions."
8
<PAGE> 9
Custodian, Transfer Agent,
Registrar and Dividend-Paying
Agent....................... Bankers Trust Company serves as the Company's
custodian. ChaseMellon Shareholder Services,
L.L.C. serves as the Company's stock transfer
agent, registrar and dividend-paying agent. See
"Custodian, Transfer Agent, Registrar and
Dividend-Paying Agent."
9
<PAGE> 10
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
Dividends paid on the Cumulative Preferred Stock are expected to consist of
varying proportions of net long-term capital gains (consisting of 20% Rate Gain
(as defined) derived from the sale of assets held longer than 18 months and 28%
Rate Gain (as defined) derived from the sale of assets held longer than one year
but less than 18 months), ordinary income and, in unusual circumstances, return
of capital.
The Company intends to distribute to its stockholders substantially all of
its investment company taxable income. The Company is a regulated investment
company ("RIC"), and a RIC's distributions generally retain their character as
capital gains or ordinary income when received by its preferred and common
stockholders. However, distributions from short-term capital gains are taxable
as ordinary income. Thus, the stated 7.20% dividends payable by the Company to
holders of the Cumulative Preferred Stock may, for Federal income tax purposes,
consist of capital gains earned on the sale of assets with various holding
periods, ordinary income and/or returns of capital.
Dividends paid out of net capital gain on assets held longer than 18 months
by the Company ("20% Rate Gain") generally are currently taxable to individuals
at a maximum Federal tax rate of 20%. Dividends paid out of net capital gain on
assets held longer than 12 months but not longer than 18 months by the Company
("28% Rate Gain") generally are currently taxable to individuals at a maximum
Federal tax rate of 28%. Dividends paid out of net investment income and net
short-term capital gains of the Company ("Ordinary Income") generally are
taxable to individuals at a maximum Federal tax rate of 39.6%.
Although the Company is not managed utilizing a tax-focused investment
strategy and does not seek to achieve any particular distribution composition,
individual investors in the Cumulative Preferred Stock would, under current
Federal income tax law, realize a tax advantage to the extent that distributions
by the Company to its stockholders are composed of the less highly taxed 20%
Rate Gain and 28% Rate Gain. In contrast, preferred stock dividends distributed
by corporations that are not RICs are generally taxed at ordinary income rates.
During the past one, five, ten and twenty fiscal years ended December 31,
1997, net long-term capital gains (i.e., capital gains from the sale of assets
held longer than 12 months and thus constituting either 20% Rate Gain or 28%
Rate Gain) comprised 93%, 95%, 94% and 88%, respectively, of distributions paid
by the Company on its Common Stock. It is currently expected that dividends paid
on the Cumulative Preferred Stock will also consist primarily of net long-term
capital gains. No assurance can be given, however, as to what percentage, if
any, of the dividends paid on the Cumulative Preferred Stock will consist of 20%
Rate Gain or 28% Rate Gain.
The Federal income tax characteristics of the Company and the taxation of
its stockholders are described more fully under "Taxation."
10
<PAGE> 11
The following table shows the percentage of yearly common stock dividends
comprised of net long-term capital gain attributable to assets held longer than
12 months.
TEN YEAR DIVIDEND HISTORY
The following chart shows the composition of the average earnings of the
Company during the 5-year period from 1993 through 1997.
5 YEAR AVERAGE-EARNINGS COMPOSITION(1)
(1) Recalculated as if the current 20% Rate Gain and 28% Rate Gain categories
were in effect during the 5-year period from 1993 through 1997.
ORDINARY INCOME EQUIVALENT YIELD CALCULATION
The following table shows the pure Ordinary Income equivalent yield that
would be generated by the stated dividend rate on the Cumulative Preferred
Stock, assuming distributions for Federal income tax purposes consisting of six
different proportions of 20% Rate Gain, 28% Rate Gain and Ordinary Income for an
individual in the 31% Federal marginal income tax bracket. Both this table and
the table below it assume the indicated proportions of 20% Rate Gain and 28%
Rate Gain. In reading these tables,
11
<PAGE> 12
prospective investors should understand that a number of actions could affect
the actual composition for Federal income tax purposes of the Company's
distributions each year. Such factors include (i) the Company's investment
performance for any particular year, which may result in varying proportions of
20% Rate Gain, 28% Rate Gain, Ordinary Income and/or return of capital in the
year's distributions, and (ii) revocation or revision of the IRS revenue ruling
requiring the proportionate allocation of 20% Rate Gain and 28% Rate Gain among
holders of various classes of a closed-end RIC'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
COMPANY'S FUTURE DISTRIBUTIONS.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED
DIVIDEND RATE OF
------------------------
<S> <C> <C> <C> <C> <C>
7.20%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF CUMULATIVE PREFERRED STOCK
STATED ANNUAL DIVIDEND COMPRISED OF
- - ------------------------------------------
LONG-TERM CAPITAL GAINS
- - ---------------------------
20% RATE 28% RATE ORDINARY IS EQUIVALENT FOR AN INDIVIDUAL IN THE 31% FEDERAL
GAIN GAIN INCOME INCOME TAX BRACKET TO AN ORDINARY INCOME YIELD OF:
- - ------------ ------------ ------------ ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
75.0% 15.0% 10.0% 8.11%
50.0% 25.0% 25.0% 7.85%
33.3% 33.3% 33.3% 7.69%
25.0% 25.0% 50.0% 7.57%
10.0% 15.0% 75.0% 7.36%
-- -- 100.0% 7.20%
</TABLE>
------------------------
Assuming that 20% Rate Gain, 28% Rate Gain and Ordinary Income comprise
75%, 15% and 10%, respectively, of a stated Cumulative Preferred Stock dividend,
the following table shows the pure Ordinary Income equivalent yields that would
be generated at the stated dividend rate for individuals in the indicated tax
brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
------------------------------
<S> <C> <C> <C> <C> <C>
7.20%
</TABLE>
<TABLE>
<CAPTION>
IS EQUIVALENT TO AN
FEDERAL TAX BRACKET(1) ORDINARY INCOME YIELD OF
- - ---------------------- -------------------------
<S> <C> <C> <C>
39.6%....................................................... 9.16%
36.0%....................................................... 8.69%
31.0%....................................................... 8.11%
28.0%....................................................... 7.80%
15.0%(2).................................................... 7.52%
</TABLE>
The tax characteristics of the Company are described more fully under
"Taxation." Consult your tax adviser for further details.
The charts above are for illustrative purposes only and cannot be taken as
an indication of the composition of future distributions by the Company.
12
<PAGE> 13
- - ---------------
(1) Annual taxable income levels corresponding to the 1998 Federal marginal tax
brackets are as follows:
<TABLE>
<CAPTION>
1998 FEDERAL INCOME
TAX BRACKET SINGLE JOINT
- - ------------------- ------ -----
<S> <C> <C>
39.6% over $278,450 over $278,450
36.0% $128,101 - $278,450 $155,951 - $278,450
31.0% $61,401 - $128,100 $102,301 - $155,950
28.0% $25,351 - $61,400 $42,351 - $102,300
15.0% up to and including $25,350 up to and including $42,350
</TABLE>
An investor's 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 for high-income taxpayers and an overall limit on
itemized deductions. Income may also be subject to certain state, local and
foreign taxes. For investors who 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) Reflects the fact that individuals in the 15% tax bracket are taxed at a 10%
rate on gain attributable to assets held longer than 18 months and at a 15%
rate on gain attributable to assets held longer than 12 months but not
longer than 18 months.
13
<PAGE> 14
FINANCIAL HIGHLIGHTS
The selected financial data set forth below is for shares of Common Stock
outstanding for the three months ended March 31, 1998 and for each year in the
ten-year period ended December 31, 1997. The financial information was derived
from and should be read in conjunction with the financial statements of the
Company incorporated by reference into this Prospectus and the Statement of
Additional Information. The financial information set forth below has been
derived from the financial statements and (except for the financial data as of
March 31, 1998) has been audited by Ernst & Young LLP, independent auditors, as
stated in their unqualified report accompanying such financial statements, which
report is incorporated by reference into this Prospectus and the Statement of
Additional Information.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ----------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 29.15 $ 25.24 $ 23.94 $ 22.31 $ 24.75 $ 28.56
-------- -------- -------- -------- -------- --------
Net investment income............. .10 .21 .22 .08 .05 .03
Net gain (loss) on securities --
realized and unrealized........ 3.49 7.15 3.86 4.54 (.94) (.80)
-------- -------- -------- -------- -------- --------
Total from investment operations.... 3.59 7.36 4.08 4.62 (.89) (.77)
-------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income(1)...................... (.01) (.26) (.20) (.11) (.05) (.04)
Distributions from capital
gains.......................... (.20) (3.19) (2.58) (2.87) (1.49) (2.98)
In excess of net income........... -- -- -- (.01) (.01) (.02)
-------- -------- -------- -------- -------- --------
Total distributions................. (.21) (3.45) (2.78) (2.99) (1.55) (3.04)
-------- -------- -------- -------- -------- --------
Net asset value, end of period...... $ 32.53 $ 29.15 $ 25.24 $ 23.94 $ 22.31 $ 24.75
======== ======== ======== ======== ======== ========
Per share market value, end of
period............................ $ 29.19 $ 26.19 $ 21.00 $ 20.00 $ 19.00 $ 22.25
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:
Stockholder Return based on market
price per share................... 12.38%(3) 42.58% 19.48% 21.22% -7.86% -15.92%
RATIOS AND SUPPLEMENTAL DATA:
Total net assets, end of period
(000's omitted)................... $776,991 $702,597 $597,597 $573,693 $519,722 $553,898
Ratio of expenses to average net
assets............................ 0.23%(3) 0.98% 1.05% 1.25% 1.17% 1.16%
Ratio of net income to average net
assets............................ 0.34%(3) 0.80% 0.88% 0.36% 0.21% 0.14%
Portfolio turnover rate............. 6.70%(3) 32.45% 33.40% 29.14% 17.69% 19.50%
Average commission rate paid per
share(2).......................... $ .0500 $ .0504 $ .0500
Shares outstanding, end of period
(000's omitted)................... 23,886 24,105 23,679 23,963 23,292 22,379
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 30.60 $ 20.60 $ 21.41 $ 17.03 $ 16.70
-------- -------- -------- -------- --------
Net investment income...................... -- .09 .18 .19 .28
Net gain (loss) on securities -- realized
and unrealized.......................... 1.05 12.05 .92 5.92 2.20
-------- -------- -------- -------- --------
Total from investment operations............. 1.05 12.14 1.10 6.11 2.48
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income(1).... (.03) (.10) (.21) (.27) (.25)
Distributions from capital gains........... (3.06) (2.04) (1.70) (1.46) (1.90)
In excess of net income.................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions.......................... (3.09) (2.14) (1.91) (1.73) (2.15)
-------- -------- -------- -------- --------
Net asset value, end of period............... $ 28.56 $ 30.60 $ 20.60 $ 21.41 $ 17.03
======== ======== ======== ======== ========
Per share market value, end of period........ $ 30.00 $ 29.00 $ 17.00 $ 18.13 $ 13.38
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN:
Stockholder Return based on market price per
share...................................... 14.78% 85.00% 4.00% 48.60% 20.94%
RATIOS AND SUPPLEMENTAL DATA:
Total net assets, end of period (000's
omitted)................................... $586,489 $587,213 $382,234 $381,933 $301,791
Ratio of expenses to average net assets...... 1.16% 1.02% 1.07% 1.04% 1.14%
Ratio of net income to average net assets.... 0.00% 0.37% 0.84% 0.96% 1.60%
Portfolio turnover rate...................... 14.42% 21.30% 18.77% 26.91% 19.37%
Average commission rate paid per share(2)....
Shares outstanding, end of period (000's
omitted)................................... 20,534 19,187 18,559 17,843 17,725
</TABLE>
- - ---------------
(1) Includes short-term capital gains in the amount of $.05 per share for 1997,
$.03 per share for 1995 and $.02 per share for 1989.
(2) Beginning with the year ended December 31, 1996, the Company is required to
disclose its average commission rate paid per share for purchases and sales
of investment securities.
(3) Not annualized.
15
<PAGE> 16
THE COMPANY
General American Investors Company, Inc. (the "Company") is a closed-end
diversified management investment company, incorporated under the laws of the
State of Delaware on October 15, 1928, and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Company succeeded to a
similar business established in 1927. As of March 31, 1998, the Company had
23,885,978 shares of Common Stock issued and outstanding with an aggregate net
asset value of $776,990,594. The Company's principal office is located at 450
Lexington Avenue, Suite 3300, New York, New York 10017, its telephone number is
(212) 916-8400 and its toll free telephone number is (800) 436-8401.
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. In seeking to achieve
its primary investment objective, the Company invests principally in common
stocks believed by its management to have better-than-average growth potential.
Normally, a substantially fully-invested position in equities is maintained. See
"Investment Objectives and Policies."
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
$144,575,000 (after deducting the underwriting discounts and estimated offering
expenses). The Company expects to invest such proceeds in accordance with the
Company's investment objectives and policies within six months from the
completion of the offering, depending on market conditions for the types of
securities in which the Company principally invests. Pending such investment,
the proceeds will be held in high quality short-term debt securities and
instruments. See "Investment Objectives and Policies."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 on an actual basis and as adjusted to give effect to the
consummation of the offering.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------
ACTUAL AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
LONG-TERM DEBT.............................................. -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $1 par value:
Authorized 10,000,000 shares; outstanding 0 shares; as
adjusted, 6,000,000 shares of 7.20% Cumulative
Preferred Stock outstanding............................ $ -- $150,000,000
============ ============
Common Stock, $1 par value:
Authorized 30,000,000 shares; outstanding 23,885,978
shares (exclusive of 262,000 shares held in
Treasury).............................................. $ 23,885,978 $ 23,885,978
Paid-in capital........................................... 342,306,878 336,881,878
Undistributed realized gain on securities sold............ 14,085,006 14,085,006
Undistributed net income.................................. 1,880,613 1,880,613
Unrealized appreciation on investments.................... 394,832,119 394,832,119
------------ ------------
Net Assets applicable to Common Stock............. $776,990,594 $771,665,594
============ ============
</TABLE>
- - ---------------
(1) After deducting the underwriting discounts and estimated offering expenses
of $5,425,000.
16
<PAGE> 17
PORTFOLIO
The following table sets forth certain information with respect to the
Company's investment portfolio as of March 31, 1998.
<TABLE>
<CAPTION>
VALUE PERCENTAGE
------------ ----------
<S> <C> <C>
Common stocks............................................... $656,845,123 84.5%
Corporate discount notes.................................... 111,392,625 14.3
Convertible corporate note.................................. 9,996,875 1.3
Liabilities in excess of cash and other assets.............. (1,244,029) (0.1)
------------ -----
Total net assets.................................. $776,990,594 100.0%
============ =====
Sector Weightings in Common Stock Portfolio:
Pharmaceuticals and health care............................. $123,667,175 15.9%
Retail trade................................................ 109,543,125 14.1
Banking..................................................... 100,350,909 12.9
Insurance................................................... 93,897,125 12.1
Consumer products and services.............................. 80,759,063 10.4
Communications and information services..................... 42,930,737 5.5
Computer software and systems............................... 35,224,750 4.5
Oil and natural gas (including services).................... 24,012,250 3.1
Environment control (including services).................... 20,186,813 2.6
Miscellaneous............................................... 16,818,813 2.2
Semiconductors.............................................. 9,351,563 1.2
Special holdings............................................ 102,800 0.0
------------ -----
$656,845,123 84.5%
============ =====
</TABLE>
The following table sets forth the Company's ten largest investment
holdings as of March 31, 1998.
<TABLE>
<CAPTION>
% TOTAL
SHARES VALUE NET ASSETS
--------- ------------ ----------
<S> <C> <C> <C>
The Home Depot, Inc. .................................. 990,000 $ 66,948,750 8.6%
Pfizer Inc. ........................................... 365,000 36,385,938 4.7
Wal-Mart Stores, Inc. ................................. 670,000 34,044,375 4.4
AB Astra............................................... 1,382,500 27,962,450 3.6
Ford Motor Company..................................... 420,000 27,221,250 3.5
First Empire State Corporation......................... 50,000 24,993,750 3.2
Life Re Corporation.................................... 275,000 20,281,250 2.6
USA Waste Services, Inc. .............................. 453,000 20,186,813 2.6
General Re Corporation................................. 90,000 19,856,250 2.6
Crestar Financial Corp. ............................... 300,000 17,737,500 2.3
------------ ----
$295,618,326 38.0%
============ ====
</TABLE>
The following table sets forth as of March 31, 1998 the unrealized
appreciation on investments as a percentage of the Company's net assets.
<TABLE>
<S> <C> <C>
Cost Basis of Net Assets.................................... $382,158,475 49.2%
Unrealized Appreciation on Investments...................... $394,832,119 50.8%
------------ -----
Total Net Assets.................................. $776,990,594 100.0%
============ =====
</TABLE>
17
<PAGE> 18
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. In seeking to achieve
its primary investment objective, the Company invests principally in common
stocks believed by its management to have better-than-average growth potential.
Normally, a substantially fully-invested position in equities is maintained.
There are market risks inherent in any investment, and no assurance can be given
that the investment objectives of the Company will be achieved.
INVESTMENT POLICIES
The Company's investment policy is flexible, as its Restated Certificate of
Incorporation permits investment in all forms of securities without limiting the
portion of its assets which may be invested in any one type. While common stocks
have made up the bulk of investments, assets may be held in cash or invested in
all types of securities, that is, in bonds, debentures, notes, preferred and
common stocks, rights and warrants, and other securities in whatever amounts or
proportions the Company believes are best suited to current and anticipated
economic and market conditions. As a diversified management investment company
registered under the 1940 Act, the Company may not make any investment which
would result in less than 75% of its assets being in cash or cash items,
Government securities and securities of other companies, limited in the case of
any one issuer to not more than 5% of the Company's total assets and to 10% of
the voting securities of such issuer.
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES; INVESTMENT RESTRICTIONS
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. These investment
objectives may not be changed without a vote of the holders of a majority of the
Company's outstanding voting securities.
The policies set forth below are fundamental policies of the Company and
may not be changed without the affirmative vote of the holders of a majority of
the Company's outstanding voting securities, as indicated above. The Company may
not:
1. Issue any class of senior security, or sell any such security of
which it is the issuer, except as permitted by the 1940 Act.
2. Borrow money in excess of 25% of its gross assets, except for the
purchase or redemption of outstanding senior securities.
3. Underwrite securities in excess of 20% of its gross assets.
4. Increase its holdings in a particular industry by additional
investment in that industry beyond 50% of the value of the Company's gross
assets.
5. Purchase or sell real estate.
6. Purchase or sell commodities or commodity contracts in excess of
20% of its gross assets.
7. Make loans (other than through the purchase of a portion of an
issue of bonds, debentures or other securities, issued by another person)
to other persons in an amount exceeding 10% to any one person or exceeding
in the aggregate 20% of its gross assets.
8. Invest in companies for the purpose of exercising control of
management, unless it becomes necessary to do so to conserve any
investment.
If a percentage restriction is met at the time of investment, a later
increase or decrease in percentage resulting from a change in the value of
portfolio securities or amount of total assets will not be considered a
violation of any of the above restrictions.
18
<PAGE> 19
Within the limits of these fundamental policies the Company has reserved
freedom of action. While the Company's fundamental policy permits the Company to
invest up to 50% of the gross value of its assets in a particular industry, it
is the operating policy of the Company to invest not more than 25% of its assets
in any one particular industry.
FOREIGN SECURITIES
The Company may invest its assets in foreign securities, which may include
securities issued by companies in developing countries. As of March 31, 1998, 9%
of the Company's assets were invested in securities of companies domiciled in
foreign countries. Of this amount, 4.9% represented direct foreign investment in
foreign companies and 4.1% represented investment in foreign companies through
American Depositary Receipts.
PORTFOLIO TURNOVER
The Company buys and sells securities to accomplish its investment
objective. The investment policies of the Company and fluctuating market
conditions are instrumental in determining the frequency of changes in
investments. Consequently, it is not possible to predict the portfolio turnover
of the Company with certainty. During the three months ended March 31, 1998 and
the years ended December 31, 1997 and 1996, the portfolio turnover of the
Company was 6.70% (not annualized), 32.45% and 33.40%, respectively.
Portfolio turnover generally involves some expense to the Company,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities. The portfolio
turnover rate is computed by dividing the lesser of the amount of the long-term
securities purchased or securities sold by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less).
19
<PAGE> 20
MANAGEMENT
Under the Company's Restated Certificate of Incorporation and Delaware
General Corporation Law, the Company's business and affairs are managed by or
under the direction of its Board of Directors. The Company's portfolio is
internally managed by the officers of the Company, without an investment
adviser. Information about the directors and officers of the Company is included
in the Statement of Additional Information.
PORTFOLIO MANAGEMENT
Spencer Davidson, President and Chief Executive Officer of the Company, has
been responsible for the management of the Company's portfolio since August
1995. Mr. Davidson joined the Company in 1994 as senior investment counselor.
Prior thereto, he was the general partner of a private investment partnership.
He has spent his entire business career on "Wall Street" since first joining an
investment and banking firm in 1966.
Mr. Davidson supervises and coordinates the Company's investment operations
and provides overall guidance with respect to industry developments and the
economic outlook. He is assisted by four individuals who have ongoing
responsibility for monitoring and evaluating developments in industries in which
they specialize. This internal effort is supplemented by the use of consultants,
two of whom are currently on retainer. The essential function of the investment
staff is to assess social, economic and technological changes and to evaluate
whether such changes give rise to investment opportunities.
EXPENSES
The Company pays all of its own expenses, including, without limitation,
salaries and benefits of its officers and employees; rent for office space;
other investment research, administration and office operations costs;
non-affiliated directors' fees; transfer agent, registrar and custodian fees;
preparation, printing and distribution of its proxy statements, stockholder
reports and notices; auditing and legal fees; Federal registration fees; stock
exchange listing fees and expenses; Federal, state and local taxes; brokerage
commissions; and the cost of issue and sale of its securities.
The Company has taken steps that it believes are reasonably designed to
address the potential failure of computer systems used by the Company and the
Company's service providers in response to the Year 2000 issue. There can be no
assurance that these steps will be sufficient to avoid any adverse impact.
20
<PAGE> 21
RISK FACTORS
Prospective investors should consider carefully the following risk factors
in addition to other information set forth in this Prospectus and the Statement
of Additional Information prior to making an investment in the Cumulative
Preferred Stock.
PREFERRED STOCK
There are a number of risks associated with an investment in Cumulative
Preferred Stock. The market price for the Cumulative Preferred Stock will be
influenced by changes in interest rates, the perceived credit quality of the
Cumulative Preferred Stock and other factors, and may be influenced by the
portion of the Company's assets consisting of unrealized appreciation, the
relative percentage of dividends on the Cumulative Preferred Stock consisting of
net investment income and net realized long-term capital gains and other
factors. The Cumulative Preferred Stock 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 of return than
that of the Cumulative Preferred Stock. Unless the Company is required to redeem
the Cumulative Preferred Stock in the circumstances described in "Description of
Preferred Stock -- Redemption -- Mandatory Redemption" and "Description of
Rating Agency Guidelines -- Redemption" or elects to do so voluntarily, the
Cumulative Preferred Stock is perpetual. The credit rating on the Cumulative
Preferred Stock 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 Cumulative Preferred Stock. A reduction or withdrawal of the credit rating
would likely have an adverse effect on the market value of the Cumulative
Preferred Stock. The Cumulative Preferred Stock is not a debt obligation of the
Company. The Cumulative Preferred Stock would be junior in respect of dividends
and liquidation preference to any indebtedness incurred by the Company. Although
not anticipated, precipitous declines in the value of the Company's assets could
result in the Company having insufficient assets to redeem all of the Cumulative
Preferred Stock for the full Redemption Price.
The tax advantage associated with the Cumulative Preferred Stock is
dependent on the Company's recognition of long-term capital gains. While some
portion of the dividends paid by the Company on its Common Stock have
historically consisted of net long-term capital gains, no assurance can be given
as to what percentage, if any, of the dividends paid on the Cumulative Preferred
Stock will consist of long-term capital gains.
FOREIGN SECURITIES
The Company may invest its assets in foreign securities. Investing in
securities of foreign companies and foreign governments, which generally are
denominated in foreign currencies, may involve certain risk and opportunity
considerations not typically associated with investing in domestic companies and
could cause the Company to be affected favorably or unfavorably by changes in
currency exchange rates and revaluations of currencies. In addition, less
information may be available about foreign companies and foreign governments
than about domestic companies and foreign companies and foreign governments
generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic companies. Foreign securities and their markets
may not be as liquid as U.S. securities and their markets. Securities of some
foreign companies may involve greater market risk than securities of U.S.
companies. Investing in foreign securities may result in higher expenses than
investing in domestic securities because of the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
U.S. exchanges, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges. Investment in foreign securities may also be
subject to local economic risks, including instability of some foreign
governments, the possibility of currency blockage or the imposition of
withholding taxes on dividend or interest payments, and the potential for
expropriation, nationalization or confiscatory taxation and limitations on the
use or removal of funds or other assets.
21
<PAGE> 22
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the expertise of Mr. Spencer Davidson in
providing portfolio management services with respect to the Company's
investments. If the Company were to lose the services of Mr. Davidson, its
investment decisions could be adversely affected to the extent the Company could
not appoint a successor in a timely manner. There can be no assurance that a
suitable replacement could be found for Mr. Davidson in a timely manner in the
event of his death, resignation, retirement or inability to act on behalf of the
Company.
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Certificate of Designations, the form of which is
filed as an exhibit to this Registration Statement. Certain of the capitalized
terms used herein are defined in the Glossary that appears at the end of this
Prospectus.
GENERAL
On March 11, 1998, the shareholders of the Company approved an amendment to
the Company's Restated Certificate of Incorporation to increase the Company's
total authorized capitalization to 40,000,000 shares, consisting of 30,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. In addition,
such amendment granted the Board of Directors the authority to establish by
resolution or resolutions, the designations and the powers, preferences and
rights of the shares of each series of Preferred Stock, if applicable, and the
qualifications, limitations or restrictions of such shares of Preferred Stock.
As of the date of this Prospectus, there are no shares of Cumulative Preferred
Stock or any other Preferred Stock of the Company outstanding.
Under the Certificate of Designations, the Company will be authorized to
issue up to 6,000,000 shares of Cumulative Preferred Stock. No fractional shares
of Cumulative Preferred Stock will be issued. The Board of Directors reserves
the right to issue additional shares of Cumulative Preferred Stock, from time to
time, subject to the restrictions set forth in the Certificate of Designations.
The shares of Cumulative Preferred Stock will, upon issuance, be fully paid and
nonassessable and will have no preemptive, exchange or conversion rights. Any
shares of Cumulative Preferred Stock repurchased or redeemed by the Company will
be cancelled and will revert to authorized but unissued Preferred Stock
undesignated as to series. The Board of Directors may by resolution classify or
reclassify any authorized but unissued Preferred Stock from time to time by
setting or changing the preferences, rights, voting powers, restrictions,
limitations or terms of redemption. The Company will not issue any class of
stock senior to the shares of Cumulative Preferred Stock.
Payments to the holders of Cumulative Preferred Stock of dividends or upon
redemption or in liquidation will be subject to the prior payments of interest
and repayment of principal then due on any other indebtedness of the Company.
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of funds legally available therefor, cumulative cash dividends at the annual
rate of 7.20% per share of the liquidation preference of $25 per share and no
more, payable quarterly in arrears on March 23, June 23, September 23 and
December 23 in each year (or, if such date is not a Business Day, on the next
succeeding Business Day) (each, a "Dividend Payment Date"), commencing on
September 23, 1998, to the persons in whose names the shares of Cumulative
Preferred Stock are registered at the close of business on the preceding March
6, June 6, September 6 and December 6, respectively. Dividends on the shares of
Cumulative Preferred Stock will accumulate from the date of issuance thereof
(the "Date of Original Issue").
No dividends will be declared or paid or set apart for payment on any
shares of Cumulative Preferred Stock for any dividend period or part thereof
unless full cumulative dividends have been or contemporaneously
22
<PAGE> 23
are declared and paid on all outstanding shares of Cumulative Preferred Stock
through the most recent Dividend Payment Dates therefor. If full cumulative
dividends are not declared and paid on the Cumulative Preferred Stock, any
dividends declared on the shares of Cumulative Preferred Stock will be paid pro
rata to the holders of all outstanding shares. Holders of shares of Cumulative
Preferred Stock 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
on any shares of Cumulative Preferred Stock that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Company will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, Common Stock
or other stock, if any, ranking junior to the Cumulative Preferred Stock as to
dividends or upon liquidation) in respect of the Common Stock or any other stock
of the Company ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends or upon liquidation, or call for redemption, redeem,
purchase or otherwise acquire for consideration any shares of its Common Stock
or any other junior stock (except by conversion into or exchange for stock of
the Company ranking junior to or on a parity with the Cumulative Preferred Stock
as to dividends and upon liquidation), unless, in each case, (i) immediately
after such transaction, the Company will have a Portfolio Calculation for
Moody's at least equal to the Basic Maintenance Amount and the Company will
maintain the Asset Coverage (see "Description of Rating Agency
Guidelines -- Asset Maintenance" and "-- Redemption"), (ii) full cumulative
dividends on shares of Cumulative Preferred Stock due on or prior to the date of
the transactions have been declared and paid (or sufficient Deposit Securities
to cover such payment have been deposited with the Dividend-Paying Agent) and
(iii) the Company has redeemed the full number of shares of Cumulative Preferred
Stock required to be redeemed by any provision for mandatory redemption
contained in the Certificate of Designations.
REDEMPTION
Mandatory Redemption. The Company will be required to redeem the
Cumulative Preferred Stock in whole or in part in the event that the Company
fails to maintain a quarterly asset coverage of at least 200% or to maintain the
discounted asset coverage required by Moody's, subject to the Company's
determination to terminate compliance with the Rating Agency Guidelines
discussed under "Description of Rating Agency Guidelines." See "Description of
Rating Agency Guidelines -- Redemption."
The Cumulative Preferred Stock is also subject to mandatory redemption in
whole by the Company at the Redemption Price if the Company's Board of Directors
and holders of Common Stock authorize (a) the dissolution of the Company; (b)
any plan of reorganization (as that term is defined in the 1940 Act) adversely
affecting the Cumulative Preferred Stock or (c) any action to change the nature
of the Company business so as to cease to be an investment company as provided
in Section 13(a)(4) of the 1940 Act.
Optional Redemption. Prior to June 23, 2003, the Company may, at its
option, redeem shares of Cumulative Preferred Stock at the Redemption Price per
share only to the extent that any such redemption is necessary, in the judgment
of the Company, to maintain the Company's status as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"). Commencing June 23, 2003, and at any time and from time to time
thereafter, on any quarterly Dividend Payment Date, the Company may, at its
option, redeem shares of Cumulative Preferred Stock in whole or in part at the
Redemption Price. Such redemptions are subject to the limitations of the 1940
Act, Delaware law and any other agreement relating to indebtedness of the
Company.
Redemption Procedures. A Notice of Redemption will be given to the holders
of record of Cumulative Preferred Stock selected for redemption not less than 30
or more than 60 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
Cumulative 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 Certificate of
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<PAGE> 24
Designations 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 Company
(whether voluntary or involuntary), holders of shares of Cumulative Preferred
Stock then outstanding will be entitled to receive out of the assets of the
Company 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 Company ranking junior to
the Cumulative Preferred Stock as to liquidation payments, a liquidation
distribution in the amount of $25 per share plus an amount equal to all unpaid
dividends accumulated thereon up to and including the date fixed for such
distribution or payment (whether or not earned or declared by the Company, but
excluding interest thereon) (the "Liquidation Preference"), and such holders
will be entitled to no further right or claim to any of the remaining assets of
the Company. If, upon any liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the assets of the Company
available for distribution among the holders of all outstanding shares of
Cumulative Preferred Stock and any other outstanding Preferred Stock of the
Company ranking on a parity with the Cumulative Preferred Stock as to payment
upon liquidation, will be insufficient to permit the payment in full to such
holders of Cumulative Preferred Stock of the Liquidation Preference and the
amounts due upon liquidation with respect to such other Preferred Stock, then
such available assets will be distributed among the holders of Cumulative
Preferred Stock and such other Preferred Stock ratably in proportion to the
respective preferential amounts to which they are entitled. Unless and until the
Liquidation Preference has been paid in full to the holders of Cumulative
Preferred Stock, no dividends or distributions will be made to holders of the
Common Stock or any other stock of the Company ranking junior to the Cumulative
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 Cumulative 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 of the Company then outstanding as a single class.
In connection with the election of the Company's directors, holders of
shares of Cumulative Preferred Stock and any other Preferred Stock, voting as a
separate class, will be entitled at all times to elect two of the Company's
directors, and the remaining directors will be elected by holders of shares of
Common Stock and holders of shares of Cumulative Preferred Stock and any other
Preferred Stock, voting together as a single class. In addition, if at any time
dividends on outstanding shares of Cumulative Preferred Stock and/or any other
Preferred Stock are unpaid in an amount equal to at least two full years'
dividends thereon or if at any time holders of any shares of Preferred Stock are
entitled, together with the holders of shares of Cumulative Preferred Stock, to
elect a majority of the directors of the Company under the 1940 Act, 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 Cumulative 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 at a special meeting of stockholders which will be called and
held as soon as practicable, and at all subsequent meetings at which directors
are to be elected, the holders of shares of Cumulative Preferred Stock and any
other Preferred Stock, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders in any event will be entitled to elect, constitutes a
majority of the total number of directors of the Company as so increased. The
terms of office of the persons who are directors at the time of that election
will continue. If the Company thereafter pays, or declares and sets apart for
payment in full, all dividends payable on all outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock for all past dividend periods, the
additional voting rights of the holders of shares of Cumulative Preferred Stock
and any other Preferred Stock as described above will cease, and the terms of
24
<PAGE> 25
office of all of the additional directors elected by the holders of shares of
Cumulative 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 Cumulative
Preferred Stock and any other Preferred Stock have the right to elect in any
event) will terminate immediately and automatically.
So long as the shares of Cumulative Preferred Stock are outstanding, the
Company will not, without the affirmative vote of the holders of a majority of
the shares of Cumulative Preferred Stock outstanding at the time, voting
separately as one class, amend, alter or repeal the provisions of the Restated
Certificate of Incorporation, whether by merger, consolidation or otherwise, so
as to materially adversely affect any of the rights set forth in the Restated
Certificate of Incorporation of holders of the shares of Cumulative Preferred
Stock. The Board of Directors, however, without stockholder approval, may amend,
alter or repeal the Rating Agency Guidelines in the event the Company receives
confirmation from Moody's that any such amendment, alteration or repeal would
not impair the rating then assigned to the Cumulative Preferred Stock.
Furthermore, under certain circumstances, without the vote of stockholders, the
Board of Directors of the Company may determine that it is not in the best
interests of the Company to continue to comply with the Rating Agency
Guidelines. See "Description of Rating Agency Guidelines -- Termination of
Rating Agency Guidelines." The affirmative vote of a majority of the votes
entitled to be cast by holders of outstanding shares of the Cumulative Preferred
Stock and any other Preferred Stock, voting as a separate 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, any action to change the
subclassification from a closed-end investment company to an open-end investment
company and changes in the Company's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives and Policies," each to the extent shareholder authorization is
required. The class vote of holders of shares of the Cumulative Preferred Stock
and any other Preferred Stock described above will be in addition to a separate
vote of the requisite percentage of shares of Common Stock and Cumulative
Preferred Stock and any other Preferred Stock, voting together as a single
class, necessary to authorize the action in question.
The foregoing voting provisions will not apply to any shares of Cumulative
Preferred Stock 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 Deposit
Securities provided to the Dividend-Paying Agent to effect such redemption.
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF ADDITIONAL PREFERRED
STOCK
So long as any shares of Cumulative Preferred Stock are outstanding, the
Company may issue and sell one or more series of a class of senior securities of
the Company representing indebtedness under the 1940 Act and/or otherwise create
or incur indebtedness, provided that the Company 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 Company representing indebtedness, as defined in the 1940 Act, of at least
300% of the amount of all indebtedness of the Company then outstanding and no
such additional indebtedness will have any preference or priority over any other
indebtedness of the Company upon the distribution of the assets of the Company
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
Company then in effect, will not be considered to be indebtedness limited by the
Certificate of Designations.
So long as any shares of Cumulative Preferred Stock are outstanding, the
Company may issue and sell shares of one of more other series of Preferred Stock
constituting a series of a class of senior securities of the Company
representing stock under the 1940 Act in addition to the shares of Cumulative
Preferred Stock, provided that (i) if the Company is using the proceeds (net of
all offering expenses payable by the Company) of such additional Preferred Stock
to purchase all or a portion of the shares of Cumulative Preferred Stock or to
redeem or otherwise refinance all or a portion of the shares of Cumulative
Preferred Stock, any other
25
<PAGE> 26
Preferred Stock and/or any indebtedness of the Company then outstanding, then
the Company 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 Company which
are stock, as defined in the 1940 Act, of at least 200% of the shares of
Cumulative Preferred Stock and all other Preferred Stock of the Company then
outstanding, or (ii) if the Company is using the proceeds (net of all offering
expenses payable by the Company) of such additional Preferred Stock for any
other purpose, then the Company 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 Company which are stock, as defined in the 1940 Act, of at least 200% of the
shares of Cumulative Preferred Stock and all other Preferred Stock of the
Company then outstanding, and, in the case of either (i) or (ii) above, (iii) no
such additional Preferred Stock will have any preference or priority over any
other Preferred Stock of the Company upon the distribution of the assets of the
Company or in respect of the payment of dividends.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Company is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem their
shares of the Company. The Company, however, may repurchase shares of the
Cumulative Preferred Stock 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 the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
BOOK-ENTRY
Shares of Cumulative Preferred Stock will initially be held in the name of
Cede & Co. ("Cede") as nominee for The Depository Trust Company ("DTC"). The
Company will treat Cede as the holder of record of the Cumulative Preferred
Stock for all purposes. In accordance with the procedures of DTC, however,
purchasers of Cumulative Preferred Stock will be deemed the beneficial owners of
shares purchased for purposes of dividends, voting and liquidation rights.
Purchasers of Cumulative Preferred Stock may obtain registered certificates by
contacting the Transfer Agent (as defined below).
DESCRIPTION OF RATING AGENCY GUIDELINES
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein are defined in the Glossary
that appears at the end of this Prospectus.
The Cumulative Preferred Stock will be rated by Moody's. Moody's has
established guidelines in connection with the Company's receipt of a rating for
the Cumulative Preferred Stock on their Date of Original Issue 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 guidelines have been developed by Moody's in connection with
issuances of asset-backed and similar securities, including debt obligations and
various preferred stocks, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines 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 guidelines do not have the force of law but are being adopted by
the Company in order to satisfy current requirements necessary for Moody's to
issue the above-described rating for the Cumulative Preferred Stock, which
rating is generally relied upon by investors in purchasing such securities. The
guidelines provide a set of tests for portfolio composition and discounted asset
coverage that supplements (and in some cases is more restrictive than) the
applicable requirements of Section 18 of the 1940 Act. Moody's guidelines are
included in the Certificate of Designations and are referred to in this
Prospectus as the "Rating Agency Guidelines."
The Company intends to maintain weekly a Portfolio Calculation at least
equal to the Basic Maintenance Amount. If the Company fails to meet such
requirement and such failure is not cured, the Company will be
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<PAGE> 27
required to redeem some or all of the Cumulative Preferred Stock. See
"-- Redemption." The Rating Agency Guidelines also exclude from Moody's Eligible
Assets and, therefore, from the Portfolio Calculation, certain types of
securities in which the Company may invest and also limit the Company's
acquisition of futures contracts or options on futures contracts, limit reverse
repurchase agreements, limit the writing of options on portfolio securities and
limit the lending of portfolio securities to 5% of the Company's total assets.
The Company historically has either not acquired these instruments or has
engaged in investment strategies requiring these instruments to only a limited
degree. As a result, the Company does not believe that compliance with the
Rating Agency Guidelines will have an adverse effect on its portfolio or on the
achievement of its investment objectives.
The Company 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. As set forth in the Certificate of Designations,
the Board of Directors of the Company may, without stockholder approval, adjust,
modify, alter or change the Rating Agency Guidelines if Moody's advises the
Company in writing that such adjustment, modification, alteration or change will
not adversely affect its then current rating on the Cumulative Preferred Stock.
Furthermore, under certain circumstances, the Board of Directors of the Company
may determine that it is not in the best interests of the Company to continue to
comply with the Rating Agency Guidelines. If the Company terminates compliance
with the Rating Agency Guidelines, it is likely that Moody's will change its
rating on the Cumulative Preferred Stock or withdraw its rating altogether,
which may have an adverse effect on the market value of the Cumulative Preferred
Stock. It is the Company's present intention to continue to comply with the
Rating Agency Guidelines.
As recently described by Moody's, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Cumulative Preferred Stock 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 the Rating
Agency Guidelines address the likelihood that a holder of Cumulative Preferred
Stock will be able to sell such shares. The rating is based on current
information furnished to Moody's by the Company 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.
ASSET MAINTENANCE
The Company will be required to satisfy two separate asset maintenance
requirements under the terms of the Certificate of Designations. These
requirements are summarized below.
Asset Coverage. The Company will be required under the Certificate of
Designations to maintain as of the last Business Day of each March, June,
September and December of each year, an asset coverage of at least 200% (or such
higher percentage as may be required under the 1940 Act) with respect to all
outstanding senior securities of the Company which are stock, including the
Cumulative Preferred Stock. If the Company fails to maintain the asset coverage
on such dates and such failure is not cured within 60 days, the Company will be
required under certain circumstances to redeem certain of the shares of
Cumulative Preferred Stock. See "-- Redemption."
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold as of March 31, 1998, the asset coverage immediately following such
issuance and sale (after giving effect to the deduction of
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<PAGE> 28
the underwriting discounts and estimated offering expenses of $5,425,000) would
have been computed as follows:
<TABLE>
<C> <C> <S>
Value of Company assets less
liabilities not constituting
senior securities $921,565,594
------------------------------------ ------------ = 614%
Senior securities representing $150,000,000
indebtedness
plus liquidation
preference of the
Cumulative Preferred
Stock
</TABLE>
Basic Maintenance Amount. The Company will be required under the
Certificate of Designations to maintain, as of each Valuation Date, portfolio
holdings meeting specified guidelines of Moody's, as described under "-- Rating
Agency Guidelines," having an aggregate discounted value (a "Portfolio
Calculation") at least equal to the Basic Maintenance Amount. If the Company
fails to meet such requirement as to any Valuation Date and such failure is not
cured within 14 days after such Valuation Date, the Company will be required to
redeem certain of the shares of Cumulative Preferred Stock. See "-- Redemption."
Any security not in compliance with the Rating Agency Guidelines described
under "-- Rating Agency Guidelines" will be excluded from the Portfolio
Calculation.
The Moody's Discount Factors and guidelines for determining the market
value of the Company's portfolio holdings have been based on criteria
established in connection with the rating of the Cumulative Preferred Stock.
These factors include, but are not limited to, the sensitivity of the market
value of the relevant asset to changes in interest rates, the liquidity and
depth of the market for the relevant asset, the credit quality of the relevant
asset (for example, the lower the rating of a corporate debt obligation, the
higher the related discount factor) and the frequency with which the relevant
asset is marked to market. The Moody's Discount Factor relating to any asset of
the Company and the Basic Maintenance Amount, the assets eligible for inclusion
in the calculation of the discounted value of the Company's portfolio and
certain 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 Cumulative
Preferred Stock by Moody's.
On or before the fifth Business Day after each Quarterly Valuation Date,
the Company is required to deliver to Moody's a Basic Maintenance Report. Within
ten Business Days after delivery of such report relating to the Quarterly
Valuation Date, the Company will deliver letters prepared by the Company's
independent auditors regarding the accuracy of the calculations made by the
Company in its most recent Basic Maintenance Report. If any such letter prepared
by the Company's independent auditors shows that an error was made in the most
recent Basic Maintenance Report, the calculation or determination made by the
Company's independent auditors will be conclusive and binding on the Company.
REDEMPTION
The Company 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) (the "Redemption Price"), certain of the
shares of Cumulative Preferred Stock (to the extent permitted under the 1940
Act, Delaware law and any other agreement relating to indebtedness of the
Company), subject to the Company's determination to terminate compliance with
the Rating Agency Guidelines discussed under "-- Termination of Rating Agency
Guidelines," in the event that:
(i) the Company fails to maintain the quarterly asset coverage of at
least 200% and such failure is not cured on or before 60 days following
such failure (a "Cure Date"); or
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<PAGE> 29
(ii) the Company fails to maintain a Portfolio Calculation at least
equal to the Basic Maintenance Amount as of any Valuation Date, and such
failure is not cured on or before the 14th day after such Valuation Date
(also, a "Cure Date").
The amount of such mandatory redemption will equal the minimum number of
outstanding shares of Cumulative Preferred Stock the redemption of which, if
such redemption had occurred immediately prior to the opening of business on a
Cure Date, would have resulted in the asset coverage having been satisfied or
the Company having a Portfolio Calculation equal to or greater than the Basic
Maintenance Amount on such Cure Date or, if the asset coverage or a Portfolio
Calculation equal to or greater than the Basic Maintenance Amount, as the case
may be, cannot be so restored, all of the shares of Cumulative Preferred Stock,
at the Redemption Price. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (i) above, the Company may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred Stock
in order to increase the "asset coverage" of a class of senior security which is
stock, as defined in the 1940 Act, of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock after redemption up to
225%. In the event that shares of Cumulative Preferred Stock are redeemed due to
the occurrence of (ii) above, the Company may, but is not required to, redeem a
sufficient number of shares of Cumulative Preferred Stock in order that the
Portfolio Calculation exceeds the Basic Maintenance Amount of the remaining
outstanding shares of Cumulative Preferred Stock and any other Preferred Stock
by up to 10%.
If the Company does not have funds legally available for the redemption of,
or is otherwise unable to redeem, all the shares of Cumulative Preferred Stock
to be redeemed on any redemption date, the Company 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 Company will have funds
legally available for the redemption of, or is otherwise able to redeem, such
shares upon written notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be redeemed,
such redemption will be made pro rata from each holder of shares in accordance
with the respective number of shares held by each such holder on the record date
for such redemption. If fewer than all shares of Cumulative 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. Unless all
accumulated and unpaid dividends for all past dividend periods will have been or
are contemporaneously paid or declared and Deposit Securities for the payment
thereof deposited with the Dividend-Paying Agent, no redemptions of Cumulative
Preferred Stock may be made.
TERMINATION OF RATING AGENCY GUIDELINES
The Certificate of Designations provides that the Board of Directors of the
Company may determine that it is not in the best interests of the Company to
continue to comply with the Rating Agency Guidelines, in which case the Company
will no longer be required to comply with such guidelines, provided that (i) the
Company has given the Dividend-Paying Agent, Moody's and holders of the
Cumulative Preferred Stock at least 20 calendar days' written notice of such
termination of compliance, (ii) the Company is in compliance with the Rating
Agency Guidelines at the time the notice required in clause (i) above is given
and at the time of termination of compliance with the Rating Agency Guidelines,
(iii) at the time the notice required in clause (i) above is given and at the
time of termination of compliance with the Rating Agency Guidelines, the
Cumulative Preferred Stock is listed on the NYSE or on another exchange
registered with the Commission as a national securities exchange and (iv) at the
time of termination of compliance with the Rating Agency Guidelines, the
cumulative cash dividend rate payable on a share of the Cumulative Preferred
Stock is increased by .375% per annum.
If the Company voluntarily terminates compliance with the Rating Agency
Guidelines, Moody's may change its rating on the Cumulative Preferred Stock or
withdraw its rating altogether, which may have an
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<PAGE> 30
adverse effect on the market value of the Cumulative Preferred Stock. It is the
Company's present intention to continue to comply with the Rating Agency
Guidelines.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
Common Stock. The Company is authorized to issue 30,000,000 shares of
Common Stock, par value $1.00 per share. Each share of Common Stock has equal
voting, dividend, distribution and liquidation rights. The shares of Common
Stock outstanding are fully paid and nonassessable. The shares of Common Stock
are not redeemable and have no preemptive, conversion or cumulative voting
rights. As a NYSE-listed company, the Company is required to hold annual
meetings of its stockholders.
Preferred Stock. The Company's Board of Directors has the authority to
cause the Company to issue and sell up to 10,000,000 shares of Preferred Stock,
par value $1.00 per share. The terms of such Preferred Stock would be fixed by
the Board of Directors and could materially limit and/or qualify the rights of
the holders of the Company's Common Stock. The Board of Directors has designated
6,000,000 shares of Preferred Stock as the Cumulative Preferred Stock offered
hereby. See "Description of Cumulative Preferred Stock."
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Company for its own account and (iii)
capital stock outstanding for each class of authorized capital stock of the
Company as of March 31, 1998.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD (EXCLUSIVE OF AMOUNT
AMOUNT BY COMPANY FOR HELD BY COMPANY FOR
TITLE OF CLASS AUTHORIZED ITS OWN ACCOUNT ITS OWN ACCOUNT)
- - -------------- ---------- ---------------- --------------------
<S> <C> <C> <C>
Common Stock................................. 30,000,000 262,000 23,885,978
Preferred Stock.............................. 10,000,000 0 0
</TABLE>
TAXATION
The following is a description of certain U.S. Federal income tax
consequences to a stockholder of acquiring, holding and disposing of the
Cumulative Preferred Stock. The discussion reflects applicable tax laws of the
United States as of the date of this Prospectus. These 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 Company 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 CUMULATIVE PREFERRED STOCK.
TAXATION OF THE COMPANY
The Company has qualified as, and intends to continue to qualify as, a RIC
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If it so qualifies, the Company (but not its stockholders) 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 realized capital gains
(i.e., the excess of its net realized long-term capital gains over its net
realized short-term capital loss) which it distributes to its stockholders in
each taxable year. If the Company fails to qualify as a RIC under the Code, it
would become subject to taxation on all of its taxable income, regardless of
whether the Company has made distributions to its stockholders.
Qualification as a RIC requires, among other things, that the Company: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains
30
<PAGE> 31
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, (i) at least 50% of the market value of the Company'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
Company'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 of any one issuer (other than U.S. government securities or the
securities of other RICs).
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 Company must distribute during each calendar
year an amount equal to, at the minimum, the sum of (1) 98% of its ordinary
income for the calendar year, (2) 98% of its capital gain net income, generally
for the one year period ending on October 31 of such year, and (3) all ordinary
income and capital gain net income for previous years that were not previously
distributed. While the Company 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 Company's
ordinary income and capital gain net income will be distributed to avoid
entirely the imposition of the tax. In such event, the Company will be liable
for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
If the Company does not meet the asset coverage requirements of the 1940
Act or the Certificate of Designations, the Company will be required to suspend
distributions to the holders of the Cumulative Preferred Stock and Common Stock
until the asset coverage is restored. See "Description of Cumulative Preferred
Stock -- Dividends." Such a suspension of distributions might prevent the
Company from distributing 90% of its investment company taxable income, as is
required to qualify as a RIC, or might prevent it from distributing enough
ordinary income and capital gain net income to avoid completely the imposition
of the excise tax. Upon any failure to meet the asset coverage requirements, the
Company may, and in certain circumstances will, be required to redeem shares of
Cumulative Preferred Stock in order to restore the requisite asset coverage and
avoid the adverse consequences to the Company and its stockholders of failing to
qualify as a RIC. If asset coverage were restored, the Company would again be
able to pay dividends and might be able to avoid Company-level taxation.
TAXATION OF STOCKHOLDERS
Dividends are paid by the Company in cash and are taxable to stockholders.
Dividends paid by the Company from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses ("Ordinary Income
Dividends") are taxable to stockholders as ordinary income. Dividends paid from
an excess of net long-term capital gains over net short-term capital losses
(including gains or losses from certain transactions in warrants, rights,
futures and options) and properly designated by the Company ("Capital Gain
Dividends") are taxable to stockholders as long-term capital gains, regardless
of the length of time the stockholder has owned Company shares. Any loss upon
the sale or exchange of Company 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. Distributions in excess of the Company'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 capital assets).
Capital Gain Dividends may be taxed at a lower rate than Ordinary Income
Dividends for certain non-corporate taxpayers. Recent legislation has introduced
additional categories of gain, taxable at different rates for individual
taxpayers. These categories include 20% Rate Gain and 28% Rate Gain. The amount
of 28% Rate Gain on assets held longer than 12 months but not longer than 18
months is taxed at the taxpayer's marginal Federal income tax rate, but not
higher than 28%. The amount of 20% Rate Gain on assets held longer than 18
months is taxed at a maximum rate of 20%. Not later than 60 days after the close
of its taxable year, the Company will provide its stockholders with a written
notice designating the amounts of any Ordinary Income Dividends or Capital Gain
Dividends as well as the portions of its Capital Gain Dividends that constitute
28% Rate Gain and 20% Rate Gain.
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<PAGE> 32
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 or other disposition of shares
of Cumulative Preferred Stock, including, without limitation, a redemption by
the Company, will be taxed as a capital gain or loss if the shares are capital
assets in the stockholder's hands. Capital gain of an individual is generally
subject to a maximum rate of 28% in respect of property held longer than 12
months but not longer than 18 months and a maximum rate of 20% in respect of
property held longer than 18 months.
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 an applicable treaty.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
At the time of a stockholder's purchase, the market price of the Cumulative
Preferred Stock may reflect undistributed net investment income or net realized
capital gains. A subsequent distribution of these amounts by the Company 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.
BACKUP WITHHOLDING
Under certain provisions of the Code, some stockholders may be subject to
31% withholding 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 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. ADDITIONAL
DISCUSSION OF THE TAX RULES APPLICABLE TO THE COMPANY CAN BE FOUND IN THE
STATEMENT OF ADDITIONAL INFORMATION WHICH IS INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS. FOR THE COMPLETE PROVISIONS APPLICABLE TO BOTH STOCKHOLDERS AND THE
COMPANY, 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 RESTATED CERTIFICATE OF INCORPORATION
AND BY-LAWS; ANTI-TAKEOVER PROVISIONS
The Company presently has provisions in its Restated Certificate of
Incorporation and By-Laws (together, in each case, its "Governing Documents")
which could have the effect of rendering more difficult the accomplishment of a
proposal to convert the Company's status to an open-end investment company. The
affirmative vote of the holders of 66 2/3% of the outstanding shares of capital
stock of the Company is required to authorize the conversion of the Company from
a closed-end to an open-end investment company and to
32
<PAGE> 33
authorize a merger or consolidation of the Company with an open-end investment
company. These and other provisions of the Governing Documents of the Company
may be regarded as "anti-takeover" provisions. In addition, the affirmative vote
of 66 2/3% of the outstanding shares of capital stock of is required to approve
the sale of all or substantially all of the assets of the Company.
The Board of Directors has determined that the foregoing voting
requirements are in the best interests of the stockholders generally.
CUSTODIAN, TRANSFER AGENT, REGISTRAR AND DIVIDEND-PAYING AGENT
Bankers Trust Company, which is located at One Bankers Trust Plaza, New
York, N.Y. 10006, acts as custodian of the securities, cash and other assets of
the Company directly or through a book-entry system and is responsible for
delivering and receiving payment for securities sold by the Company, receiving
and paying for securities purchased by the Company, collecting income from
investments of the Company and performing other duties, all as directed by an
authorized person of the Company. ChaseMellon Shareholder Services, L.L.C.,
which is located at Overpeck Centre, 85 Challenger Road, Ridgefield Park, N.J.
07660, acts as the Company's transfer agent, registrar and dividend-paying agent
and will serve in such capacity with respect to the Cumulative Preferred Stock.
UNDERWRITING
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to the Underwriters
severally, the respective number of shares of Cumulative Preferred Stock set
forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 1,300,000
Smith Barney Inc. .......................................... 1,300,000
PaineWebber Incorporated.................................... 1,300,000
Prudential Securities Incorporated.......................... 1,300,000
ABN AMRO Incorporated....................................... 50,000
BT Alex. Brown Incorporated................................. 50,000
Robert W. Baird & Co. Incorporated.......................... 50,000
Bear, Stearns & Co. Inc. ................................... 50,000
CIBC Oppenheimer Corp. ..................................... 50,000
Cowen & Company............................................. 50,000
Dain Rauscher Wessels....................................... 50,000
A.G. Edwards & Sons, Inc. .................................. 50,000
EVEREN Securities, Inc. .................................... 50,000
Fidelity Capital Markets, a Division of Nat'l Finc'l Svs
Corp. .................................................... 50,000
Legg Mason Wood Walker, Incorporated........................ 50,000
Piper Jaffray Inc. ......................................... 50,000
Raymond James & Associates, Inc. ........................... 50,000
The Robinson-Humphrey Company, LLC.......................... 50,000
Tucker Anthony Incorporated................................. 50,000
Wheat First Securities, Inc. ............................... 50,000
---------
Total............................................. 6,000,000
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith Barney Inc.
are acting as joint bookrunners and co-representatives of the Underwriters.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the terms and
33
<PAGE> 34
conditions set forth herein. The Underwriters are committed to take and pay for
all of the shares of Cumulative Preferred Stock offered hereby if any are taken.
The Underwriters propose initially to offer the shares of Cumulative
Preferred Stock to the public at the public offering price set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of $0.50 per share. The Underwriter may allow, and such dealers may
reallow, a discount not in excess of $0.30 per share to certain other dealers.
After the initial offering of the Cumulative Preferred Stock, the public
offering price, concession, and discount may be changed. The underwriting
discount of $.7875 per share is equal to 3.15% of the initial public offering
price. Investors must pay for any shares of Cumulative Preferred Stock purchased
on or before June 19, 1998.
At the request of the Company, the Underwriters have initially reserved up
to 291,000 shares of Cumulative Preferred Stock for sale at the initial public
offering price set forth on the cover page of this Prospectus to certain
eligible directors, employees and persons having business relationships with the
Company. The number of shares of Cumulative Preferred Stock available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be offered
by the Underwriters to the general public on the same basis as other shares
offered hereby. The Company has agreed that it will ensure that shares of
Cumulative Preferred Stock reserved for sale to certain persons identified by
the Underwriters will be restricted from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Underwriters have advised the Company that, pursuant to Regulation M
under the 1933 Act, certain persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Cumulative Preferred Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of shares of Cumulative Preferred Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of shares of
Cumulative Preferred Stock. A "syndicate covering transaction" is a bid for or
purchase of Cumulative Preferred Stock on behalf of the Underwriters to reduce a
short position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Underwriters to reclaim the
selling concession otherwise accruing to an Underwriter or selling group member
in connection with the offering if any of the shares of Cumulative Preferred
Stock originally sold by such Underwriter or selling group member is purchased
in a syndicate covering transaction and has therefore not been effectively
placed by such Underwriter or selling group member. The Underwriters have
advised the Company that such transactions may be effected on the NYSE otherwise
and, if commenced, may be discontinued at any time.
The Company anticipates that the Underwriters may, subsequent to the
completion of the offering of Cumulative Preferred Stock hereunder, from time to
time act as brokers or dealers in connection with the execution of portfolio
transactions for the Company. The Underwriters may also, during the pendency of
the offering of Cumulative Preferred Stock hereunder, act as brokers with
respect to such transactions. See "Brokerage Allocation and Other Practices" in
the Statement of Additional Information. In addition, the Underwriters have
agreed to pay Financial Products Group, Inc. a fee for services performed by it
for the Company in respect of the Cumulative Preferred Stock.
Prior to this offering, there has been no market for the Cumulative
Preferred Stock. The Cumulative Preferred Stock has been approved for listing on
the NYSE, subject to notice of official issuance. However, during an initial
period which is not expected to exceed 30 days from the date of this Prospectus,
the Cumulative Preferred Stock may not be listed on such securities exchange.
During such period, the Underwriters intend to make a market in the Cumulative
Preferred Stock; however, they have no obligation to do so. Consequently, an
investment in the Cumulative Preferred Stock may be illiquid during such period.
The Underwriters have undertaken to sell shares to a minimum of 100 beneficial
owners.
It is expected that delivery of the shares of Cumulative Preferred Stock
will be made against payment therefor on or about the date specified in the last
paragraph of the cover page of this Prospectus.
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<PAGE> 35
VALIDITY OF CUMULATIVE PREFERRED STOCK
The validity of the shares of Cumulative Preferred Stock will be passed on
for the Company by Sullivan & Cromwell, New York, New York. Certain legal
matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York, counsel to the Underwriters.
EXPERTS
Ernst & Young LLP are the independent auditors of the Company. The audited
financial statements of the Company and certain of the information appearing
under the caption "Financial Highlights" included in this Prospectus have been
audited by Ernst & Young LLP. Ernst & Young LLP has an office at 787 Seventh
Avenue, New York, New York 10019, and also performs tax and other professional
services for the Company.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith files reports
and other information with the Commission. Reports, proxy statements and other
information filed by the Company with the Commission pursuant to the
informational requirements of such Acts can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Northeast Regional Office, Seven World Trade
Center, Suite 1300, New York, New York 10048; Pacific Regional Office, 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and Midwest
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and copies of such material can be obtained
from the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with it.
The Company's Common Stock is listed on the New York Stock Exchange, and
reports, proxy statements and other information concerning the Company and filed
with the SEC by the Company 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
Company with the SEC under the Securities Act of 1933 and the 1940 Act. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits for further information with respect to the Company and the
Cumulative Preferred Stock offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the SEC. Each such
statement is qualified in its entirety by such reference. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by its rules and regulations.
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<PAGE> 36
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information dated the date hereof has been filed
with the SEC and is incorporated by reference in this Prospectus. A copy of the
Statement of Additional Information may be obtained by writing to the Company at
its address at 450 Lexington Avenue, Suite 3300, New York, New York 10017, or
calling the Company at (212) 916-8400 or toll-free at (800) 436-8401. The Table
of Contents of the Statement of Additional Information is as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. B-2
Investment Objectives and Policies.......................... B-2
Management of the Company................................... B-4
Principal Stockholders...................................... B-9
Code of Ethics and Related Matters.......................... B-9
Investment Advisory and Other Services...................... B-10
Brokerage Allocation and Other Practices.................... B-10
Net Asset Value............................................. B-11
Financial Statements........................................ B-11
Taxation.................................................... B-11
General Information......................................... B-14
Counsel and Independent Auditors............................ B-16
</TABLE>
GLOSSARY
"Asset Coverage" means asset coverage, as defined in Section 18(h) of the
1940 Act, of at least 200%, or such other percentage as may be required under
the 1940 Act, with respect to all outstanding senior securities of the Company
constituting stock, including all outstanding shares of Cumulative Preferred
Stock.
"Basic Maintenance Amount" means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product of the number of shares of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
Liquidation Preference; (B) to the extent not included in (A), the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each outstanding share of Cumulative Preferred Stock from the
most recent Dividend Payment Date to which dividends have been paid or duly
provided for (or, in the event the Basic Maintenance Amount is calculated on a
date prior to the initial Dividend Payment Date with respect to the Cumulative
Preferred Stock, then from the Date of Original Issue) through the Valuation
Date plus all dividends to accumulate on the Cumulative Preferred Stock then
outstanding during the 70 days following such Valuation Date; (C) the Company's
other liabilities due and payable as of such Valuation Date (except that
dividends and other distributions payable by the Company by the issuance of
Common Stock will not be included as a liability) and such liabilities projected
to become due and payable by the Company during the 90 days following such
Valuation Date (excluding liabilities for investments to be purchased and for
dividends and other distributions not declared as of such Valuation Date); (D)
any current liabilities of the Company as of such Valuation Date to the extent
not reflected in any of (i)(A) through (i)(C) (including, without limitation,
and immediately upon determination, any amounts due and payable by the Company
pursuant to reverse repurchase agreements and any payables for assets purchased
as of such Valuation Date) less (ii) (A) the Discounted Value of any of the
Company's assets and/or (B) the face value of any of the Company's assets if, in
the case of both (ii)(A) and (ii)(B), such assets are either cash or securities
which mature prior to or on the date of redemption or repurchase of Cumulative
Preferred Stock or payment of another liability and are either U.S. Government
Obligations or securities which have a rating assigned by Moody's of at least
Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-l+ or A-1+, in both
cases irrevocably held by the Company's custodian bank in a segregated account
or deposited by the Company with the Dividend-Paying Agent for the payment of
the amounts needed to redeem or repurchase Cumulative Preferred Stock subject to
redemption or repurchase or any of (i)(B) through (i)(D) and provided that in
the event the Company has repurchased Cumulative Preferred
36
<PAGE> 37
Stock at a price of less than the Liquidation Preference thereof and irrevocably
segregated or deposited assets as described above with its custodian bank or the
Dividend-Paying Agent for the payment of the repurchase price the Company may
deduct 100% of the Liquidation Preference of such Cumulative Preferred Stock to
be repurchased from (i) above.
"Basic Maintenance Report" means a report signed by the President,
Treasurer or any Vice President of the Company which sets forth, as of the
related Valuation Date, the assets of the Company, the market value and
Discounted Value thereof (seriatim and in the aggregate) and the Basic
Maintenance Amount.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and that is neither a Saturday, Sunday nor any other day on which banks
in the City of New York are authorized by law to close.
"Certificate of Designations" means the Company's Certificate of
Designations, Preferences and Rights creating and fixing the rights and
limitations of the Cumulative Preferred Stock.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $1.00 per share, of the
Company.
"Company" means General American Investors Company, Inc., a Delaware
corporation.
"Cumulative Preferred Stock" means the 7.20% Tax-Advantaged Cumulative
Preferred Stock, par value $1.00 per share, of the Company.
"Cure Date" has the meanings set forth on pages 28 and 29 of this
Prospectus.
"Date of Original Issue" has the meaning set forth on page 22 of this
Prospectus.
"Deposit Securities" means cash, Short-Term Money Market Instruments and
U.S. Government Obligations. Except for determining whether the Company has a
Portfolio Calculation equal to or greater than the Basic Maintenance Amount,
each Deposit Security will be deemed to have a value equal to its principal or
face amount payable at maturity plus any interest payable thereon after delivery
of such Deposit Security but only if payable on or prior to the applicable
payment date in advance of which the relevant deposit is made.
"Discounted Value" means the quotient of (A) in the case of non-convertible
fixed income securities, the lower of the principal amount and the market value
thereof or (B) in the case of any other Moody's Eligible Assets, the market
value thereof, divided by the applicable Moody's Discount Factor.
"Dividend-Paying Agent" means ChaseMellon Shareholder Services, L.L.C. or
its successor, or any other dividend-paying agent appointed by the Company.
"Dividend Payment Date" has the meaning set forth on page 22 of this
Prospectus.
"Governing Documents" has the meaning set forth on page 32 of this
Prospectus.
"Liquidation Preference" has the meaning set forth on page 24 of this
Prospectus.
"Moody's" means Moody's Investors Service, Inc., or its successor.
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<PAGE> 38
"Moody's Discount Factor" means, with respect to a Moody's Eligible Asset
specified below, the following applicable numbers:
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
------------------------------ -----------------
<S> <C>
Moody's 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 Moody's Short-Term
Money Market Instruments.............................. 1.00
Commercial paper rated P-1 by Moody's maturing in 30
days or less.......................................... 1.00
Commercial paper rated P-1 by Moody's maturing in more
than 30 days but in 270 days or less.................. 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days
or less............................................... 1.25
Repurchase obligations includible in Moody's Short-Term
Money Market Instruments if term is less than 30 days
and counterparty is rated at least A2................. 1.00
Discount Factor
applicable to
Other repurchase obligations........................... underlying assets
Common stocks............................................... 3.00
Preferred Stocks:
Auction rate preferred stocks.......................... 3.50
Other preferred stocks issued by issuers in the
financial and industrial industries................... 2.35
Other preferred stocks issued by issuers in the
utilities industry.................................... 1.60
U.S. Government Obligations (other than U.S. Treasury
Securities Strips set forth below) with remaining terms to
maturity of:
1 year or less........................................ 1.08
2 years or less....................................... 1.15
3 years or less....................................... 1.20
4 years or less....................................... 1.26
5 years or less....................................... 1.31
7 years or less....................................... 1.40
10 years or less....................................... 1.48
15 years or less....................................... 1.54
20 years or less....................................... 1.61
30 years or less....................................... 1.63
U.S. Treasury Securities Strips with remaining terms to
maturity of:
1 year or less........................................ 1.08
2 years or less....................................... 1.16
3 years or less....................................... 1.23
4 years or less....................................... 1.30
5 years or less....................................... 1.37
7 years or less....................................... 1.51
10 years or less....................................... 1.69
15 years or less....................................... 1.99
20 years or less....................................... 2.28
30 years or less....................................... 2.56
</TABLE>
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<PAGE> 39
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
------------------------------ -----------------
<S> <C>
Corporate bonds:
Corporate bonds rated Aaa with remaining terms to maturity
of:
1 year or less........................................ 1.14
2 years or less....................................... 1.21
3 years or less....................................... 1.26
4 years or less....................................... 1.32
5 years or less....................................... 1.38
7 years or less....................................... 1.47
10 years or less....................................... 1.55
15 years or less....................................... 1.62
20 years or less....................................... 1.69
30 years or less....................................... 1.71
Corporate bonds rated Aa with remaining terms to maturity
of:
1 year or less........................................ 1.19
2 years or less....................................... 1.26
3 years or less....................................... 1.32
4 years or less....................................... 1.38
5 years or less....................................... 1.44
7 years or less....................................... 1.54
10 years or less....................................... 1.63
15 years or less....................................... 1.69
20 years or less....................................... 1.77
30 years or less....................................... 1.79
Corporate bonds rated A with remaining terms to maturity
of:
1 year or less........................................ 1.24
2 years or less....................................... 1.32
3 years or less....................................... 1.38
4 years or less....................................... 1.45
5 years or less....................................... 1.51
7 years or less....................................... 1.61
10 years or less....................................... 1.70
15 years or less....................................... 1.77
20 years or less....................................... 1.85
30 years or less....................................... 1.87
Convertible corporate bonds with senior debt securities
rated Aa issued by the following type of issuers:
Utility................................................ 1.80
Industrial............................................. 2.97
Financial.............................................. 2.92
Transportation......................................... 4.27
Convertible corporate bonds with senior debt securities
rated A issued by the following type of issuers:
Utility................................................ 1.85
Industrial............................................. 3.02
Financial.............................................. 2.97
Transportation......................................... 4.32
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET DISCOUNT FACTOR
------------------------------ -----------------
<S> <C>
Convertible corporate bonds with senior debt securities
rated Baa issued by the following type of issuers:
Utility................................................ 2.02
Industrial............................................. 3.18
Financial.............................................. 3.13
Transportation......................................... 4.48
Convertible corporate bonds with senior debt securities
rated Ba issued by the following type of issuers:
Utility................................................ 2.02
Industrial............................................. 3.19
Financial.............................................. 3.14
Transportation......................................... 4.49
Convertible corporate bonds with senior debt securities
rated B issued by the following type of issuers:
Utility................................................ 2.12
Industrial............................................. 3.29
Financial.............................................. 3.24
Transportation......................................... 4.59
</TABLE>
"Moody's Eligible Assets" means:
i. cash (including, for this purpose, receivables for investments
sold to a counterparty whose senior debt securities are rated at least Baa3
by Moody's or a counterparty approved by Moody's and payable within five
Business Days following such Valuation Date and dividends and interest
receivable within 70 days on investments);
ii. Short-Term Money Market Instruments;
iii. commercial paper that is not includible as a Short-Term Money
Market Instrument having on the Valuation Date a rating from Moody's of at
least P-1 and maturing within 270 days;
iv. preferred stocks (A) which either (1) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (2) are rated
at least "baa3" by Moody's (or in the event an issuer's senior debt
securities or preferred stock is not rated by Moody's, which either (1) are
issued by an issuer whose senior debt securities are rated at least A by
S&P or (2) are rated at least A by S&P and for this purpose have been
assigned a Moody's equivalent rating of at least "baa3"), (B) of issuers
which have (or, in the case of issuers which are special purpose
corporations, whose parent companies have) common stock listed on the New
York Stock Exchange or the American Stock Exchange, (C) which have a
minimum issue size (when taken together with other of the issuer's issues
of similar tenor) of $50,000,000, (D) which have paid cash dividends
consistently during the preceding three-year period (or, in the case of new
issues without a dividend history, are rated at least "a1' by Moody's or,
if not rated by Moody's, are rated at least AA by S&P), (E) which pay
cumulative cash dividends in U.S. dollars, (F) which are not convertible
into any other class of stock and do not have warrants attached, (G) which
are not issued by issuers in the transportation industry and (H) in the
case of auction rate preferred stocks, which are rated at least "aa" by
Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved
in writing by Moody's and have never had a failed auction; provided,
however, that for this purpose the aggregate market value of the Company's
holdings of any issue of preferred stock will not be less than $500,000 nor
more than $5,000,000;
v. common stocks (A)(i) which are traded in the United States on a
national securities exchange or in the over-the-counter market, (ii) which,
if cash dividend paying, pay cash dividends in U.S. dollars, and (iii)
which may be sold without restriction by the Company; provided, however,
that (1) common stock which, while a Moody's Eligible Asset owned by the
Company, ceases paying any regular cash
40
<PAGE> 41
dividend will no longer be considered a Moody's Eligible Asset until 71
days after the date of the announcement of such cessation, unless the
issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (2) the aggregate market value of the Company's holdings of the
common stock of any issuer will not exceed 4% in the case of utility common
stock and 6% in the case of non-utility common stock of the number of
outstanding shares times the market value of such common stock, and (B)
which are securities denominated in any currency other than the U.S. dollar
or securities of issuers formed under the laws of jurisdictions other than
the United States, its states, commonwealths, territories and possessions,
including the District of Columbia, for which there are dollar-denominated
American Depository Receipts ("ADRs") which are traded in the United States
on a national securities exchange or in the over-the-counter market and are
issued by banks formed under the laws of the United States, its states,
commonwealths, territories and possessions, including the District of
Columbia, provided, however, that the aggregate market value of the
Company's holdings of securities denominated in currencies other than the
U.S. dollar and ADRs in excess of (i) 6% of the aggregate market value of
the outstanding shares of common stock and ADRs of the issuer thereof or
(ii) 10% of the market value of Moody's Eligible Assets with respect to
issuers formed under the laws of any single such non-U.S. jurisdiction,
other than Australia, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland and the United Kingdom, shall not be a Moody's Eligible Asset;
vi. U.S. Government Obligations;
vii. corporate bonds (A) which may be sold without restriction by the
Company and are rated at least B3 (Caa subordinate) by Moody's (or, in the
event the bond is not rated by Moody's, the bond is rated at least BB-by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), with such rating confirmed on each
Valuation Date, (B) which have a minimum issue size of at least (x)
$100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3,
(C) which are U.S. dollar denominated and pay interest in cash in U.S.
dollars, (D) which are not convertible or exchangeable into equity of the
issuing corporation and have a maturity of not more than 30 years, (E) for
which, if rated below Baa3, the aggregate market value of the Company's
holdings do not exceed 10% of the aggregate market value of any individual
issue of corporate bonds calculated at the time of original issuance, (F)
the cash flow from which must be controlled by an Indenture trustee and (G)
which are not issued in connection with a reorganization under any
bankruptcy law;
viii. convertible corporate bonds (A) which are issued by issuers
whose senior debt securities are rated at least B2 by Moody's (or, in the
event an issuer's senior debt securities are not rated by Moody's, which
are issued by issuers whose senior debt securities are rated at least BB by
S&P and which for this purpose is assigned a Moody's equivalent rating of
one full rating category lower), (B) which are convertible into common
stocks which are traded on the New York Stock Exchange or the American
Stock Exchange or are quoted on the NASDAQ National Market System and (C)
which, if cash dividend paying, pay cash dividends in U.S. dollars;
provided, however, that once convertible corporate bonds have been
converted into common stock, the common stock issued upon conversion must
satisfy the criteria set forth in clause (v) above and other relevant
criteria set forth in this definition in order to be a Moody's Eligible
Asset;
41
<PAGE> 42
provided, however, that the Company's investment in preferred stock, common
stock, corporate bonds and convertible corporate bonds described above must be
within the following diversification requirements (utilizing Moody's industry
and sub-industry categories) in order to be included in Moody's Eligible Assets:
ISSUER:
<TABLE>
<CAPTION>
NON-UTILITY
MAXIMUM UTILITY MAXIMUM
MOODY'S RATING(1)(2) SINGLE ISSUER(3)(4) SINGLE ISSUER(3)(4)
- - -------------------- ------------------- -------------------
<S> <C> <C>
"aaa", Aaa................................................ 100% 100%
"aa", Aa.................................................. 20% 20%
"a", A.................................................... 10% 10%
CS/CB, "Baa", Baa(5)...................................... 6% 4%
Ba........................................................ 4% 4%
B1/B2..................................................... 3% 3%
B3 (Caa subordinate)...................................... 2% 2%
</TABLE>
INDUSTRY AND STATE:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY MAXIMUM
MAXIMUM SINGLE SUB- UTILITY MAXIMUM
MOODY'S RATING(1)(2) SINGLE ISSUER(3) INDUSTRY(3)(6) SINGLE STATE(3)
- - -------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
"aaa", "Aaa................................... 100% 100% 100%
"aa", Aa...................................... 60% 60% 20%
"a", A........................................ 40% 50% 10%(7)
CS/CB, "baa", Baa(5).......................... 20% 50% 7%(7)
Ba............................................ 12% 12% N/A
B1/B2......................................... 8% 8% N/A
B3 (Caa Subordinate).......................... 5% 5% N/A
</TABLE>
- - ---------------
(1) The equivalent Moody's rating must be lowered one full rating category for
preferred stocks, corporate bonds and convertible corporate bonds rated by
S&P but not by Moody's.
(2) Corporate bonds from issues ranging from $50,000,000 to $100,000,000 are
limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate bonds, which are
diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility bonds
and utility convertible bonds, the definition of industry refers to
sub-industries (electric, water, hydro power, gas, diversified). Investments
in other sub-industries are eligible only to the extent that the combined
sum represents a percentage position of Moody's Eligible Assets less than or
equal to the percentage limits in the diversification tables above.
(7) Such percentage will be 15% in the case of utilities regulated by
California, New York and Texas;
and provided, further, that the Company's investments in auction rate
preferred stocks described in clause (iv) above will be included in the
Moody's Eligible Assets only to the extent that the aggregate market value
of such stocks does not exceed 10% of the aggregate market value of all of
the Company's investments meeting the criteria set forth in clauses (i)
through (viii) above less the aggregate market value of those investments
excluded from Moody's Eligible Assets pursuant to the immediately preceding
provison; and
42
<PAGE> 43
ix. no assets which are subject to any lien or irrevocably deposited
by the Company for the payment of amounts needed to meet the obligations
described in clauses (i)(A) through (i)(E) of the definition of "Basic
Maintenance Amount" may be includible in Moody's Eligible Assets.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth on page 29 of this
Prospectus.
"Portfolio Calculation" means the aggregate Discounted Value of all of
Moody's Eligible Assets.
"Preferred Stock" means the preferred stock, par value $1.00 per share, of
the Company, and includes the Cumulative Preferred Stock.
"Quarterly Valuation Date" means the last Valuation Date in March, June,
September and December of each year, commencing September, 1998.
"Rating Agency Guidelines" has the meaning set forth on page 26 of this
Prospectus.
"Redemption Price" has the meaning set forth on page 28 of this Prospectus.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., a corporation organized and existing under the laws
of the State of Delaware, its successors and their assigns, and if such
corporation shall be dissolved or liquidated or shall no longer perform the
functions of a securities rating agency, "S&P" shall be deemed to refer to any
other nationally recognized securities rating agency designated by the Company.
"senior security" means, as defined in Section 18(g) of the 1940 Act,
unless otherwise provided therein, any bond, debenture, note, or similar
obligation or instrument constituting a security and evidencing indebtedness,
and any stock of a class having priority over any other class as to distribution
of assets or payment of dividends.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Company (or, in the case of an instrument specified by clauses (i) and (ii)
below, on the Valuation Date), the remaining terms to maturity thereof are not
in excess of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by Moody's and is issued by
an issuer (or guaranteed or supported by a person or entity other than the
issuer) whose long-term unsecured debt obligations are rated at least Aa by
Moody's.
(iii) demand or time deposits in or certificates of deposit of or
banker's acceptances issued by (A) a depository institution or trust
company incorporated under the laws of the United States of America or any
state thereof or the District of Columbia or (B) a United States branch
office or agency of a foreign depository institution (provided that such
branch office or agency is subject to banking regulation under the laws of
the United States, any state thereof or the District of Columbia) if, in
each case, the commercial paper, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of which are based on
the credit of a person or entity other than such depository institution or
trust company) of such depository institution or trust company at the time
of purchase or acquisition and the Valuation Date, have (1) credit ratings
from Moody's of at least P-1 in the case of commercial paper and (2) credit
ratings from Moody's of at least Aa in the case of long-term unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase or
other acquisition by the Company, all of the foregoing requirements will be
applicable except that the required long-term unsecured debt credit rating
of such depository institution or trust company from Moody's will be at
least A2; and provided, further, however, that the foregoing credit rating
requirements will be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or trust
company is the principal depository institution in a holding company
system, (2) the commercial paper, if any, of such depository institution or
trust company is not rated below P-1 by Moody's and (3) the holding company
will meet all of the foregoing
43
<PAGE> 44
credit rating requirements (including the preceding proviso in the case of
investments that mature in no more than one Business Day from the date of
purchase or other acquisition by the Company);
(iv) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust company or
securities dealer (acting as principal) which is rated (A) at least Aa3 if
the maturity is three months or less, (B) at least A1 if the maturity is
two months or less and (C) at least A2 if the maturity is one month or
less; and
(v) Eurodollar demand or time deposits in, or certificates of deposit
of, the head office or the London branch office of a depository institution
or trust company meeting the credit rating requirements of commercial paper
and long-term unsecured debt obligations specified in clause (iii) above,
provided that the interest receivable by the Company will be payable in
U.S. dollars and will not be subject to any withholding or similar taxes.
"U.S. Government Obligations" means direct non-callable obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills and U.S. Treasury Securities Strips, provide for
the periodic payment of interest and the full payment of principal at maturity.
"Valuation Date" means every Friday or, if such day is not a Business Day,
the immediately preceding Business Day.
44
<PAGE> 45
======================================================
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 COMPANY 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
COMPANY 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 ANY OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................... 3
Tax Attributes of Preferred Stock
Dividends.............................. 10
Financial Highlights..................... 14
The Company.............................. 16
Use of Proceeds.......................... 16
Capitalization........................... 16
Portfolio................................ 17
Investment Objectives and Policies....... 18
Management............................... 20
Risk Factors............................. 21
Description of Cumulative Preferred
Stock.................................. 22
Description of Rating Agency
Guidelines............................. 26
Description of Capital Stock and Other
Securities............................. 30
Taxation................................. 30
Certain Provisions of the Restated
Certificate of Incorporation and
By-laws; Anti-takeover Provisions...... 32
Custodian, Transfer Agent, Registrar and
Dividend-Paying Agent.................. 33
Underwriting............................. 33
Validity of Cumulative Preferred Stock... 34
Experts.................................. 35
Additional Information................... 35
Table of Contents of Statement of
Additional Information................. 36
Glossary................................. 36
</TABLE>
Through and including July 11, 1998 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in the 7.20% Cumulative
Preferred Stock, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
======================================================
======================================================
6,000,000 SHARES
GENERAL AMERICAN
INVESTORS COMPANY, INC.
7.20% TAX-ADVANTAGED
CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
JUNE 16, 1998
======================================================
<PAGE> 46
GENERAL AMERICAN INVESTORS COMPANY, INC.
------------------------
STATEMENT OF ADDITIONAL INFORMATION
General American Investors Company, Inc. (the "Company") is a diversified
closed-end management investment company that seeks long-term capital
appreciation by investing primarily in a portfolio of equity securities. Lesser
emphasis is placed on current income.
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus of the Company dated June 16,
1998 (the "Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing shares of Cumulative
Preferred Stock, and investors should obtain and read the Prospectus prior to
purchasing shares of Cumulative Preferred Stock. A copy of the Prospectus may be
obtained without charge, by calling the Company at (212) 916-8400 or toll free
at (800) 436-8401. This SAI incorporates by reference the entire Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information and History............................. B-2
Investment Objectives and Policies.......................... B-2
Management of the Company................................... B-4
Principal Stockholders...................................... B-9
Code of Ethics and Related Matters.......................... B-9
Investment Advisory and Other Services...................... B-10
Brokerage Allocation and Other Practices.................... B-10
Net Asset Value............................................. B-11
Financial Statements........................................ B-11
Taxation.................................................... B-11
General Information......................................... B-14
Counsel and Independent Auditors............................ B-16
</TABLE>
The Prospectus and this SAI omit certain of the information contained in
the registration statement of Form N-2 (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission"), Washington, D.C. The
Registration Statement may be obtained from the Commission upon payment of the
fee prescribed, or inspected at the Commission's office at no charge.
This Statement of Additional Information is dated June 16, 1998.
B-1
<PAGE> 47
GENERAL INFORMATION AND HISTORY
General American Investors Company, Inc. (the "Company") was organized as a
Delaware corporation on October 15, 1928 and succeeded to a similar business
established in 1927. The Company is a diversified closed-end investment company,
and is an internally-managed independent organization. Total net assets of the
Company were $776,990,594 as of March 31, 1998.
In 1973, the Company commenced providing investment advisory services to
outside accounts and, in 1974, it registered under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"). In 1980, the Company formed a
wholly-owned subsidiary, General American Advisers, Inc., which also registered
under the Advisers Act. The subsidiary, which began operations in April 1981,
was formed to enable the Company to remain in compliance with the provisions of
the Internal Revenue Code, which, in effect, limit the amount of service income
that may be earned by a regulated investment company. As of December 31 1995,
the subsidiary discontinued its operations and, in early 1996, deregistered as
an investment advisory company. As an investment adviser, the Company currently
provides investment advisory services to an outside client account whose
investment objectives are compatible with those of the Company. In addition, the
Company provides investment advisory services to the Company's Employees'
Retirement Plan trust.
Shares of the Company's Common Stock, $1.00 par value, are listed and
traded on The New York Stock Exchange, Inc. (under the symbol "GAM").
INVESTMENT OBJECTIVES AND POLICIES
The Company's principal investment objective is long-term capital
appreciation. Lesser emphasis is placed on current income. These objectives may
not be changed without the affirmative vote of the holders of a majority of the
Company's outstanding voting securities.
FUNDAMENTAL POLICIES
Except for the information set forth in items (2) and (5) below, the
following are fundamental policies which may not be changed without a vote of
the holders of a majority of the Company's voting securities:
(1) The Company may issue debt and senior equity securities to the
extent permitted by the Investment Company Act of 1940, as amended (the
"1940 Act").
(2) The Company has no policy with respect to short sales, purchases
on margin or the writing of put and call options. While the Company has not
engaged in transactions of this nature, it has complete freedom of action
to do so in the future.
(3) The Company may not borrow money in excess of 25% of its gross
assets, except for the purchase or redemption of outstanding senior
securities.
(4) The Company may not underwrite securities in excess of 20% of its
gross assets.
(5) The Company has no policy restricting the acquisition of
restricted securities (securities that must be registered under the
Securities Act of 1933, as amended (the "Act") before they may be offered
or sold to the public).
(6) The Company's holdings in a particular industry may not be
increased by additional investment in that industry beyond 50% of the value
of the Company's gross assets.
(7) The Company does not purchase or sell real estate.
(8) The Company may not trade in commodities and commodity contracts
in excess of 20% of its gross assets.
(9) The Company may not make loans (other than through the purchase of
a portion of an issue of bonds, debentures or other securities issued by
another person) to other persons in an amount exceeding 10% to any one
person or exceeding in the aggregate 20% of its gross assets.
B-2
<PAGE> 48
(10) The Company does not make investments for the purpose of
participating in management, although it maintains the freedom to do so if
it should become necessary to conserve any investment.
Other than as set forth above and subject to the requirements of the 1940
Act relating to diversified investment companies, the Company's investment
policy is flexible, as its charter permits investment in all forms of securities
without limiting the portion of its assets which may be invested in any one
type. The Company's operating policy, however, is to invest not more than 25% of
the value of its assets in any one particular industry.
B-3
<PAGE> 49
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to each
director and officer of the Company as of March 31, 1998.
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATIONS DURING THE
NAME, ADDRESS AND AGE WITH THE COMPANY PAST FIVE YEARS AND CURRENT AFFILIATIONS
- - --------------------- ---------------- ----------------------------------------
<S> <C> <C>
Arthur G. Altschul, Jr. (34)......... Director Co-chairman and managing member of Diaz
745 Fifth Avenue, Suite 3001 & Altschul Group, LLC (investments and
New York, NY 10151 securities) which was founded in May
1996; from 1992 to May 1996, employed by
SUGEN, Inc. (biopharmaceuticals), most
recently as senior director of corporate
affairs; assistant secretary of SUGEN
from May 1992 to May 1996; managing
general partner of Altschul Investment
Group, L.P. (a private investment
partnership) since 1988; director of
Delta Opportunity Company, Ltd., Medicis
Pharmaceutical Corporation, the New York
Council for the Humanities, and several
privately owned companies
Lawrence B. Buttenwieser (66)........ Director, Chairman Chairman of the Board of Directors of
575 Madison Avenue of the Board the Company since May 1995 and a
New York, NY 10022 director of the Company since 1967;
partner of Rosenman & Colin LLP
(lawyers)
Lewis B. Cullman (79)................ Director President of Cullman Ventures, Inc.
767 Third Avenue (calendars and catalogs and formerly
New York, NY 10017 solely a holding company) since 1968;
chairman and a director of
Chess-in-the-Schools (charitable
foundation); vice chairman of the
international council and an honorary
trustee of the Museum of Modern Art; an
honorary trustee of the Metropolitan
Museum of Art
Spencer Davidson* (55)............... Director, President President and Chief Executive Officer of
450 Lexington Avenue and Chief Executive the Company since August 1995; prior
New York, NY 10017 Officer thereto, senior investment counselor
since joining the Company in 1994; prior
thereto, general partner of The Hudson
Partnership (a private investment
partnership); trustee of the Innisfree
Foundation, Inc. (not-for-profit
foundation) and of the Neurosciences
Research Foundation (scientific research
foundation)
</TABLE>
B-4
<PAGE> 50
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATIONS DURING THE
NAME, ADDRESS AND AGE WITH THE COMPANY PAST FIVE YEARS AND CURRENT AFFILIATIONS
- - --------------------- ---------------- ----------------------------------------
<S> <C> <C>
Gerald M. Edelman (68)............... Director Member and the chairman of the
10666 North Torrey Pines Rd. Department of Neurobiology of The
LaJolla, CA 92037 Scripps Research Institute since July
1992; prior thereto, Vincent Astor
Professor of The Rockefeller University;
director and president of the
Neurosciences Institute of the
Neurosciences Research Foundation
(scientific research foundation);
president and a director of the
Neurosciences Support Corporation
(scientific research support
foundation); director of Becton,
Dickinson and Company; and member
emeritus of the board of governors of
the Weizmann Institute of Science
Anthony M. Frank (66)................ Director Chairman of Belvedere Capital Partners
101 California Street, Suite 205 (private financial consulting) since
San Francisco, CA 94111 1994; chairman of Acrogen Inc.
(biotechnology company) since March
1992; prior thereto, The Postmaster
General of the United States from March
1988; director of Bedford Properties,
Cotelligent Group, Inc., Crescent Real
Estate Equities, Inc., Financial
Security Assurance Holdings Ltd., Irvine
Apartment Communities, Inc., The Schwab
(Charles) Corporation, and
Temple-Inland, Inc.
John D. Gordan, III (52)............. Director Partner of Morgan, Lewis and Bockius LLP
101 Park Avenue (lawyers) since October 1994; prior
New York, NY 10178 thereto, partner of Lord Day & Lord,
Barrett Smith and predecessor firm from
1979
Bill Green (68)...................... Director Represented the 15th New York
14 East 60th Street -- Suite 702 Congressional District (east side of
New York, NY 10022 Manhattan) in the U.S. House of
Representatives from 1978 through 1992;
director of ClientSoft, Inc., Commercial
Capital Corp. and Energy Answers
Corporation; member of the New York City
Campaign Finance Board and member and
vice chair of the New York City Housing
Development Corporation
Victoria Hamilton* (44).............. Director, Executive Executive Vice-President and Chief
450 Lexington Avenue Vice-President and Operating Officer of the Company since
New York, NY 10017 Chief Operating August 1995; prior thereto,
Officer Vice-President from the time she joined
the Company in February 1992; director
of BioReliance Corporation
</TABLE>
B-5
<PAGE> 51
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATIONS DURING THE
NAME, ADDRESS AND AGE WITH THE COMPANY PAST FIVE YEARS AND CURRENT AFFILIATIONS
- - --------------------- ---------------- ----------------------------------------
<S> <C> <C>
Sidney R. Knafel (67)................ Director Managing partner of SRK Management
126 East 56th Street Company (private investment company)
New York, NY 10022 since 1981; chairman of the board of
directors of BioReliance Corporation and
Insight Communications, Inc; director of
Cellular Communications International,
Inc., CoreComm Incorporated, IGENE
Biotechnology, Inc., NTL Incorporated,
and some privately owned companies
Richard R. Pivirotto (67)............ Director President of Richard R. Pivirotto Co.,
111 Clapboard Ridge Road Inc. (self-employed consultant);
Greenwich, CT 06830 director of CBS Inc., The Gillette
Company, The Greenwich Bank and Trust
Company, Immunomedics, Inc.
(biopharmaceuticals), and New York Life
Insurance Company; trustee of Greenwich
Hospital Corporation and General
Theological Seminary; charter trustee
emeritus of Princeton University;
director of the Yale New Haven Health
Services Corp.
Joseph T. Stewart, Jr. (68).......... Director Executive consultant to Johnson &
147 Rolling Hill Road Johnson, since September 1990; director
Skillman, NJ 08558 of Liposome Co., Inc.; trustee of the
Foundation of the University of Medicine
and Dentistry of New Jersey; trustee of
the New School for Social Research;
member of the advisory council to the
Marine Biological Laboratory
Raymond S. Troubh (71)............... Director Financial consultant since 1974;
10 Rockefeller Plaza -- Suite 712 director of Ariad Pharmaceuticals, Inc.,
New York, NY 10020 Becton, Dickinson and Company, Diamond
Offshore Drilling, Inc., Foundation
Health Systems, Inc., Olsten
Corporation, Time Warner Inc., Triarc
Companies, Inc., and WHX Corporation;
trustee of MicroCap Liquidating Trust
and Petrie Stores Liquidating Trust
Eugene L. DeStaebler, Jr.* (59)...... Vice-President, Vice-President, Administration of the
450 Lexington Avenue Administration Company since 1978
New York, NY 10017
Peter P. Donnelly* (49).............. Vice-President Vice-President of the Company since 1991
450 Lexington Avenue and securities trader for the Company
New York, NY 10017 since 1974
Andrew V. Vindigni* (38)............. Vice-President Vice-President of the Company since
450 Lexington Avenue September 1995; prior thereto, Assistant
New York, NY 10017 Vice-President of the Company from 1991;
security analyst for the Company since
1988
Diane G. Radosti* (45)............... Treasurer Treasurer of the Company since 1990;
450 Lexington Avenue employee of the Company since 1980
New York, NY 10017
</TABLE>
B-6
<PAGE> 52
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATIONS DURING THE
NAME, ADDRESS AND AGE WITH THE COMPANY PAST FIVE YEARS AND CURRENT AFFILIATIONS
- - --------------------- ---------------- ----------------------------------------
<S> <C> <C>
Carole Anne Clementi* (51)........... Secretary Secretary of the Company since October
450 Lexington Avenue 1994; prior thereto, Assistant Secretary
New York, NY 10017 from July 1993; employee of the Company
since 1982
</TABLE>
- - ---------------
* An "interested person" of the Company as defined under Section 2(a)(19) of the
1940 Act by reason of being an officer of the Company.
------------------------
Normally, holders of shares of Preferred Stock of the Company, including
the Cumulative Preferred Stock, voting as a separate class, will elect two
members of the Company's Board of Directors, and holders of Preferred Stock,
including the Cumulative Preferred Stock, and Common Stock, voting as a single
class, will elect the remaining directors. See "Description of Cumulative
Preferred Stock--Voting Rights" in the Prospectus. Messrs. Green and Knafel have
been designated as the Preferred Stock directors, subject to election at the
first meeting of the Company's stockholders to be called after issuance of the
Cumulative Preferred Stock.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee comprised of the following
directors, all of whom are "non-interested" directors: Mr. Sidney R. Knafel,
Chairman, Mr. Arthur G. Altschul, Jr., Mr. Lawrence B. Buttenwieser, Mr. Lewis
B. Cullman, Mr. John D. Gordan, III, Mr. Bill Green, and Mr. Raymond S. Troubh.
Mr. Anthony M. Frank serves as an alternate member of the Audit Committee.
Generally, the Audit Committee monitors the Company's financial reporting,
reviews reports on the Company's system of internal accounting control, reviews
the scope of the audit work performed for the Company, reviews fees in relation
to services performed by the auditors, reviews the results of auditors' work,
reviews and oversees responses to recommendations, if any, made to the Company
by the auditors, recommends the selection of the auditors to the Board of
Directors and acts as a liaison between the Board of Directors and the auditors
and management personnel.
The Board of Directors has a Compensation Committee comprised of the
following directors: Mr. Bill Green, Chairman, Mr. Arthur G. Altschul, Jr., Mr.
Lawrence B. Buttenwieser, Mr. Anthony M. Frank, Mr. Sidney R. Knafel, Mr.
Richard R. Pivirotto, Mr. Joseph T. Stewart, Jr. and Mr. Raymond S. Troubh. Mr.
Lewis B. Cullman and Dr. Gerald M. Edelman serve as alternate members of the
Compensation Committee. Generally, the Compensation Committee reviews the
Company's operations and performance as well as contributions made during each
year by its officers and employees, reviews management proposals for year-end
supplemental compensation and levels of compensation for the ensuing year,
reviews comparable operating and compensation data of other companies in the
investment industry and makes recommendations on matters of compensation to the
Board of Directors.
The Board of Directors has an Executive Committee/Nominating Committee
comprised of the following directors: Mr. Richard R. Pivirotto, Chairman, Mr.
Lawrence B. Buttenwieser, Mr. Spencer Davidson, Dr. Gerald M. Edelman, Ms.
Victoria Hamilton and Mr. Joseph T. Stewart, Jr. Mr. John D. Gordan III and Mr.
Bill Green serve as alternate members of the Executive Committee/Nominating
Committee. In addition to functioning as an Executive Committee with authority
to exercise the powers of the Board of Directors in the management of the
business and affairs of the Company when the Board of Directors is not in
session, the Executive Committee/Nominating Committee is responsible for
identifying individuals who may be nominated to serve as directors of the
Company, responding to inquiries relating to nominations to the Board and making
recommendations to the Board of Directors with respect to individuals to be
nominated to serve as directors.
B-7
<PAGE> 53
REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth the compensation received from the Company
by its executive officers and directors for the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
NAME OF INDIVIDUAL OR AGGREGATE BENEFITS ACCRUED
NUMBER OF PERSONS IN GROUP CAPACITIES IN WHICH SERVED COMPENSATION DURING 1997(1)
-------------------------- -------------------------- ------------ ----------------
<S> <C> <C> <C>
Spencer Davidson........................ President and Chief $ 685,000 $ 52,200
Executive Officer
Victoria Hamilton....................... Executive Vice-President 325,000 36,000
and Chief Operating
Officer
Andrew V. Vindigni...................... Vice-President 575,000 32,994
7 executive officers as a group......... 2,437,000 200,615
13 directors as a group................. 170,000(2)
</TABLE>
- - ---------------
(1) The amounts shown in this column represent the Company's payments made
during 1997 to the trustee of the Company's Employees' Thrift Plan, as
described below, or accounting reserves established during 1997 under the
Company's Excess Contribution Plan, as described below, on behalf of the
respective individuals or group members.
(2) Each director who is not a paid officer of the Company received a fee of
$10,000 as an annual retainer, a fee of $500 for attendance at each
Directors' meeting and $500 for each Committee meeting which he attended in
his capacity as a Director.
With respect to the Company's Employees' Thrift Plan, the Company matches
150% of an employee's contributions up to 8% of basic salary to the plan.
Company contributions are invested in shares of the Company's Common Stock. An
employee's interest in Company contributions to his account is fully vested
after six years of service. Partial vesting begins after two years of
participation in the plan. All employees, including officers, are eligible to
participate in the Thrift Plan after six months of service with the Company.
Employees whose annual compensation exceeds $150,000 are required to invest
their future contributions to the plan in shares of the Company's Common Stock,
and their existing plan balances will be converted into the Company's Common
Stock over the three years next succeeding the attainment of that compensation
level.
The Company has an Employees' Retirement Plan which is broadly
characterized as a defined benefit plan. The Company contributes to the trustee
for the plan annual costs which include actuarially determined current service
costs and amortization of prior service costs. Retirement benefits are based on
final average earnings (basic salary, exclusive of overtime, bonuses,
commissions, pension, retainer fees, fees under contracts or any other forms of
additional or special compensation, for the five consecutive years in which the
participant had the highest basic salary during the last ten years of service)
and years of credited service, less an offset for social security covered
compensation, plus an additional amount equal to $50 for each year of credited
service. All employees, including officers, over age 21 commence participation
in the plan after one year of service and are fully vested after six years of
service. Partial vesting begins after two years of service. Participants are
eligible to receive normal retirement benefits at age 65. In certain instances,
a reduced benefit may begin upon retirement between ages 55 and 65.
The following table shows the estimated annual retirement benefits
(including amounts attributable to the Company's Excess Benefit Plan, as
described below), which are subject to a deduction based on a portion
B-8
<PAGE> 54
of social security covered compensation, payable on a straight life annuity
basis, at normal retirement date to all eligible employees, including officers,
in specified compensation and years-of-service classifications:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS BASED UPON
YEARS OF CREDITED SERVICE
FINAL AVERAGE -------------------------------------------
EARNINGS 10 20 30 40
- - ------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
$50,000.......................... $ 8,685 $ 17,375 $ 26,060 $ 32,035
100,000.......................... 16,830 33,665 50,495 61,900
150,000.......................... 24,975 49,955 74,930 91,765
200,000.......................... 33,120 66,245 99,365 121,630
250,000.......................... 41,265 82,535 123,800 151,495
300,000.......................... 49,410 98,825 148,235 181,360
350,000.......................... 57,555 115,115 172,670 211,225
400,000.......................... 65,700 131,405 197,105 241,090
450,000.......................... 73,845 147,695 221,540 270,955
</TABLE>
For those officers of the Company listed in the compensation table on page
B-7, the following indicates his or her years of credited services in the
Company's Retirement Plan and basic salary for 1997: Spencer Davidson (3)
$435,000, Victoria Hamilton (5) $300,000 and Andrew V. Vindigni (9) $275,000.
The Company also has Excess Contribution and Excess Benefit Plans. Under
such plans, the Company may establish accounting reserves and make payments
directly to selected participants in the Company's Thrift and Retirement Plans,
respectively, to the extent the levels of contributions or benefits for such
participants under such plans are limited by Sections 415, 416 and/or 401(a)(17)
of the Internal Revenue Code. Such benefits commence at the time benefits
commence under the related tax-qualified plan. Mr. Davidson, Ms. Hamilton and
Mr. Vindigni are participants in both the Excess Contribution and Excess Benefit
Plans.
PRINCIPAL STOCKHOLDERS
As of April 30, 1998, the following person owned of record or was known by
the Company to have owned beneficially 5% or more of the 23,779,878 shares of
its Common Stock then outstanding:
<TABLE>
<CAPTION>
TYPE AND PERCENTAGE OF
NAME AND ADDRESS OWNERSHIP
- - ---------------- ----------------------
<S> <C> <C>
Depository Trust Company.................................... Of record only 71.8%
Cede & Co
P.O. Box 20, Bowling Green Station
New York, New York 10274
</TABLE>
All officers and directors of the Company as a group owned approximately
7.0% of the Company's outstanding shares of Common Stock as of such date. In
addition, approximately 1.4% of the Company's outstanding shares of Common Stock
were held as of such date by the trustee for the Company's Employees' Thrift
Plan with respect to which the Company has the power to vote.
CODE OF ETHICS AND RELATED MATTERS
The Company has had a written code of ethics since 1981, which was amended
most recently on December 13, 1995, with respect to trading in securities by its
directors, officers and employees. It generally provides that such persons are
not to take personal advantage of any information which they may have concerning
the Company's current investment decisions or programs. It also requires
preclearance of all personal securities transactions and, with respect to
disinterested directors, preclearance of personal securities transactions in
securities held by the Company and/or any of its advisory client accounts.
B-9
<PAGE> 55
In order to enforce the foregoing policy, the Company follows the practice
of maintaining "restricted lists" which show securities being considered for
purchase or sale or securities in process of being purchased or sold for its
portfolio or for the portfolio of any of its clients. All employees, officers
and directors are expected to check the lists before they make individual
investment decisions and to preclear their intentions with the Company's trader
or compliance personnel. At the end of each quarter, the Company obtains from
each of its employees, officers and interested directors a sealed report of his
or her security transactions during the quarter and, with respect to each of its
disinterested directors, a limited report, relating only to the securities held
in the Company's portfolio or in any of the client accounts, of his security
transactions during the quarter. In addition, since January 1, 1995, each of its
employees, officers and interested directors have been required to have their
brokers provide the Company with duplicate copies of trade confirmations and
monthly statements.
The Company provides the transaction reports, duplicate confirmations and
month-end statements to its independent public auditors, together with a copy of
the "restricted lists" for the period. The auditors compare the reports and
brokerage material with the restricted lists and report their findings to the
Company. Any transactions in a "restricted" security by individuals during the
period would be investigated thoroughly and appropriate action taken. The
individual reports, brokerage material and restricted lists are returned to the
Company by the auditors in a sealed envelope together with their report; these
are maintained in the Company's files.
INVESTMENT ADVISORY AND OTHER SERVICES
CUSTODIAN
Bankers Trust Company, One Bankers Trust Plaza, New York, NY 10006, is the
custodian for the assets of the Company. The custodian is responsible for
holding all cash and securities of the Company, directly or through a book-entry
system, delivering and receiving payment for securities sold by the Company,
receiving and paying for securities purchased by the Company, collecting income
from investments of the Company and performing other duties, all as directed by
an authorized person of the Company. The custodian does not exercise any
supervisory functions in such matters as the purchase and sale of securities by
the Company, payment of dividends or payment of expenses of the Company. During
1997, 1996 and 1995, the Company paid $28,500, $33,000 and $25,500,
respectively, in fees to Bankers Trust Company for its custodial services.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Company's general policy regarding the execution of securities
transactions is to select brokers and dealers on the basis of the most favorable
markets, prices and execution of orders. A certain amount of the Company's
securities transactions are placed with brokers and dealers who provide
brokerage and research services and in these circumstances the commissions paid
may be higher than those which might otherwise have been paid to another broker
or dealer if those services had not been provided.
Research services generally include receipt of written reports, attendance
at meetings or participation in discussions with respect to specific subjects,
such as a company, an industry or the economic outlook. Block availability is
also a consideration in determining the selection of brokers. The Company seeks
to utilize services obtained from brokers and dealers fairly with respect to all
accounts under its management. To the extent that the ability to direct
brokerage enhances its access to such services, the benefits are fairly shared.
In negotiating brokerage commissions on securities transactions, the
Company's trader, with his awareness of competitive rates, negotiates the most
favorable commission to effect a particular transaction. Size of order and
difficulty of execution are considerations in the negotiation. All transactions,
including the commission factor, are subject to supervision and review by the
Company's officers.
During the year ended December 31, 1997, the Company did not acquire any
securities of any of its regular brokers or dealers (as defined in Rule 10b-1
under the 1940 Act) or of any of their parents.
B-10
<PAGE> 56
Brokerage commissions paid by the Company during 1997, 1996 and 1995 were
$362,483, $425,409 and $609,368, respectively. Such amounts included $59,904
(16.53%), $45,077 (10.60%) and $124,075 (20.36%), respectively, which were paid
to Goldman, Sachs & Co. The Chairman Emeritus of the Company is a limited
partner of The Goldman Sachs Group, L.P. which is an affiliate of Goldman, Sachs
& Co. Of the aggregate dollar amount of the Company's transactions involving
brokerage commissions during 1997, 13.29% were effected through Goldman, Sachs &
Co.
One or more of the Underwriters may have effected purchases and sales of
the portfolio securities of the Company and of the account managed by the
Company and may be chosen to effect future transactions for the Company and such
other account.
NET ASSET VALUE
The Company calculates the net asset value of its shares of Common Stock
daily and makes that information available daily by telephone at (212) 916-8400
or, toll free, (800) 436-8401 and weekly for publication. Currently, The Wall
Street Journal, The New York Times and Barron's publish net asset values for
closed-end investment companies weekly. Net asset value per share of Common
Stock is determined at the close of regular trading on the New York Stock
Exchange (currently 4:00 P.M., Eastern time) on each day on which the Exchange
is open. The net asset value of the Company's Common Stock is calculated by
dividing the current value of the Company's total assets less the sum of all of
its liabilities and the aggregate liquidation preference of its outstanding
shares of Preferred Stock, by the total number of shares of the Common Stock
outstanding.
In determining net asset value, securities listed on an exchange or on the
National Association of Securities Dealers Automated Quotation System are valued
on the basis of the last reported sale prior to the time the valuation is made
or, if no sale is reported for such day, at their electronically-reported bid
price. Quotations are taken from the market where the security is primarily
traded. Other over-the-counter securities for which market quotations are
readily available are valued at their electronically-reported bid price or, if
there is no such price, then at their representative bid price. 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. Corporate discount notes are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at their fair value under procedures established
and supervised by the Company's Board of Directors.
The underwriting discount and the expenses of issuance and distribution
associated with the Cumulative Preferred Stock will be charged to paid-in
capital.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Company's Stockholders for the fiscal year ended December 31, 1997, together
with the report of Ernst & Young LLP thereon, and the unaudited financial
statements of the Company for the three months ended March 31, 1998 are
incorporated herein by reference.
TAXATION
The following discussion is a brief summary of certain tax considerations
affecting the Company and its stockholders. No attempt is made to present a
detailed explanation of all U.S. Federal, state, local and foreign tax concerns,
and the discussions set forth herein and in the Prospectus do not constitute tax
advice. The discussion reflects applicable Federal 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. INVESTORS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS WITH ANY SPECIFIC QUESTIONS RELATING TO FEDERAL, STATE, LOCAL AND
FOREIGN TAXES.
B-11
<PAGE> 57
TAXATION OF THE COMPANY
The Company 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 Company
(but not its stockholders) 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 realized capital gains (i.e., the excess of its net realized
long-term capital gains over its net realized short-term capital loss) which it
distributes to its stockholders in each taxable year. If the company fails to
qualify as a RIC under the Code, it would become subject to taxation on all of
its taxable income, regardless of whether the Company has made distributions to
its stockholders.
Qualification as a RIC requires, among other things, that the Company: (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,
(i) at least 50% of the market value of the Company'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 Company'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 of any one issuer (other
than U.S. government securities or the securities of other RICs).
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 Company must distribute during each calendar
year, an amount equal to, at the minimum, the sum of (1) 98% of its ordinary
income for the calendar year, (2) 98% of its capital gain net income, generally
for the one year period ending on October 31 of such year, and (3) all ordinary
income and capital gain net income for previous years that were not previously
distributed. A distribution will be treated as paid during the calendar year if
it is paid during the calendar year or declared by the Company in October,
November or December of the year, payable to stockholders of record on a date
during such month and paid by the Company during January of the following year.
Any such distributions paid during January of the following year will be deemed
to be received by stockholders of the Company on December 31 of the year the
distributions are declared, rather than when the distributions are received.
While the Company 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 Company's ordinary
income and capital gain net income will be distributed to avoid entirely the
imposition of the tax. In such event, the Company will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
As a result of investing in certain types of securities which produce
income for tax purposes that is not matched by a corresponding cash distribution
to the Company, the Company could be required to include in current income
amounts it has not yet received. Any such income would be subject to the
distribution requirements of the Code. This might prevent the Company from
distributing 90% of its net investment company taxable income, as is required to
qualify as a RIC, or might prevent it from distributing enough ordinary income
and capital gain net income to avoid completely the imposition of the excise
tax. To avoid this result, the Company may be required to borrow money or
dispose of other securities to be able to make distributions to its investors.
If the Company does not meet the asset coverage requirements of the 1940
Act or the Certificate of Designations, the Company will be required to suspend
distributions to the holders of the Cumulative Preferred Stock and Common Stock
until the asset coverage is restored. See "Description of Cumulative Preferred
Stock -- Dividends" in the Prospectus. Such a suspension of distributions might
prevent the Company from distributing 90% of its net investment company taxable
income, as is required to qualify as a RIC, or might prevent it from
distributing enough ordinary income and capital gain net income to avoid
completely the imposition of the excise tax. Upon any failure to meet the asset
coverage requirements, the
B-12
<PAGE> 58
Company may, and in certain circumstances will, be required to redeem shares of
Cumulative Preferred Stock in order to restore the requisite asset coverage and
avoid the adverse consequences to the Company and its stockholders of failing to
qualify as a RIC. If asset coverage were restored, the Company would again be
able to pay dividends and might be able to avoid Company-level taxation.
TAXATION OF STOCKHOLDERS
Dividends are paid by the Company in cash and are taxable to stockholders.
Dividends paid by the Company from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses ("Ordinary Income
Dividends") are taxable to stockholders as ordinary income. Dividends paid from
an excess of net long-term capital gains over net short-term capital losses
(including gains or losses from certain transactions in warrants, rights,
futures and options) and properly designated by the Company ("Capital Gain
Dividends") are taxable to stockholders as long-term capital gains, regardless
of the length of time the stockholder has owned Company shares. Any loss upon
the sale or exchange of Company 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. Distributions in excess of the Company'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 capital assets).
Capital Gain Dividends may be taxed at a lower rate than ordinary income
dividends for certain non-corporate taxpayers. Under recent legislation,
"long-term capital gain" has been broken down into additional categories of
gain, taxable at different rates for individual taxpayers. These categories
include 20% Rate Gain and 28% Rate Gain. The amount of "28% Rate Gain" (net
capital gain on assets held longer than 12 months but not longer than 18 months)
is taxed at the taxpayer's marginal Federal income tax rate, but not higher than
28%. The amount of "20% Rate Gain" (net capital gain on assets held longer than
18 months) is taxed at a maximum rate of 20%. Not later than 60 days after the
close of its taxable year, the Company will provide its stockholders with a
written notice designating the amounts of any Ordinary Income Dividends or
Capital Gain Dividends as well as the portions of its Capital Gain Dividends
that constitute 28% Rate Gain and 20% Rate Gain.
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 or other disposition of shares
of the Cumulative Preferred Stock including, without limitation, a redemption,
by the Company, will be taxed as a capital gain or loss if the shares are
capital assets in the stockholder's hands. Capital gain of an individual is
generally subject to a maximum rate of 28% in respect of property held longer
than 12 months but not longer than 18 months and a maximum rate of 20% in
respect of property held longer than 18 months. A loss realized on a sale or
exchange of shares of the Company will be disallowed if other Company 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.
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 an applicable treaty.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
At the time of a stockholder's purchase, the market price of the Cumulative
Preferred Stock may reflect undistributed net investment income or net realized
capital gains. A subsequent distribution of these amounts by the Company 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.
B-13
<PAGE> 59
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The
IRS has taken the position in Revenue Ruling 89-81 that if a RIC has two classes
of shares, it may designate distributions made to each class from the RIC's
taxable income in any year as consisting of no more than such class's
proportionate share of particular types of income, such as long-term capital
gains, recognized by the RIC in such year. A class's proportionate share of a
particular type of income is determined according to the percentage of total
dividends paid to such class out of the RIC's earnings for such year.
Consequently, the Company will designate distributions made to the Common Stock
and Cumulative Preferred Stock and any other Preferred Stock series as
consisting of particular types of income in accordance with the classes'
proportionate shares of such income. Because of this rule, the Company is
required to allocate a portion of its net capital gains to holders of Common
Stock, holders of Cumulative Preferred Stock and any other Preferred Stock. The
amount of net capital gains allocable among holders of the Common Stock, the
Cumulative Preferred Stock and any other Preferred Stock will depend upon the
amount of such gains and other income recognized by and taxes paid by the
Company during a taxable year and the total dividends paid by the Company on
shares of Common Stock and Cumulative Preferred Stock and any other Preferred
Stock during a taxable year.
Under the distribution policy adopted by the Company, all dividends
received by holders of the Cumulative Preferred Stock within a given calendar
year will have the same proportions of 20% Rate Gain, 28% Rate Gain, ordinary
income and return of capital. As a result of this distribution policy,
"spill-over" dividends paid by the Company pursuant to Section 855 of the Code
will be paid solely to holders of the Common Stock. No portion of the quarterly
dividends paid to the holders of the Cumulative Preferred Stock will be deemed
to consist of any portion of such "spill-over" dividends.
BACKUP WITHHOLDING
Under certain provisions of the Code, some stockholders may be subject to
31% withholding 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 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 APPLICABLE TO BOTH STOCKHOLDERS AND THE COMPANY, 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.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
The Depository Trust Company ("DTC"), New York, NY, will act as securities
depository for the shares of Cumulative Preferred Stock offered pursuant to the
Prospectus (the "Securities"). The information in this section concerning DTC
and DTC's book-entry system is based upon information obtained from DTC. The
Securities 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 certificate or certificates initially will be
issued, representing in the aggregate the total number of Securities, and will
be deposited with DTC.
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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
("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 Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). 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 ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
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 each Security
("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 Participant 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;
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.
Redemption notices shall be sent to Cede & Co. If less than all of the
securities are being redeemed, DTC's practice is to determine by lot the amount
of the interest of each Direct Participant.
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 Company, 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 Company, 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 ChaseMellon Shareholder Services, L.L.C., which acts as transfer
agent for the Company's capital stock.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the
Company. Under such circumstances, in the event that a successor securities
depository is not obtained, certificates representing the Securities will be
printed and delivered. The Company may decide to discontinue use of the system
of book-entry transfers through DTC (or a successor securities depository). In
that event, Security certificates will be printed and delivered.
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COUNSEL AND INDEPENDENT AUDITORS
Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, is counsel
to the Company in connection with the offering of the Cumulative Preferred
Stock.
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, has been
selected as independent auditors for the Company.
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