<PAGE> 1
P R O S P E C T U S
5,000,000 SHARES
THE GABELLI EQUITY
TRUST INC.
7.25% TAX ADVANTAGED CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
[THE GABELLI EQUITY TRUST LOGO]
------------------------
The 7.25% Tax Advantaged Cumulative Preferred Stock, liquidation preference
$25 per share (the "Cumulative Preferred Stock"), to be issued by The Gabelli
Equity Trust Inc. (the "Fund") will be senior securities of the Fund. Prior to
this offering, there has been no public market for the Cumulative Preferred
Stock. The Fund is a closed-end non-diversified management investment company.
The Fund's primary investment objective is long-term growth of capital,
primarily through investment in a portfolio of equity securities including
common stock, preferred stock, convertible or exchangeable securities and
warrants and rights to purchase such securities. Income is a secondary objective
of the Fund. Gabelli Funds, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of 7.25% of the liquidation preference of $25 per share, are cumulative
from the Date of Original Issue (as hereinafter defined) thereof and are payable
quarterly on March 26, June 26, September 26 and December 26 in each year,
commencing on September 26, 1998.
Dividends paid on the Cumulative Preferred Stock are expected to consist of
long-term capital gains (consisting of 28% rate capital gain from the sale of
assets held longer than 12 months but not longer than 18 months and 20% rate
gain from the sale of assets held longer than 18 months), net investment income
(i.e. generally dividends and interest income in excess of interest expense and
other expenses), short-term capital gains and, in unusual circumstances, return
of capital. Over the past one, three and five fiscal years ending December 31,
1997, distributions of the Fund consisted of 90%, 72%, and 60% of 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, which are taxed at lower rates for individuals than
ordinary income (net investment income and short-term capital gains) 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 and maintenance of such rating, the Fund will be required to
maintain a minimum discounted asset coverage with respect to the Cumulative
Preferred Stock under guidelines established by Moody's. See "Description of
Cumulative Preferred Stock -- Rating Agency Guidelines."
The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Fund for cash at a price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) (the
"Redemption Price") to the extent the Fund fails to maintain either of the
minimum asset coverages required by Moody's and the Investment Company
(Continued on next page)
THE CUMULATIVE PREFERRED STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO
OFFICIAL NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE (THE "NYSE").
TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE NYSE IS EXPECTED TO COMMENCE
WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE "UNDERWRITING."
------------------------
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>
<S> <C> <C> <C>
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS AND PROCEEDS
PUBLIC(1) COMMISSIONS(2) TO FUND(3)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Per Share $25.00 $0.7875 $24.2125
- -----------------------------------------------------------------------------------------------------------------------
Total(4) $125,000,000 $3,937,500 $121,062,500
=======================================================================================================================
</TABLE>
(1) Plus accumulated but unpaid dividends, if any, from the Date of Original
Issue.
(2) The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
(3) Before deducting offering expenses payable by the Fund, estimated at
$458,769.
(4) The Fund has granted the Underwriters a 30-day over-allotment option to
purchase up to 750,000 additional shares of Cumulative Preferred Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$143,750,000 plus accumulated but unpaid dividends on such additional
shares, if any, from the Date of Original Issue, the total Underwriting
Discounts and Commissions will be $4,528,125 and the total Proceeds to Fund
will be $139,221,875.
------------------------
The shares of Cumulative Preferred Stock are being offered by the
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that delivery of the
shares of Cumulative Preferred Stock will be made in book-entry form through the
facilities of The Depository Trust Company on or about June 9, 1998.
------------------------
SALOMON SMITH BARNEY
GABELLI & COMPANY, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
June 4, 1998
<PAGE> 2
(continued from cover page)
Act of 1940, as amended or if certain corporate actions are authorized by the
Fund's Board of Directors and Common Stockholders. Commencing June 9, 2003 and
thereafter, the Fund 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 9, 2003, the Cumulative Preferred Stock will be redeemable, at the option
of the Fund, for cash at a price equal to the Redemption Price, only to the
extent necessary for the Fund to continue to qualify for tax treatment as a
regulated investment company. See "Description of Cumulative Preferred Stock --
Redemption."
This Prospectus sets forth certain information about the Fund an investor
should know before investing and should be retained for future reference.
A Statement of Additional Information dated June 4, 1998 (the "SAI") has
been filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus. The table of contents of the SAI appears on page
38 of this Prospectus. A copy of the SAI may be obtained without charge by
writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or calling the Fund toll-free at (800) 422-3554.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE
PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the SAI.
Capitalized terms not defined in this Summary are defined in the Glossary that
appears at the end of this Prospectus. Unless otherwise indicated, the
information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option:
The Fund................... The Fund has been engaged in business as a
closed-end non-diversified management investment
company since August 21, 1986.
Investment Objectives...... The Fund's primary investment objective is
long-term growth of capital, primarily through
investment in a portfolio of equity securities
including common stock, preferred stock,
convertible or exchangeable securities and
warrants and rights to purchase such securities.
Income is a secondary objective of the Fund. No
assurance can be given that the Fund's investment
objectives will be achieved. See "Investment
Objectives and Policies." The Fund's outstanding
common stock, par value $.001 per share (the
"Common Stock"), is listed and traded on the
NYSE. As of March 31, 1998, the net assets of the
Fund were approximately $1.31 billion.
Dividends and
Distributions.............. Dividends on the Cumulative Preferred Stock, at the
annual rate of 7.25% of the liquidation
preference, are cumulative from the Date of
Original Issue and are payable, when, as and if
declared by the Board of Directors of the Fund,
out of funds legally available therefor,
quarterly on March 26, June 26, September 26 and
December 26 in each year, commencing September
26, 1998. See "Description of Cumulative
Preferred Stock -- Dividends." In the unlikely
event that for any calendar year the total
distributions on the Cumulative Preferred Shares
exceed net investment income and net capital gain
allocable to the Cumulative Preferred Shares, the
excess will generally be treated as a tax-free
return of capital (to the extent of the
stockholder's tax basis in his shares). The
amount treated as a tax-free return of capital
will reduce a stockholder's adjusted basis in his
shares, thereby increasing his potential gain or
reducing his potential loss on the sale of his
shares.
The Fund has a policy of paying distributions on
its Common Stock of at least 10% of average
quarter-end net assets attributable to common
stock. In order to implement this policy, the
Fund makes quarterly distributions of $0.27 per
common share at the end of each of the first
three calendar quarters of each year. The Fund's
distribution in December for each calendar year
is an adjusting distribution (equal to the sum of
2.5% of the net asset value of the Fund as of the
last day of the four preceding calendar quarters
less the aggregate distributions of $0.81 per
share made for the most recent three calendar
quarters) in order to meet the Fund's 10% pay-out
goal as well as the distribution requirements of
the Internal Revenue Code of 1986, as amended
(the "Code"). Prior to May 13, 1998, the
quarterly distribution in each of the first three
quarters of each year was $0.25 per share.
The Offering............... The Fund is offering 5,000,000 shares of 7.25% Tax
Advantaged Cumulative Preferred Stock, par value
$.001 per share, liquidation preference $25 per
share (the "Cumulative Preferred Stock"), at a
purchase price of $25 per share (the "Offering").
3
<PAGE> 4
Potential Tax Benefit to
Certain Investors.......... Under recently adopted legislation, long-term
capital gain on assets held for longer than 18
months is now taxed to individuals at a maximum
federal income tax rate of 20% ("20% Rate Gain")
and long-term capital gain on assets held for
longer than 12 months but not longer than 18
months is taxed to individuals at a maximum
federal income tax rate of 28% ("28% Rate Gain").
For individual taxpayers in the 15% marginal
federal income tax bracket, the tax rate on 20%
Rate Gain is 10% and on 28% Rate Gain is 15%. See
"Taxation."
The Fund intends to allocate net capital gain (the
excess of its net long-term capital gain over its
net short-term capital loss), as well as other
types of income, 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 paid on the Cumulative
Preferred Stock are expected to consist of 20%
Rate Gain and 28% Rate Gain, net investment
income (i.e. generally dividends and interest
income in excess of interest expense and other
expenses), net short-term capital gain and, in
unusual circumstances, return of capital.
Distributions of net investment income and net
short-term capital gain ("Ordinary Income
Dividends") are taxed at ordinary income rates.
Over the past one, three and five fiscal years
ending December 31, 1997, the distributions of
the Fund consisted of 90%, 72%, and 60% of
long-term capital gain. Accordingly, certain
investors in the Cumulative Preferred Stock may
realize a tax benefit to the extent that
dividends paid by the Fund on those shares are
composed of long-term capital gain. See "Tax
Attributes of Preferred Stock Dividends." 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 gain. To the extent that
dividends on the shares of Cumulative Preferred
Stock are not paid from net capital gain which is
taxed at the rates applicable to long-term
capital gain, they will be paid from net
investment income and will be taxed as ordinary
income.
Rating..................... It is a condition to issuance that the Cumulative
Preferred Stock be issued with a rating of "aaa"
from Moody's. The Articles Supplementary creating
and fixing the rights and preferences of the
Cumulative Preferred Stock (the "Articles
Supplementary") contain certain provisions which
reflect discounted asset coverage guidelines
established by Moody's (the "Rating Agency
Guidelines") in order to obtain such rating on
the Cumulative Preferred Stock on the Date of
Original Issue. See "Description of Cumulative
Preferred Stock -- Rating Agency Guidelines."
Asset Coverage............. In order to maintain the 'aaa' rating on the
Cumulative Preferred Stock, the Fund will be
required to maintain Adjusted Assets greater than
or equal to the Basic Maintenance Amount in
accordance with discount factors and guidelines
established by Moody's and an asset coverage of
at least 200% (or such higher or lower percentage
as may be required at the time under the 1940
Act) with respect to all outstanding senior
securities of the Fund which are stock, including
the Cumulative Preferred Stock. See "Description
of Cumulative Preferred Stock -- Asset
Maintenance."
4
<PAGE> 5
Voting Rights.............. At all times, holders of shares of Cumulative
Preferred Stock or any other Preferred Stock,
voting as a single class, will be entitled to
elect two members of the Fund's Board of
Directors, and holders 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 Fund to pay dividends on the Cumulative
Preferred Stock or any other Preferred Stock in
an amount equal to two full years' dividends,
holders of Cumulative Preferred Stock and any
other Preferred Stock of the Fund, voting as a
single class, will have the right to elect the
smallest number of directors that would
constitute a majority of the directors until all
cumulative dividends have been paid or provided
for. Holders of Cumulative Preferred Stock and
any other Preferred Stock will vote separately as
a class on certain other matters, as required
under the Articles Supplementary, the 1940 Act
and Maryland law. Except as otherwise indicated
in this Prospectus and as otherwise required by
applicable law, holders of 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 other Preferred Stock as a
single class. See "Description of Cumulative
Preferred Stock -- Voting Rights."
Mandatory Redemption....... The Cumulative Preferred Stock is subject to
mandatory redemption in whole or in part by the
Fund to the extent that the Fund fails to
maintain Adjusted Assets equal to or greater than
the Basic Maintenance Amount or fails to maintain
Asset Coverage and does not cure such failure by
the applicable cure date. Any such redemption
will be made for cash at a price equal to $25 per
share plus accumulated and unpaid dividends
(whether or not earned or declared) to the
redemption date (the "Redemption Price"). In such
circumstances, the Fund may, but is not required
to, redeem a sufficient number of shares of
Cumulative Preferred Stock so that Adjusted
Assets of the remaining outstanding shares of
Cumulative Preferred Stock and any other
Preferred Stock after redemption is as high as
110% of the Basic Maintenance Amount and the
asset coverage, as defined in the 1940 Act, of
the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock is
as high as 220%. The Cumulative Preferred Stock
is also subject to mandatory redemption in whole
by the Fund at the Redemption Price if the Fund's
Board of Directors and holders of Common Stock
authorize (i) the dissolution of the Fund, (ii)
any amendment to the Articles of Incorporation
and any other actions necessary to be approved by
them for the Fund to convert to open-end status
which makes any class of the Fund's stock a
redeemable security (as that term is defined in
the Investment Company Act of 1940, as amended
(the "1940 Act")), (iii) any plan of
reorganization (as that term is defined in the
1940 Act) adversely affecting the Cumulative
Preferred Stock or (iv) any other action
requiring a vote of the Fund's security holders
as provided in Section 13(a) of the 1940 Act. See
"Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption."
Optional Redemption........ Commencing June 9, 2003 and thereafter, the Fund at
its option may redeem the Cumulative Preferred
Stock, in whole or in part, for cash at a price
per share equal to the Redemption Price. Prior to
June 9,
5
<PAGE> 6
2003, the Cumulative Preferred Stock will be
redeemable at the option of the Fund at the
Redemption Price only to the extent necessary for
the Fund to continue to qualify for tax treatment
as a regulated investment company. See
"Description of 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 but unpaid dividends
(whether or not earned or declared) to the date
of distribution. See "Description of Cumulative
Preferred Stock -- Liquidation Rights."
Use of Proceeds............ The Fund will use the net proceeds from the
Offering to purchase additional portfolio
securities in accordance with its investment
objectives and policies. See "Use of Proceeds."
Listing.................... Prior to the Offering, there has been no public
market for the Cumulative Preferred Stock. The
Cumulative Preferred Stock has been approved for
listing, subject to official notice of issuance,
on the NYSE. However, during an initial period
which is not expected to exceed 30 days after the
date of this Prospectus, the Cumulative Preferred
Stock will not be listed on any 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.
Special Characteristics and
Risks...................... 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. As indicated
above, the Cumulative Preferred Stock is subject
to redemption under specified circumstances.
Subject to such circumstances, 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 an obligation of the Fund.
Although unlikely, precipitous declines in the
value of the Fund's assets could result in the
Fund having insufficient assets to redeem all of
the Cumulative Preferred Stock for the full
Redemption Price.
As a non-diversified investment company under the
1940 Act, the Fund is not limited in the
proportion of its assets that may be invested in
securities of a single issuer, and, accordingly,
an investment in the Fund may, under certain
circumstances, present greater risk to an
investor than an investment in a diversified
company. See "Risk Factors and Special
Considerations -- Non-Diversified Status."
The Fund may invest up to 35% of its total assets
in foreign securities. Investing in securities of
foreign companies and foreign governments, which
generally are denominated in foreign currencies,
may involve certain risks and opportunity
considerations not typically associated with
investing in domestic companies and could cause
the Fund to be affected favorably or unfavorably
by changes in currency exchange
6
<PAGE> 7
rates and revaluation of currencies. See "Risk
Factors and Special Considerations -- Foreign
Securities."
The Adviser (as hereinafter defined) is dependent
upon the expertise of Mr. Mario J. Gabelli in
providing advisory services with respect to the
Fund's investments. There is no contract of
employment between the Adviser and Mr. Gabelli.
If the Adviser were to lose the services of Mr.
Gabelli, its ability to service the Fund could be
adversely affected. There can be no assurance
that a suitable replacement could be found for
Mr. Gabelli in the event of his death,
resignation, retirement or inability to act on
behalf of the Adviser.
Federal Income Tax
Considerations........... The Fund has qualified, and intends to remain
qualified, for Federal income tax purposes, as a
regulated investment company. Qualification
requires, among other things, compliance by the
Fund with certain distribution requirements.
Statutory limitations on distributions on the
Common Stock if the Fund fails to satisfy the
1940 Act's asset coverage requirements could
jeopardize the Fund's ability to meet the
distribution requirements. The Fund presently
intends, however, to purchase or redeem the
Cumulative Preferred Stock to the extent
necessary in order to maintain compliance with
such asset coverage requirements. See "Taxation"
for a more complete discussion of these and other
Federal income tax considerations.
Management and Fees........ Gabelli Funds, Inc. serves as the Fund's investment
adviser (the "Adviser") and is compensated for
its services and its related expenses at an
annual rate of 1.00% of the Fund's average daily
net assets. The Adviser is responsible for
administration of the Fund and currently utilizes
and pays the fees of a third party administrator.
Notwithstanding the foregoing, the Adviser will
waive the portion of its investment advisory fee
attributable to an amount of assets of the Fund
equal to the aggregate stated value of the
Cumulative Preferred Stock for any calendar year
in which the net asset value total return of the
Fund allocable to the Common Stock, including
distributions and the advisory fee subject to
potential waiver, is less than the stated
dividend rate of the Cumulative Preferred Stock
(prorated during the initial and final year the
Cumulative Preferred Stock is outstanding).
Repurchase of Common Stock,
and Anti-takeover
Provisions............... The Fund is authorized, subject to maintaining
required asset coverage on the Cumulative
Preferred Stock, to repurchase its Common Stock
on the open market when the shares are trading at
a discount of 10% or more (or such other
percentage as its Board of Directors may
determine from time to time) from their net asset
value. In addition, certain provisions of the
Fund's Articles of Incorporation (the "Charter")
and By-Laws may be regarded as "anti-takeover"
provisions. Pursuant to these provisions, only
one of three classes of directors is elected each
year, and the affirmative vote of the holders of
66 2/3% of the outstanding shares of each class
of stock of the Fund is necessary to authorize
the conversion of the Fund from a closed-end to
an open-end investment company and an affirmative
vote of 66 2/3% of each class of the outstanding
voting shares of the Fund may be necessary to
authorize certain business transactions with any
beneficial owner of more than 5% of the
outstanding shares of the Fund. The overall
effect
7
<PAGE> 8
of these provisions is to render more difficult
the accomplishment of a merger with, or the
assumption of control by, a principal
stockholder. These provisions may have the effect
of depriving Fund stockholders of an opportunity
to sell their shares at a premium to the
prevailing market price. See "Certain Provisions
of the Charter and By-Laws."
Custodian, Transfer and
Dividend-Disbursing Agent
and Registrar............ State Street Bank and Trust Company serves as the
Fund's custodian and, with respect to the
Cumulative Preferred Stock, as transfer and
dividend-disbursing agent and registrar and as
agent to provide notice of redemption and certain
voting rights. See "Custodian, Transfer Agent and
Dividend-Disbursing Agent."
8
<PAGE> 9
TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially all of its
net capital gains and net investment income. The Fund is a regulated investment
company ("RIC"), and a RIC's distributions generally retain their character as
capital gain or ordinary income when received by its preferred and common
stockholders. However, distributions of short-term capital gain are taxed at
ordinary income rates. Thus, the stated 7.25% dividends paid by the Fund to
holders of the Cumulative Preferred Stock may, for Federal income tax purposes,
consist of varying proportions of long-term capital gain, short-term capital
gain, ordinary income and/or returns of capital.
Long-term capital gain on assets held longer than 18 months by the Fund
("20% Rate Gain") generally is currently taxable to individuals at a maximum
rate of 20%. Long-term capital gain on assets held longer than twelve months but
not longer than 18 months by the Fund ("28% Rate Gain") generally is currently
taxable to individuals at a maximum rate of 28%. Distributions of net investment
income and net short-term capital gain ("Ordinary Income Dividends") are
currently taxable to individuals at a maximum rate of 39.6%.
Although the Fund 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 savings on their investment to the extent
that distributions by the Fund to its stockholders were partially 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
comprised, for Federal income tax purposes, only of ordinary income.
Dividends paid on the Cumulative Preferred Stock are expected to consist of
20% Rate Gain, 28% Rate Gain and Ordinary Income. Over the past one, three and
five fiscal years ending December 31, 1997, distributions of the Fund consisted
of 90%, 72% and 60% of long-term capital gain.
The Federal income tax characteristics of the Fund and the taxation of its
stockholders are described more fully under "Taxation".
ASSUMPTIONS
The following table shows examples of 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 31.0% Federal marginal income tax
bracket. Both this table and the table that follows it assume the indicated
proportions of 20% Rate Gain and 28% Rate Gain. In reading these tables,
prospective investors should understand that a number of factors could affect
the actual composition for Federal income tax purposes of the Fund's
distributions each year. Such factors include (i) the Fund's investment
performance for any particular year, which may result in 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 RICs' capital stock.
THESE TABLES ARE FOR ILLUSTRATIVE PURPOSES ONLY AND CANNOT BE TAKEN AS AN
INDICATION OF THE ACTUAL COMPOSITION FOR FEDERAL INCOME TAX PURPOSES OF THE
FUND'S FUTURE DISTRIBUTIONS.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED
STOCK STATED ANNUAL
DIVIDEND RATE OF
PERCENTAGE OF CUMULATIVE PREFERRED STOCK ---------------------------------------
STATED ANNUAL DIVIDEND COMPRISED OF 7.25%
- ---------------------------------------- IS EQUIVALENT FOR AN INDIVIDUAL IN THE
ORDINARY 31% FEDERAL INCOME TAX BRACKET TO AN
20% RATE GAIN 28% RATE GAIN INCOME ORDINARY INCOME YIELD OF
- ------------- ------------- -------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
75.0% 15.0% 10.0% 8.16%
50.0% 25.0% 25.0% 7.91%
33.3% 33.3% 33.3% 7.74%
25.0% 25.0% 50.0% 7.62%
16.7% 16.7% 66.6% 7.50%
-- -- 100.0% 7.25%
</TABLE>
9
<PAGE> 10
Assuming a stated Cumulative Preferred Stock dividend consisting of 33.3%
20% Rate Gain, 33.3% 28% Rate Gain and 33.3% Ordinary Income, 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 STATED ANNUAL
DIVIDEND RATE OF
------------------------------
<S> <C> <C> <C>
7.25%
<CAPTION>
IS EQUIVALENT TO AN ORDINARY
1997 FEDERAL INCOME TAX BRACKET(1) INCOME YIELD OF
- ------------------------------------------------------- ------------------------------
<S> <C> <C> <C>
39.6%.................................................. 8.50%
36.0%.................................................. 8.16%
31.0%.................................................. 7.74%
28.0%.................................................. 7.52%
15.0%(2)............................................... 7.39%
</TABLE>
- ---------------
(1) Annual taxable income levels corresponding to the 1997 Federal Marginal Tax
Brackets are as follows:
<TABLE>
<CAPTION>
1997 FEDERAL INCOME
TAX BRACKET SINGLE JOINT
- ------------------- ------ -----
<S> <C> <C>
39.6% over $271,050 over $271,050
36.0% $124,651 - $271,050 $151,751 - $271,050
31.0% $59,751 - $124,650 $99,601 - $151,750
28.0% $24,651 - $59,750 $41,201 - $99,600
15.0% up to and including $24,650 up to and including $41,200
</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 deduction 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) Assumes pass-through of 10.0% Rate Gain tax rate and 15.0% Rate Gain tax
rate.
10
<PAGE> 11
FINANCIAL HIGHLIGHTS
The selected data set forth below is for shares of Common Stock outstanding
for the periods presented. The financial information was derived from and should
be read in conjunction with the Financial Statements of the Fund incorporated by
reference into this Prospectus and the SAI. The financial information, insofar
as it relates to each of the five years in the period ended December 31, 1997,
has been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report on such financial statements is incorporated by reference
into this Prospectus and the SAI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 9.77 $ 9.95 $ 9.46 $ 11.23 $ 10.58
---------- ---------- ---------- -------- --------
Net investment income........................... 0.08 0.11 0.13 0.14 0.14
Net realized and unrealized gain (loss) on
investments.................................. 2.75 0.71 1.74 (0.08) 2.13
Provision for income taxes...................... -- -- -- -- --
---------- ---------- ---------- -------- --------
Total from investment operations............. 2.83 0.82 1.87 0.06 2.27
Increase (decrease) in net asset value from
Equity Trust share transactions.............. -- -- (0.37) -- (0.50)
Offering expenses charged to capital surplus.... -- -- (0.01) -- (0.01)
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income........................... (0.08) (0.11) (0.13) (0.14)(b) (0.11)
Distributions in excess of net investment
income....................................... 0.00(d) -- -- -- --
Net realized gains.............................. (0.92) (0.78) (0.47) (0.37) (0.77)
Distributions in excess of net realized gains... (0.01) (0.00)(d) (0.02) -- (0.02)
Paid-in capital................................. (0.03) (0.11) (0.38) (1.32)(b) (0.21)
---------- ---------- ---------- -------- --------
Total distributions.......................... (1.04) (1.00) (1.00) (1.83) (1.11)
========== ========== ========== ======== ========
Net asset value, end of period.................. $ 11.56 $ 9.77 $ 9.95 $ 9.46 $ 11.23
========== ========== ========== ======== ========
Market value, end of period..................... $ 11.688 $ 9.375 $ 9.375 $ 9.625 $ 12.125
========== ========== ========== ======== ========
Total Investment Return*........................ 37.46% 11.00% 11.70% (5.10)% 36.50%
========== ========== ========== ======== ========
Net Asset Value Total Return**.................. 30.46% 9.00% 20.60% 0.50% 22.40%
========== ========== ========== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $1,210,570 $1,015,437 $1,034,091 $825,193 $937,773
Net investment income........................... 0.76% 1.07% 1.26% 1.29% 1.25%
Operating expenses.............................. 1.14% 1.18% 1.21% 1.19% 1.20%
Portfolio turnover rate......................... 39.2% 18.9% 25.1% 22.2% 24.4%
Average commission rate (per share of
security(c).................................. $ 0.0342 $ 0.0335 N/A N/A N/A
</TABLE>
- ---------------
* Based on market value per share, adjusted for reinvestment
of distributions and taxes, including the effect of shares
issued pursuant to rights offering, assuming full
subscription by stockholder.
** Based on net asset value per share, adjusted for
reinvestment of distributions and taxes, including the
effect of shares issued pursuant to rights offering,
assuming full subscription by stockholder.
(a) Per share amounts have been calculated using the monthly
average shares outstanding method.
(b) A distribution equivalent to $0.75 per share for The Gabelli
Global Multimedia Trust Inc. spin-off from net investment
income, realized short-term gain, and paid-in capital were
$0.064, $0.031 and $0.655, respectively.
(c) Average commission rate (per share of security) as required
by amended SEC disclosure requirements effective for fiscal
years beginning after September 1, 1995.
(d) Amount represents less than $0.005 per share.
11
<PAGE> 12
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.61 $ 10.49 $ 13.34 $ 11.22 $ 9.82 $ 9.40
-------- -------- -------- -------- -------- --------
Net investment income........................... 0.19 0.27 0.44 0.38 0.14 0.16
Net realized and unrealized gain (loss) on
investments.................................. 1.21 1.37 (2.11) 3.26+ 2.32+ 0.89
Provision for income taxes...................... -- -- -- (0.21) (0.09) --
-------- -------- -------- -------- -------- --------
Total from investment operations............. 1.40 1.64 (1.67) 3.43 2.37 1.05
Increase (decrease) in net asset value from
Equity Trust share transactions.............. (0.36) (0.42) -- -- 0.02 0.01
Offering expenses charged to capital surplus.... (0.01) (0.01) -- -- -- --
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income........................... (0.19) (0.27) (0.53) (0.29) (0.21) (0.19)
Distributions in excess of net investment
income....................................... -- -- -- -- -- --
Net realized gains.............................. (0.38) (0.14) (0.23) (1.02) (0.78) (0.45)
Distributions in excess of net realized gains... -- -- -- -- -- --
Paid-in capital................................. (0.49) (0.68) (0.42) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions.......................... (1.06) (1.09) (1.18) (1.31) (0.99) (0.64)
======== ======== ======== ======== ======== ========
Net asset value, end of period.................. $ 10.58 $ 10.61 $ 10.49 $ 13.34 $ 11.22 $ 9.82
======== ======== ======== ======== ======== ========
Market value, end of period..................... $ 10.250 $ 10.125 $ 10.500 $ 14.000 $ 9.875 $ 7.625
======== ======== ======== ======== ======== ========
Total Investment Return*........................ 15.90% 10.90% (16.70)% 59.00%+ 37.80%+ (0.90)%
======== ======== ======== ======== ======== ========
Net Asset Value Total Return**.................. 14.20% 16.20% (12.70)% 33.20% 21.50% 17.10)%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $725,263 $595,151 $479,863 $589,990 $484,792 $429,490
Net investment income........................... 1.88% 2.34% 3.84% 2.82% 1.36% 1.50%
Operating expenses.............................. 1.22% 1.24% 1.18% 1.18% 1.25% 1.24%
Portfolio turnover rate......................... 12.5% 11.2% 15.5% 28.1% 51.5% 96.5%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Based on market value per share, adjusted for reinvestment
of distributions and taxes, including the effect of shares
issued pursuant to rights offering, assuming full
subscription by stockholder.
** Based on net asset value per share, adjusted for
reinvestment of distributions and taxes, including the
effect of shares issued pursuant to rights offering,
assuming full subscription by stockholder.
+ Before provision for income taxes.
</TABLE>
12
<PAGE> 13
USE OF PROCEEDS
The net proceeds of the offering are estimated at $120,603,731, after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. The Adviser expects to invest such proceeds in accordance with the
Fund's investment objectives and policies within six months after the completion
of the offering, depending on market conditions for the types of securities in
which the Fund principally invests. Pending such investment, the proceeds will
be held in high quality short-term debt securities and instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
December 31, 1997, and as adjusted to give effect to the Offering.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(A)
-------------- --------------
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $.001 par value:
Authorized 0 shares; as adjusted
8,000,000 shares authorized; issued
and outstanding 0 shares; as adjusted,
5,000,000 shares of 7.25% Cumulative
Preferred Stock issued and
outstanding........................... $ 0 $ 125,000,000
Common Stock, $.001 par value:
Authorized 200,000,000 shares; as
adjusted 192,000,000 authorized;
issued and outstanding 104,676,383
shares................................ $ 104,676 $ 104,676
Additional paid-in capital.............. $ 708,595,580 $ 704,199,311
Distributions in excess of net realized
gain on investments................... $ (1,270,637) $ (1,270,637)
Distributions in excess of net
investment income..................... $ (81) $ (81)
Net unrealized appreciation of
investments........................... $ 503,140,056 $ 503,140,056
Net assets......................... $1,210,569,594 $1,331,173,325
Net assets applicable to
outstanding Common Stock......... $1,210,569,594 $1,206,173,325
</TABLE>
- ---------------
(a) After deducting underwriting discounts and estimated costs of the Offering
of $4,396,269.
13
<PAGE> 14
THE FUND
The Fund, incorporated in Maryland on May 20, 1986, is a non-diversified
closed-end management investment company registered under the 1940 Act. The
Fund's Common Stock is traded on the NYSE under the symbol "GAB."
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is long-term growth of
capital. Income is a secondary objective of the Fund. The Fund attempts to
achieve its objectives by investing primarily in a portfolio of equity
securities consisting of common stock, preferred stock, convertible or
exchangeable securities and warrants and rights to purchase such securities,
selected by the Adviser. The Adviser selects investments on the basis of
fundamental value and, accordingly, the Fund typically invests in the securities
of companies that are believed by the Adviser to be priced lower than justified
in relation to their underlying assets. Other important factors in the selection
of investments include favorable price/earnings and debt/equity ratios and
strong management.
The Fund's secondary investment objective is income, which the Fund seeks
to achieve, in part, by investing up to 10% of its total assets in a portfolio
consisting primarily of high-yielding, fixed-income securities, such as
corporate bonds, debentures, notes, convertible securities, preferred stocks and
domestic and foreign government obligations. Generally, debt securities
purchased by the Fund will be rated in the lower rating categories of recognized
statistical rating agencies, such as securities rated "CCC" or lower by S&P or
"Caa" or lower by Moody's, or will be non-rated securities of comparable
quality. These debt securities are predominantly speculative and involve major
risk exposure to adverse conditions and are often referred to in the financial
press as "junk bonds."
The Fund's investment primary and secondary objectives of long-term growth
of capital and income, respectively, are fundamental policies and may not be
changed without the authorization of the holders of a majority of the Fund's
outstanding voting securities. As used in this Prospectus, a "majority of the
Fund's outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Adviser normally will consider
the following factors, among others: (1) the Adviser's own evaluations of the
private market value, cash flow, earnings per share and other fundamental
aspects of the underlying assets and business of the company; (2) the potential
for capital appreciation of the securities; (3) the interest or dividend income
generated by the securities; (4) the prices of the securities relative to other
comparable securities; (5) whether the securities are entitled to the benefits
of call protection or other protective covenants; (6) the existence of any
anti-dilution protections or guarantees of the security; and (7) the
diversification of the portfolio of the Fund as to issuers. The Adviser's
investment philosophy with respect to equity securities seeks to identify assets
that are selling in the public market at a discount to their private market
value, which the Adviser defines as the value informed purchasers are willing to
pay to acquire assets with similar characteristics. The Adviser also normally
evaluates the issuers' free cash flow and long-term earnings trends. Finally,
the Adviser looks for a catalyst -- something in the company's industry or
indigenous to the company or country itself that will surface additional value.
CERTAIN PRACTICES
Foreign Securities. The Fund may invest up to 35% of its total assets in
foreign securities. Among the foreign securities in which the Fund may invest
are those issued by companies located in developing countries, which are
countries in the initial stages of their industrialization cycles. Investing in
the equity and debt markets of developing countries involves exposure to
economic structures that are generally less diverse and less mature, and to
political systems that can be expected to have less stability, than those of
developed countries. The markets of developing countries historically have been
more volatile than the markets of the
14
<PAGE> 15
more mature economies of developed countries, but often have provided higher
rates of return to investors. The fund may also invest in debt securities of
foreign governments. See "Investment Objectives and Policies -- Investment
Practices" in the SAI.
Temporary Investments. Although under normal market conditions at least
65% of the Fund's assets will consist of equity securities, when a temporary
defensive posture is believed by the Adviser to be warranted ("temporary
defensive periods"), the Fund may without limitation hold cash or invest its
assets in money market instruments and repurchase agreements in respect of those
instruments. The Fund may also invest up to 10% of the market value of its total
assets during temporary defensive periods in shares of money market mutual funds
that invest primarily in U.S. Government Securities and repurchase agreements in
respect of those securities. For a further description of such transactions, see
"Investment Objectives and Policies -- Investment Practices" in the SAI.
Repurchase Agreements. During temporary defensive periods or for cash
management purposes, the Fund may engage in repurchase agreement transactions
involving money market instruments with banks, registered broker-dealers and
government securities dealers approved by the Board of Directors. The Fund will
not enter into repurchase agreements with the Adviser or any of its affiliates.
See "Investment Objectives and Policies -- Investment Practices" in the SAI.
Other Investments. The Fund is permitted to invest in special situations,
options and futures contracts. See the SAI for a discussion of these investments
and techniques and the risk associated with them.
SPECIAL INVESTMENT METHODS
TEMPORARY INVESTMENTS
During temporary defensive periods the Fund may invest in U.S. Government
Securities and in money market mutual funds that invest in those securities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association, are supported by the "full
faith and credit" of the U.S. Government; others, such as those of the
Export-Import Bank of the U.S., are supported by the right of the issuer to
borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law.
OPTIONS
On behalf of the Fund, the Adviser may, subject to the guidelines of the
Board of Directors, purchase or sell, i.e., write, options on securities,
securities indices and foreign currencies which are listed on a national
securities exchange or in the U.S. over-the-counter ("OTC") markets as a means
of achieving additional return or of hedging the value of the Fund's portfolio.
The Fund may write covered call options on common stocks that it owns or has an
immediate right to acquire through conversion or exchange of other securities in
an amount not to exceed 25% of total assets or invest up to 10% of its total
assets in the purchase of put options on common stocks that the Fund owns or may
acquire through the conversion or exchange of other securities that it owns.
A call option is a contract that gives the holder of the option the right
to buy from the writer (seller) of the call option, in return for a premium
paid, the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right to
sell to the writer (seller), in return for the premium, the underlying security
at a specified price during the term of the option. The writer of
15
<PAGE> 16
the put, who receives the premium, has the obligation to buy the underlying
security upon exercise, at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
An exchange traded option may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option.
FUTURES CONTRACTS AND OPTIONS THEREON
On behalf of the Fund, the Adviser may, subject to guidelines of the Board
of Directors, purchase and sell financial futures contracts and options thereon
which are traded on a commodities exchange or board of trade for certain
hedging, yield enhancement and risk management purposes, in accordance with
regulations of the Commodity Futures Trading Commission ("CFTC"). These futures
contracts and related options may be on debt securities, financial indices,
securities indices, U.S. Government securities and foreign currencies. A
financial futures contract is an agreement to purchase or sell an agreed amount
of securities or currencies at a set price for delivery in the future.
Under CFTC regulations, the Adviser on behalf of the Fund may purchase and
sell futures contracts and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the Fund's
assets committed to margin and option premiums. The Fund will not enter into
futures contracts or options on futures contracts unless (i) the aggregate
initial margins and premiums do not exceed 5% of the fair market value of its
assets and (ii) the aggregate market value of its outstanding futures contracts
and the market value of the currencies and futures contracts subject to
outstanding options written by the Fund, as the case may be, do not exceed 50%
of the market value of its total assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
Subject to guidelines of the Board of Directors, the Fund may enter into
forward foreign currency exchange contracts to protect the value of its
portfolio against future changes in the level of currency exchange rates. The
Fund may enter into such contracts on a spot, i.e., cash, basis at the rate then
prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract. The
Fund's dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions, and the amount the Fund may invest
in forward currency contracts is limited to the amount of its aggregate
investments in foreign currencies. The Fund will only enter into forward
currency contracts with parties which it believes to be creditworthy.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. If the Adviser's
prediction of movements in the direction of the securities, foreign currency and
interest rate markets are inaccurate, the consequences to the Fund may leave the
Fund in a worse position than if such strategies were not used. Risks inherent
in the use of options, foreign currency, futures contracts and options on
futures contracts, securities indices and foreign currencies include (1)
dependence on the Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to
16
<PAGE> 17
avoid adverse tax consequences; (6) the possible inability of the Fund to
purchase or sell a security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a security at a
disadvantageous time due to a need for the Fund to maintain "cover" or to
segregate securities in connection with the hedging techniques; and (7) the
creditworthiness of counterparties. For a further description, see "Risk Factors
and Special Considerations -- Futures Transactions" and "Risk Factors and
Special Considerations -- Forward Currency Exchange Contracts."
REPURCHASE AGREEMENTS
During temporary defensive periods or for cash management purposes, the
Fund may engage in repurchase agreement transactions involving money market
instruments with banks, registered broker-dealers and government securities
dealers approved by the Fund's Board of Directors. The Fund will not enter into
repurchase agreements with the Adviser or any of its affiliates. Under the terms
of a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed price and time, thereby determining the yield during
the Fund's holding period. Thus, repurchase agreements may be seen to be loans
by the Fund collateralized by the underlying debt obligation. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Fund's holding period. The value of the underlying securities will be
at least equal at all times to the total amount of the repurchase obligation,
including interest. The Fund bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the Fund is
delayed in or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks to assert these
rights. The Adviser, acting under the supervision of the Fund's Board of
Directors, reviews the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate these risks and monitors
on an ongoing basis the value of the securities subject to repurchase agreements
to ensure that the value is maintained at the required level.
LEVERAGING
As provided in the 1940 Act and subject to compliance with the Fund's
investment objectives, policies and restrictions, the Fund may issue debt or
preferred stock so long as the Fund's net assets exceed 300% of the amount of
the debt outstanding and exceed 200% of the amount of preferred stock
outstanding. Such debt or preferred stock may be convertible in accordance with
SEC staff guidelines which may permit the Fund to obtain leverage at attractive
rates. Leverage entails two primary risks. The first risk is that the use of
leverage magnifies the impact on the common stockholders of changes in net asset
value. For example, a fund that uses 33% leverage will show a 1.5% increase or
decline in net asset value for each 1% increase or decline in the value of its
total assets. The second risk is that the cost of leverage will exceed the
return on the securities acquired with the proceeds of leverage, thereby
diminishing rather than enhancing the return to common stockholders. These two
risks would generally make the Fund's total return to common stockholders more
volatile. In addition, the Fund may be required to sell investments in order to
meet dividend or interest payments on the debt or preferred stock when it may be
disadvantageous to do so.
A decline in net asset value could affect the ability of the Fund to make
common stock dividend payments and such a failure to pay dividends or make
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended ("the
Code"). See "Taxation". Finally, if the asset coverage for preferred stock or
debt securities declines to less than 200% or 300%, respectively (as a result of
market fluctuations or otherwise), the Fund may be required to sell a portion of
its investments to redeem the preferred stock or repay the debt when it may be
disadvantageous to do so.
Prior to May 12, 1997, the Fund was prohibited from issuing preferred stock
by a fundamental investment restriction preventing the Fund from issuing senior
securities. At its 1997 annual meeting of stockholders held on May 12, 1997, the
Fund's stockholders approved an amendment to such restriction to permit the
issuance of senior securities in accordance with the requirements of the 1940
Act. The Fund, its directors, and the Adviser were named as defendants in a
putative class action filed March 9, 1998, alleging violations of
17
<PAGE> 18
Section 14(a) of the Securities Exchange Act of 1934 and Section 20(a) of the
1940 Act, and (as against the Fund's directors) breach of fiduciary duty (Carter
v. Gabelli Equity Trust Inc., et al., United States District Court, Southern
District of New York, 98 Civ. 1710 (CLB)), seeking an injunction to enjoin the
issuance of the Cumulative Preferred Stock. The principal allegation of the
complaint is that the defendants made material misrepresentations and omissions
in a proxy statement, by which defendants solicited proxies from holders of the
Fund's Common Stock to remove the prohibition on the issuance of senior
securities. Plaintiff further contends that issuance by the Fund of Cumulative
Preferred Stock would deprive holders of the Fund's Common Stock of the ability
to control major business decisions of the Fund, specifically including any
decision to convert the Fund into an "open-end" mutual fund.
The Fund believes that the provision of the Fund's Cumulative Preferred
Stock requiring the Board of Directors to call the Cumulative Preferred Stock at
any time if the Board of Directors and the requisite percentage of shares of the
Fund's Common Stock have approved all requisite charter amendments and other
actions necessary for the Fund to convert to open-end status eliminates any
possibility that the holders of the Fund's Common Stock would be disadvantaged
with respect to consideration of open-ending by the issuance of the Cumulative
Preferred Stock. Moreover, at its 1998 annual meeting of stockholders held on
May 22, 1998, the Fund's stockholders ratified the proposal approved in 1997
after disclosure of information Plaintiff claimed was omitted from the earlier
proxy statement. The Fund believes that such stockholder ratification renders
this action moot.
Further information on the investment objectives and policies of the Fund
are set forth in the SAI.
INVESTMENT RESTRICTIONS
The Fund operates under certain restrictions that may not be changed
without the affirmative vote of holders of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). For a description of such
restrictions, see "Investment Restrictions" in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment objective.
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover may be higher than that of other investment
companies. While it is impossible to predict with certainty the portfolio
turnover, the Adviser expects that the annual turnover rate of the Fund will not
exceed 100%. During the years ended December 31, 1997 and 1996, the portfolio
turnover of the Fund was 39.2% and 18.9%, respectively.
Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. The portfolio turnover rate
is computed by dividing the lesser of the amount of the 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).
OTHER INVESTMENTS
The Fund is permitted to invest in illiquid securities, warrants and rights
and other investment companies and to enter into forward commitments for the
purchase or sale of securities, including on a "when issued" or "delayed
delivery" basis. See the SAI for a discussion of these investments and
techniques and the risks associated with them.
18
<PAGE> 19
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations associated
with investing in the Fund.
PREFERRED STOCK
There are a number of risks associated with an investment in 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. 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 than that of the Cumulative Preferred Stock. Subject
to such circumstances, 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 an
obligation of the Fund. The Cumulative Preferred Stock would be junior in
respect of dividends and liquidation preference to any indebtedness incurred by
the Fund. Although unlikely, precipitous declines in the value of the Fund's
assets could result in the Fund having insufficient assets to redeem all of the
Cumulative Preferred Stock for the full Redemption Price.
LONG-TERM OBJECTIVE
The Fund is intended for investors seeking long-term capital growth. The
Fund is not meant to provide a vehicle for those who wish to play short-term
swings in the stock market. An investment in shares of the Fund should not be
considered a complete investment program. Each stockholder should take into
account the investment objectives of the Fund as well as such stockholder's
other investments when considering an investment in the Fund.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means the Fund is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer. Because
the Fund, as a non-diversified investment company, may invest in the securities
of individual issuers to a greater degree than a diversified investment company,
an investment in the Fund may, under certain circumstance, present greater risk
to an investor than an investment in a diversified investment company.
LOWER RATED SECURITIES
The Fund may invest up to 10% of its total assets in fixed-income
securities rated in the lower rating categories of recognized statistical rating
agencies, such as securities rated CCC or lower by Standard & Poor's Ratings
Services ("S&P") or Caa or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. These securities and
securities rated BB or lower by S&P and Ba or lower by Moody's are often
referred to in the financial press as "junk bonds" and may include securities of
issuers in default. "Junk bonds" are considered by the rating agencies to be
predominantly speculative and may involve major risk exposures such as: (i)
vulnerability to economic downturns and changes in interest rates; (ii)
sensitivity to adverse economic changes and corporate developments; (iii)
redemption or call provisions which may be exercised at inopportune times; (iv)
difficulty in accurately valuing or disposing of such securities; (v)
subordination to other debt of the issuer; and (vi) junk bonds are generally
unsecured.
The Fund may invest in securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Adviser believes that
such issuers will honor their obligations or emerge from bankruptcy protection
and the value of these securities will appreciate. By investing in securities of
issuers in default, the Fund bears the risk that these issuers will not continue
to honor their obligations or emerge from
19
<PAGE> 20
bankruptcy protection or that the value of these securities will not appreciate.
Securities rated BBB by S&P or Baa by Moody's, in the opinion of the rating
agencies, also have speculative characteristics.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Investment
Practices -- Lower Rated Securities" in the SAI.
FOREIGN SECURITIES
The Fund may invest up to 35% of its total assets in foreign securities.
Investing in securities of foreign companies and foreign governments, which are
generally denominated in foreign currencies, may involve certain risk and
opportunity considerations not typically associated with investing in domestic
companies and could cause the Fund to be affected favorably or unfavorably by
changes in currency exchange rates and 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 or political 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.
The Fund may purchase sponsored American Depository Receipts ("ADRs") or
U.S. denominated securities of foreign issuers which shall not be included in
this foreign securities limitation. ADRs are receipts issued by United States
banks or trust companies in respect of securities of foreign issuers held on
deposit for use in the United States securities markets. While ADRs may not
necessarily be denominated in the same currency as the securities into which
they may be converted, many of the risks associated with foreign securities may
also apply to ADRs.
FUTURES TRANSACTIONS
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements for such
transactions. For a further description, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
FORWARD CURRENCY EXCHANGE CONTRACTS
The use of forward currency contracts may involve certain risks, including
the failure of the counter party to perform its obligations under the contract,
and that such use may not serve as a complete hedge because of an imperfect
correlation between movements in the prices of the contracts and the prices of
the currencies hedged or used for cover. For a further description of such
investments, see "Investment Objectives and Policies -- Investment Practices" in
the SAI.
DEPENDENCE ON KEY PERSONNEL
The Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in
providing advisory services with respect to the Fund's investments. There is no
contract of employment between the Adviser and Mr. Gabelli. If the Adviser were
to lose the services of Mr. Gabelli, its ability to service the Fund could be
adversely
20
<PAGE> 21
affected. There can be no assurance that a suitable replacement could be found
for Mr. Gabelli in the event of his death, resignation, retirement or inability
to act on behalf of the Adviser.
YEAR 2000 RISKS
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Adviser is in the process of working with the Fund's service
providers to prepare for the year 2000. Based on information currently
available, the Adviser does not expect that the Fund will incur significant
operating expenses or be required to incur material costs to be year 2000
compliant. Although the Adviser does not anticipate that the year 2000 issue
will have a material impact on the Fund's ability to provide service at current
levels, there can be no assurance that steps taken in preparation for the year
2000 will be sufficient to avoid any adverse impact on the Fund.
MANAGEMENT OF THE FUND
The Fund's Board of Directors (who, with its officers, are described in the
SAI) has overall responsibility for the management of the Fund. The Board of
Directors decides upon matters of general policy and reviews the actions of the
Adviser and the Administrator (as defined below). Pursuant to an Investment
Advisory Contract with the Fund, the Adviser, under the supervision of the
Fund's Board of Directors, provides a continuous investment program for the
Fund's portfolio; provides investment research and makes and executes
recommendations for the purchase and sale of securities; and provides all
facilities and personnel, including officers required for its administrative
management and pays the compensation of all officers and directors of the Fund
who are its affiliates. As compensation for its services and the related
expenses borne by the Adviser, the Fund pays the Adviser a fee, computed daily
and payable monthly, equal, on an annual basis, to 1.00% of the Fund's average
daily net assets, which is higher than that paid by most mutual funds. For the
fiscal years ended December 31, 1995, 1996 and 1997 the Fund paid a management
fee of $9,060,694, $10,364,591 and $11,136,210, respectively. Notwithstanding
the foregoing, the Adviser will waive the portion of its investment advisory fee
attributable to an amount of assets of the Fund equal to the aggregate stated
value of the Cumulative Preferred Stock for any calendar year in which the net
asset value total return of the Fund, including distributions and the advisory
fee subject to potential waiver, allocable to common stock is less than the
stated dividend rate of the Cumulative Preferred Stock (prorated during the
initial and final year the Cumulative Preferred Stock is outstanding).
The Adviser is located at One Corporate Center, Rye, New York 10580-1434.
The Adviser was formed in 1980 and acts as investment adviser to other
closed-end and open-end investment companies with total net assets in excess of
$6.8 billion as of March 31, 1998. GAMCO Investors, Inc. ("GAMCO"), a subsidiary
of the Adviser, acts as investment adviser for individuals, pension trusts,
profit sharing trusts and endowments. As of March 31, 1998, GAMCO had aggregate
assets in excess of $7.5 billion under its management. Mr. Mario J. Gabelli may
be deemed a "controlling person" of the Adviser on the basis of his ownership of
stock of the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the
payment of all its other expenses incurred in the operation of the Fund, which
include, among other things, expenses for legal and independent accountant's
services, stock exchange listing fees, expenses relating to the Offering of
Cumulative Preferred Stock (including rating agency fees), costs of printing
proxies, stock certificates and stockholder reports, charges of State Street
Bank and Trust Company ("State Street", the "Custodian," "Transfer Agent" or
"Dividend -- Disbursing Agent"), SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest, brokerage costs, taxes, expenses of qualifying
the Fund for sale in various states, expenses of personnel performing
stockholder servicing functions, litigation and other extraordinary or
non-recurring expenses and other expenses properly payable by the Fund.
The Investment Advisory Contract contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of the
Fund. Under those provisions, the Adviser may (1) direct Fund
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<PAGE> 22
portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates
of the Adviser; and (2) pay commissions to brokers other than Gabelli & Company,
Inc. which are higher than might be charged by another qualified broker to
obtain brokerage and/or research services considered by the Adviser to be useful
or desirable for its investment management of the Fund and/or its other advisory
accounts or those of any investment adviser affiliated with it. The SAI contains
further information about the Investment Advisory Contract including a more
complete description of the advisory and expense arrangements, exculpatory and
brokerage provisions, as well as information on the brokerage practices of the
Fund.
PORTFOLIO MANAGER
Mario J. Gabelli serves as Portfolio Manager and is primarily responsible
for the day-to-day management of the Fund. Mr. Gabelli has served as the Fund's
Portfolio Manager since its inception and has served as Chairman, President and
Chief Investment Officer of the Adviser since 1980. Mr. Gabelli also serves as
Portfolio Manager for several other funds in the Gabelli fund family. Because of
the diverse nature of Mr. Gabelli's responsibilities, he will devote less than
all of his time to the day-to-day management at the Fund.
NON-RESIDENT DIRECTORS
Karl Otto Pohl, a director of the Fund, resides outside the United States
and all or a significant portion of his assets are located outside the United
States. He has no authorized agent in the United States to receive service of
process. As a result, it may not be possible for investors to effect service of
process within the United States or to enforce against him in United States
courts judgments predicated upon civil liability provisions of United States
securities laws. It may also not be possible to enforce against him in foreign
courts judgments of United States courts or liabilities in original actions
predicated upon civil liability provisions of the United States securities laws.
ADMINISTRATOR
The Adviser has entered into an Administration Contract with First Data
Investor Services Group Inc. ("Investor Services Group" or the "Administrator")
pursuant to which the Administrator provides certain administrative services
necessary for the Fund's operations which do not include the investment advisory
and portfolio management services provided by the Adviser. For these services
and the related expenses borne by Investor Services Group, the Adviser pays a
prorated monthly fee at the annual rate of .10% of the first $1.0 billion of the
aggregate average net assets of the Fund and all other Funds advised by the
Adviser and administered by Investor Services Group and .08% of the aggregate
average net assets exceeding $1.0 billion and .03% of the aggregate average net
assets in excess of $1.5 billion and .02% of the aggregate net assets in excess
of $3.0 billion (with a minimum annual fee of $30,000 per portfolio), which,
together with the services to be rendered, is subject to negotiation between the
parties. Investor Services Group has its principal office at 53 State Street,
Boston MA 02109-2873.
DIVIDEND AND DISTRIBUTION POLICY
DISTRIBUTION POLICY
The Fund's policy is to make quarterly distributions of $0.27 per share at
the end of each of the first three calendar quarters of each year to holders of
its Common Stock. The Fund's distribution in December for each calendar year is
an adjusting distribution (equal to the sum of 2.5% of the net asset value of
the Fund as of the last day of the four preceding calendar quarters less the
aggregate distributions of $0.81 per share made for the most recent three
calendar quarters) in order to meet the Fund's 10% pay-out goal as well as the
Code's distribution requirements. Prior to May 13, 1998, the quarterly
distribution in each of the first three quarters of each year was $0.25 per
share.
The Fund reserves the right, but does not currently intend, to retain for
reinvestment and pay federal income taxes on its net capital gain, if any. If
for any calendar year, the total distributions exceed net
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<PAGE> 23
investment income and net capital gain, the excess will generally be treated as
a tax-free return of capital (up to the amount of the stockholder's tax basis in
his shares) which can be made payable by the Fund either in the form of a cash
distribution or a stock dividend. The amount treated as a tax-free return of
capital will reduce a stockholder's adjusted basis in his shares, thereby
increasing his potential gain or reducing his potential loss on the sale of his
shares.
In the event the Fund distributes amounts in excess of its net investment
income and net realized capital gains, such distributions will decrease the
Fund's total assets and therefore, have the likely effect of increasing the
Fund's expense ratio. In addition, in order to make such distributions, the Fund
may have to sell a portion of its investment portfolio at a time when
independent investment judgement might not dictate such action.
See "Description of Cumulative Preferred Stock -- Dividends" for additional
information relating to dividends on the Cumulative Preferred Stock.
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 Articles Supplementary, the form of which is filed
as an exhibit to the Fund's Registration Statement. Certain of the capitalized
terms used herein are defined in the Glossary that appears at the end of this
Prospectus.
GENERAL
Under the Articles Supplementary, the Fund will be authorized to issue
5,750,000 shares of Cumulative Preferred Stock, 5,000,000 of which are offered
hereby. No fractional shares of Cumulative Preferred Stock will be issued. As of
the date of this Prospectus, there were no shares of Cumulative Preferred Stock
or any other Preferred Stock of the Fund outstanding. The Board of Directors
reserves the right to issue additional shares of Preferred Stock, including
Cumulative Preferred Stock, from time to time, subject to the restrictions in
the Articles Supplementary and the 1940 Act. 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 Fund will be classified as authorized but
unissued Preferred Stock. 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, conversion or other rights, voting powers,
restrictions, limitations as to dividends or terms or conditions of redemption.
The Fund will not issue any class of stock senior to the shares of Cumulative
Preferred Stock.
RATING AGENCY GUIDELINES
Moody's has established guidelines in connection with the Fund's receipt of
a rating for the Cumulative Preferred Stock on the 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 utilized for the Cumulative
Preferred Stock have been developed by Moody's in connection with issuances of
asset-backed and similar securities, including debt obligations and various
types of preferred stocks, 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 Fund 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 supplement (and in some cases are more restrictive than) the applicable
requirements of Section 18 of the 1940 Act. Moody's guidelines are included in
the Articles Supplementary and are referred to in this Prospectus as the "Rating
Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain Adjusted Assets
greater than or equal to the Basic Maintenance Amount. If the Fund fails to meet
such requirement and such failure is not cured by
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<PAGE> 24
the applicable cure date, the Fund will be required to redeem some or all of the
Cumulative Preferred Stock. See "Description of Cumulative Preferred
Stock -- Redemption -- Mandatory Redemption." The Rating Agency Guidelines also
exclude from Moody's Eligible Assets and, therefore, from Adjusted Assets,
certain types of securities in which the Fund may invest. The Adviser does not
believe that compliance with the Rating Agency Guidelines will have an adverse
effect on its management of the Fund's portfolio or on the achievement of the
Fund's investment objectives. It is the Fund's present intention to continue to
comply with the Rating Agency Guidelines.
The Fund may, but is not required to, adopt any modifications to the Rating
Agency Guidelines that may hereafter be established by Moody's. Failure to adopt
such modifications, however, may result in a change in Moody's rating or a
withdrawal of a rating altogether. In addition, Moody's may, at any time, change
or withdraw such rating. However, failure to comply with the Rating Agency
Guidelines would require the Fund to redeem all or part of the Cumulative
Preferred Stock.
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 Moody's requirements 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 Fund and the
Adviser and information obtained from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of, such
information.
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, cumulative cash dividends, at the annual rate
of 7.25% of the liquidation preference of $25 per share, payable quarterly on
March 26, June 26, September 26 and December 26 or if any such day is not a
Business Day, the next succeeding Business Day (the "Dividend Payment Date"),
commencing on September 26, 1998, to the persons in whose names the shares of
Cumulative Preferred Stock are registered at the close of business on the fifth
preceding Business Day.
Dividends on the shares of Cumulative Preferred Stock will accumulate from
the date on which such shares are issued; provided, however, that with respect
to any shares of Cumulative Preferred Stock issued within 30 days of the Date of
Original Issue, dividends on such shares will accumulate from such Date of
Original Issue.
No dividends will be declared or paid or set apart for payment on shares of
Cumulative Preferred Stock for any dividend period or part thereof unless full
cumulative dividends have been or contemporaneously are declared and paid on all
outstanding shares of Cumulative Preferred Stock through the most recent
Dividend Payment Date thereof. If full cumulative dividends are not paid on the
Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred
Stock will be paid pro rata to the holders of the shares of Cumulative Preferred
Stock. Holders 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 that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Board of Directors of the Fund will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares 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 Fund 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 stock of the Fund ranking junior to
or on a parity with the Cumulative Preferred Stock as to dividends or upon
liquidation (except by conversion into or exchange for stock of the Fund ranking
junior to or on a parity with the Cumulative Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately after such transaction,
the Fund will have Adjusted Assets greater than or equal to the Basic
Maintenance Amount and will have the required Asset Coverage (see "-- Asset
Maintenance" and "-- Redemption" below),
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<PAGE> 25
(B) 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 Assets to cover such payment have been deposited with the
Dividend-Disbursing Agent) and (C) the Fund has redeemed the full number of
shares of Cumulative Preferred Stock required to be redeemed by any provision
for mandatory redemption contained in the Articles Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Asset Coverage. The Fund will be required under the Articles Supplementary
to maintain as of the last Business Day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of at
least 200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of the
Fund which are stock, including the Cumulative Preferred Stock (the "Asset
Coverage"). If the Fund fails to maintain the Asset Coverage on such dates and
such failure is not cured within 60 days, the Fund will be required under
certain circumstances to redeem certain of the shares of Cumulative Preferred
Stock. See "-- Redemption" below.
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold as of December 31, 1997, the asset coverage immediately following such
issuance and sale (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $4,396,269), would
have been computed as follows:
<TABLE>
<S> <C> <C> <C>
Value of Fund assets less liabilities not constituting
senior securities $1,331,173,325
= 1,065%
----------------- ------------
Senior securities representing indebtedness plus $125,000,000
liquidation preference of the Cumulative Preferred
Stock
</TABLE>
Basic Maintenance Amount. The Fund will be required under the Articles
Supplementary to maintain, as of each Valuation Date, Adjusted Assets greater
than or equal to the Basic Maintenance Amount, which is in general the sum of
the aggregate liquidation preference of the Cumulative Preferred Stock, any
indebtedness for borrowed money and current liabilities and dividends. If the
Fund fails to meet such requirement as to any Valuation Date and such failure is
not cured within 7 days after such Valuation Date, the Fund will be required to
redeem certain of the shares of Cumulative Preferred Stock. See "-- Redemption"
below.
Any security not meeting the Rating Agency Guidelines will be excluded from
the calculation of Adjusted Assets.
The Moody's Discount Factors and guidelines for determining the market
value of the Fund'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 historical volatility of common stock prices
in general and within particular industry groups, the credit quality of the
relevant asset (for example, the lower the rating of a corporate debt
obligation, the higher the related discount factor), the frequency with which
the relevant asset is marked to market and the amount of time the Fund may take
to cure a failure to meet the Basic Maintenance Amount test. The Moody's
Discount Factor relating to any asset of the Fund, the assets eligible for
inclusion in the calculation of Adjusted Assets and the Basic Maintenance Amount
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 the Moody's. This feature will permit the Fund to respond to
changes required or permitted by Moody's from time to time without requiring a
vote of stockholders and should enhance the ability of the Fund to earn an
incremental return for the holders of its Common Stock without impairing the
rating of the Cumulative Preferred Stock.
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<PAGE> 26
On or before the fifth Business Day after each Quarterly Valuation Date,
the Fund is required to deliver to Moody's a report setting forth at least the
Fund's Adjusted Assets and the Basic Maintenance Amount as of the relevant
Valuation Date (the "Basic Maintenance Report"). Within ten Business Days after
delivery of such report to Moody's and on one other occasion chosen at random by
Fund's independent accountants, the Fund will deliver letters prepared by the
Fund's independent accountants regarding the accuracy of the calculations made
by the Fund in, and certain other matters relating to, its most recent Basic
Maintenance Report.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price equal to $25 per share plus accumulated but 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 and Maryland law) in the event that:
(i) the Fund fails to maintain the Asset Coverage and such failure is
not cured on or before 60 days following such failure (a "Cure Date"); or
(ii) the Fund fails to maintain Adjusted Assets greater than or equal
to the Basic Maintenance Amount as of any Valuation Date, and such failure
is not cured on or before the 7th 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 Fund having Adjusted Assets equal to or greater than the Basic Maintenance
Amount on such Cure Date or, if the Asset Coverage or Adjusted Assets 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 Fund may, but is not required to, redeem a
sufficient number of shares of Cumulative Preferred Stock so that the asset
coverage (as defined in the 1940 Act) of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock remaining after
redemption is up to 220%. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (ii) above, the Fund may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred Stock
so that the Adjusted Assets of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock remaining after redemption is up
to 110% of the Basic Maintenance Amount.
The Cumulative Preferred Stock is also subject to mandatory redemption in
whole in the following circumstances. If the Board of Directors and the holders
of the number of shares of the Common Stock of the Fund entitled and required by
applicable law to be cast thereon vote to authorize the dissolution of the Fund,
any amendment to the Articles of Incorporation and any other actions necessary
to be approved by them for the Fund to convert to open-end status which makes
any class of the Fund's stock a redeemable security (as that term is defined in
the 1940 Act), any plan of reorganization (as that term is defined in the 1940
Act) adversely affecting the Cumulative Preferred Stock or any other action
requiring a vote of security holders of the Fund as provided in Section 13(a) of
the 1940 Act, then, notwithstanding the vote or failure to vote on such actions
of the holders of shares of the Cumulative Preferred Stock, the Fund (i) may
take such actions, subject to satisfying any further requirements of applicable
law, and (ii) shall, prior to taking such actions, give a written notice of
redemption ("Notice of Redemption") with respect to the redemption of all shares
of the Cumulative Preferred Stock then outstanding and redeem such shares.
If the Fund 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 Fund will redeem on such redemption date
that number of shares for which it has legally available funds, or is otherwise
able, to redeem ratably from each holder whose shares are to be redeemed, and
the remainder of the shares required to be redeemed will be redeemed on the
earliest practicable date on which the Fund will have funds legally available
for the redemption of, or is otherwise able to redeem, such shares upon Notice
of Redemption.
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<PAGE> 27
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 Assets for the payment
thereof deposited with the Dividend-Disbursing Agent, no redemptions of
Cumulative Preferred Stock may be made.
Optional Redemption. Prior to June 9, 2003, the shares of Cumulative
Preferred Stock are not subject to any optional redemption by the Fund unless
such redemption is necessary, in the judgment of the Fund, to maintain the
Fund's status as a regulated investment company ("RIC") under the Code.
Commencing June 9, 2003 and thereafter, the Fund may at any time 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 and Maryland law.
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 45 days prior to the date fixed for the redemption. Each Notice of
Redemption will state (i) the redemption date, (ii) the number of shares of
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 Articles
Supplementary under which the redemption is being made. No defect in the Notice
of Redemption or in the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the Fund
(whether voluntary or involuntary), holders of shares of Cumulative Preferred
Stock then outstanding will be entitled to receive out of the assets of the Fund
available for distribution to stockholders, after satisfying claims of creditors
but before any distribution or payment of assets is made to holders of the
Common Stock or any other class of stock of the Fund ranking junior to the
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 accrued to and including the date fixed for such distribution or
payment (whether or not earned or declared by the Fund but excluding interest
thereon) (the "Liquidation Payment"), and such holders will be entitled to no
further participation in any distribution or payment in connection with any such
liquidation, dissolution or winding up. If, upon any liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
assets of the Fund available for distribution among the holders of all
outstanding shares of Cumulative Preferred Stock and any other outstanding class
or series of Preferred Stock of the Fund 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 Payment 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 Payment 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 Fund 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 and any other
Preferred Stock will be entitled to one vote per share on each matter submitted
to a vote of stockholders and will vote together with holders of shares of
Common Stock and of any other Preferred Stock then outstanding as a single
class. Also, except as otherwise required by the 1940 Act, (i) holders of
outstanding shares of the Cumulative Preferred Stock will be entitled as a
class, to the exclusion of the holders of all other securities, including other
Preferred Stock, Common Stock
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<PAGE> 28
and other classes of capital stock of the Fund, to vote on matters affecting the
Cumulative Preferred Stock that do not materially adversely affect any of the
contract rights of holders of such other securities, including other Preferred
Stock, Common Stock and other classes of capital stock, as expressly set forth
in the Fund's Charter, and (ii) holders of outstanding shares of Cumulative
Preferred Stock will not be entitled to vote on matters affecting any other
Preferred Stock that do not materially adversely affect any of the contract
rights of holders of the Cumulative Preferred Stock, as expressly set forth in
the Charter.
Upon any liquidation the holders of the Common Stock, after required
Payments to the holders of Preferred Stock will be entitled to participate
equally and ratably in the remaining assets of the Fund.
In connection with the election of the Fund'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 Fund'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 Fund 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 by the holders of Cumulative Preferred Stock and any other
Preferred Stock, voting as a separate class, 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
seperate 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 Fund as so increased. The Charter currently limits the maximum
number of directors of the Fund to nine. In the event that an increase in the
number of directors elected solely by the holders of shares of Cumulative
Preferred Stock and any other Preferred Stock would cause the total number of
directors to exceed nine, one or more directors, other than the two previously
elected by the holders of shares of Cumulative Preferred Stock and Preferred
Stock, voting as a separate class, would resign so that the result would be that
directors elected by the Preferred stockholders would fill the vacancies so that
a majority of the Board of Directors had been elected by the holders of the
Cumulative Preferred Stock and any other Preferred Stock, voting as a separate
class. Except as otherwise provided in the immediately preceding sentence, the
terms of office of the persons who are directors at the time of that election
will continue. If the Fund thereafter pays, or declares and sets apart for
payment in full, all dividends payable on all outstanding shares of 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
office of all of the additional or replacement 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
as a separate class in any event) will terminate automatically.
So long as shares of the Cumulative Preferred Stock are outstanding, the
Fund will not, without the affirmative vote of the holders of a majority (as
defined in the 1940 Act) of the shares of Preferred Stock outstanding at the
time, voting separately as one class, amend, alter or repeal the provisions of
the Charter, whether by merger, consolidation or otherwise, so as to materially
adversely affect any of the contract rights expressly set forth in the Charter
of holders of shares of the Cumulative Preferred Stock or any other Preferred
Stock. The Board of Directors, however, without stockholder approval, may amend,
alter or repeal the Rating Agency Guidelines in the event the Fund receives
confirmation from Moody's that any such amendment, alteration or repeal would
not impair the rating then assigned to the Cumulative Preferred Stock. Unless a
higher percentage is provided for under the Charter or applicable provisions of
Maryland General Corporation
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<PAGE> 29
Law, 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, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives and Policies" and "Investment Restrictions" in the Prospectus and the
SAI. The class vote of holders of shares of the Cumulative Preferred Stock and
any other Preferred Stock described above in each case will be in addition to a
separate vote of the requisite percentage of shares of Common Stock 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 Assets
provided to the Dividend-Disbursing Agent to effect such redemption. The holders
of Cumulative Preferred Stock will have no preemptive rights or rights to
cumulative voting.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF ADDITIONAL
PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding and
subject to compliance with the Fund's investment objectives, policies and
restrictions, the Fund may issue and sell one or more series of a class of
senior securities of the Fund representing indebtedness under the 1940 Act
and/or otherwise create or incur indebtedness, provided that the Fund will,
immediately after giving effect to the incurrence of such indebtedness and to
its receipt and application of the proceeds thereof, have an "asset coverage"
for all senior securities of the Fund representing indebtedness, as defined in
the 1940 Act, of at least 300% of the amount of all indebtedness of the Fund
then outstanding and no such additional indebtedness will have any preference or
priority over any other indebtedness of the Fund upon the distribution of the
assets of the Fund or in respect of the payment of interest. Any possible
liability resulting from lending and/or borrowing portfolio securities, entering
into reverse repurchase agreements, entering into futures contracts and writing
options, to the extent such transactions are made in accordance with the
investment restrictions of the Fund then in effect, will not be considered to be
indebtedness limited by the Articles Supplementary.
So long as any shares of Cumulative Preferred Stock are outstanding and
subject to compliance with the Fund's investment objectives, policies and
restrictions, the Fund may issue and sell shares of one of more other series of
Preferred Stock in addition to the shares of Cumulative Preferred Stock,
provided that the Fund will, immediately after giving effect to the issuance of
such additional Preferred Stock and to its receipt and application of the
proceeds thereof, have an "asset coverage" for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 200% of the sum of the
liquidation preference of the shares of Cumulative Preferred Stock and all other
Preferred Stock of the Fund then outstanding and all indebtedness of the Fund
constituting senior securities and no such additional Preferred Stock will have
any preference or priority over any other Preferred Stock of the Fund upon the
distribution of the assets of the Fund or in respect of the payment of
dividends.
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund 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 Fund. The Fund, 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 other applicable requirements.
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
Fund will treat Cede as the holder of record of
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<PAGE> 30
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 CAPITAL STOCK AND OTHER SECURITIES
Common Stock. The Fund, which was incorporated under the laws of the State
of Maryland on May 20, 1986, is authorized to issue 192,000,000 shares of Common
Stock, par value $.001 per share. Each share has equal voting, dividend,
distribution and liquidation rights. The shares issued and outstanding are fully
paid and non-assessable. Shares of the Common Stock are not redeemable and have
no preemptive, conversion or cumulative voting rights. The Fund's shares are
listed and traded on the NYSE under the symbol "GAB".
Preferred Stock. The Fund's Board of Directors has authority to cause the
Fund to issue and sell up to 8,000,000 shares of Preferred Stock, par value
$.001 per share. The terms of such Preferred Stock would be fixed by the Board
of Directors and would materially limit and/or qualify the rights of the holders
of the Fund's Common Stock. The Board of Directors has designated up to
5,750,000 shares of Preferred Stock as the Cumulative Preferred Stock, 5,000,000
of which are offered hereby. All shares of Cumulative Preferred Stock, when
issued in accordance with the terms of the Offering, will be fully paid and
nonassessable. 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 Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund as
of March 31, 1998 as if the Offering had been completed by such date.
<TABLE>
<CAPTION>
AMOUNT
HELD BY
AMOUNT FUND FOR ITS AMOUNT
TITLE OF CLASS AUTHORIZED OWN ACCOUNT OUTSTANDING
-------------- ----------- ------------ -----------
<S> <C> <C> <C>
Common Stock.................................. 192,000,000 800,000 104,676,383
Preferred Stock............................... 8,000,000 0 5,000,000
</TABLE>
TAXATION
The following is a description of certain U.S. Federal income tax
consequences to a stockholder of acquiring, holding and disposing of Cumulative
Preferred and Common Shares of the Fund. The discussion reflects applicable tax
laws of the United States as of the date of this Prospectus, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service (the "IRS") retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S. Federal,
state, local and foreign tax concerns affecting the Fund and its stockholders,
and the discussion set forth herein does not constitute tax advice. Investors
are urged to consult their own tax advisers to determine the tax consequences to
them of investing in the Fund.
TAXATION OF THE FUND
The Fund has elected to be treated and has qualified as, and intends to
continue to qualify as, a RIC under Subchapter M of the Code. If it so
qualifies, the Fund will not be subject to U.S. Federal income tax on the
portion of its net investment income (i.e., its investment company taxable
income as defined in the Code without regard to the deduction for dividends
paid) and its net capital gain (i.e., the excess of its net realized long-term
capital gain over its net realized short-term capital loss) which it distributes
to its stockholders in each taxable year, provided that it distributes to its
stockholders at least 90% of its net investment income for such taxable year.
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<PAGE> 31
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, 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 Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other RICs).
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. To qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to Cumulative
Preferred Stockholders and Common Stockholders as a dividend paid out of the
Fund's net investment income its earnings and profits attributable to non-RIC
years reduced by an interest charge on 50% of such earnings and profits payable
by the Fund to the IRS. In addition, if the Fund failed to qualify as a RIC for
a period greater than one taxable year, then the Fund would be required to
recognize and pay tax on any net built-in gains (the excess of aggregate gains,
including items of income, over aggregate losses that would have been realized
if the Fund had been liquidated) in order to qualify as a RIC in a subsequent
year. To the extent possible, the Fund intends to make sufficient distributions
to avoid application of the corporate income tax.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount 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 for the one
year period ending on October 31 of such year, unless an election is made by a
fund with a November or December year-end to use the fund's fiscal year (the
Fund has made this election), and (3) all ordinary income and capital gain net
income for previous years that were not previously distributed. For purposes of
the excise tax, any income or capital gain retained by and taxed in the hands of
the Fund will be treated as having been distributed. While the Fund intends to
distribute its ordinary income and capital gain net income in the manner
necessary to minimize imposition of the 4% excise tax, there can be no assurance
that sufficient amounts of the Fund's ordinary income and capital gain net
income will be distributed to avoid entirely the imposition of the tax. In such
event, the Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the 1940 Act
and the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage is
restored. See "Description of Cumulative Preferred Stock -- Dividends" and
"Description of Capital Stock and Other Securities." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to avoid Fund-level taxation on the Fund's
distributions, or might prevent it from distributing enough income and capital
gain to avoid completely the imposition of the excise tax. Upon any failure to
meet the asset coverage requirements of the 1940 Act or the Articles
Supplementary, the Fund may, and in certain circumstances will, be required to
partially redeem the shares of Cumulative Preferred Stock in order to restore
the requisite asset coverage and avoid the adverse consequences to the Fund and
its stockholders of failing to qualify as a RIC. If asset coverage were
restored, the Fund would again be able to pay dividends and might be able to
avoid Fund-level taxation on the Fund's undistributed income.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund are taxable to stockholders whether such
dividends are paid in cash or paid in additional shares of stock under the
Fund's plan for the automatic reinvestment of dividends. Dividends paid by the
Fund from its net investment income ("Ordinary Income Dividends") are taxable to
stockholders as ordinary income. Distributions made from net capital gain
(including gains or losses from certain transactions
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<PAGE> 32
in warrants, rights, futures and options) and properly designated by the Fund
("Capital Gain Dividends") are taxable to stockholders as long-term capital
gain, regardless of the length of time the stockholder has owned Fund shares.
Any loss upon the sale or exchange of Fund shares held for six months or less
will be treated as long-term capital loss to the extent of any Capital Gain
Dividends received by the stockholder. Distributions in excess of the Fund's
earnings and profits will first result in a non-taxable reduction to 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 (provided that the
shares are held as a capital asset).
Capital Gain Dividends may be taxed at a lower rate than Ordinary Income
Dividends for certain non-corporate taxpayers. Under recent legislation, net
"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 and certain other categories of gain
that the Fund does not expect to realize. 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%. 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 Fund 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. If
the Fund pays a dividend in January which was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its stockholders on December 31 of the year in which
such dividend was declared.
Stockholders may be entitled to offset their Capital Gain Dividends with
capital losses. There are a number of statutory provisions that affect the use
of capital losses to offset capital gains, and that limit the use of losses from
certain investments and activities. Accordingly, stockholders with capital
losses are urged to consult their tax advisers.
Gain or loss, if any, recognized on the sale of other disposition of shares
of the Fund, including, without limitation, a redemption by the Fund will be
taxed as a capital gain or loss if the shares are capital assets in the
stockholder's hands and will be taxed as long-term or short-term gain or loss,
as the case may be. A loss realized on a sale or exchange of shares of the Fund
will be disallowed if other Fund shares of the same class are acquired within a
61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of. In that case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
The Code provides that capital gain recognized on the termination of a
position held as part of a "conversion transaction" will be treated as ordinary
income, to the extent it does not exceed the interest that would have accrued on
the net investment in the conversion transaction at an interest rate prescribed
by the Code. A "conversion transaction," for these purposes, is a transaction
substantially all of the return from which is attributable to the time value of
the net investment in the transaction, and which is marketed as producing
capital gains, but having the characteristics of a loan. Although there are no
regulations construing this provision, the conversion transaction rules would
not apply to an investment in the Cumulative Preferred Stock because dividends
paid with respect to the Cumulative Preferred Stock will not constitute gain
which is recognized on the disposition or other termination of any position
which was held as part of a conversion transaction.
Ordinary Income Dividends (but not Capital Gain Dividends) paid to
stockholders who are non-resident aliens or foreign entities will be subject to
a 30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
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<PAGE> 33
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on Ordinary Income Dividends, Capital Gain Dividends and
redemption payments ("backup withholding"). A stockholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form with the payor (i.e., the financial institution or brokerage firm where the
stockholder maintains his or her account), certifying under penalties of perjury
that such stockholder's taxpayer identification number is correct and that such
stockholder (i) has never been notified by the IRS that he is subject to backup
withholding, (ii) has been notified by the IRS that he is no longer subject to
backup withholding, or (iii) is exempt from backup withholding. Corporate
stockholders and certain other stockholders are exempt from backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a stockholder may be credited
against such stockholder's Federal income tax liability.
At the time of a stockholder's purchase, the market price of the Fund's
Common Stock or Cumulative Preferred Stock may reflect undistributed net
investment income or net capital gain. A subsequent distribution of these
amounts by the Fund will be taxable to the stockholder even though the
distribution economically is a return of part of the stockholder's investment.
Investors should carefully consider the tax implications of acquiring shares
just prior to a distribution, as they will receive a distribution that would
nevertheless be taxable to them.
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 in any year as
consisting of no more than such class's proportionate share of particular types
of income, such as net long-term capital gain and foreign taxes paid by the RIC
(if such taxes are subject to a "pass-through" election as described above). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such year
that was paid to such class. Because of this rule, the Fund is required to
allocate a portion of its net capital gain and foreign taxes paid to holders of
Common Stock, holders of Cumulative Preferred Stock and any other Preferred
Stock. The amount of net capital gain, other types of income and foreign taxes
paid 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 realized by and taxes paid by the Fund and the total dividends paid
by the Fund on shares of Common Stock and Cumulative Preferred Stock and any
other Preferred Stock during a taxable year.
The Fund believes that under current law the manner in which the Fund
intends to allocate net capital gain, other types of income and foreign taxes
paid between shares of Common Stock and Cumulative Preferred Stock will be
respected for Federal income tax purposes. However, the Fund has not requested
and will not request direct guidance from the IRS specifically addressing
whether the Fund's method of allocation will be respected for Federal income tax
purposes, and it is possible that the IRS could disagree with the Fund and
attempt to reallocate the Fund's net capital gain, other taxable income and
foreign taxes paid.
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. It is anticipated that the fund
will not invest more than 35% of its total assets in foreign securities.
Accordingly, the Fund will not be eligible to elect to "pass-through" to
stockholders of the Fund the ability to use the foreign tax deduction or foreign
tax credit for foreign taxes paid with respect to qualifying taxes. In order to
make such an election, at least 50% of the Fund's total would be required to be
invested in foreign securities at the close of the Fund's fiscal year.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE
PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. A MORE
COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND CAN BE FOUND IN THE
SAI WHICH IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. FOR THE COMPLETE
PROVISIONS APPLICABLE TO BOTH STOCKHOLDERS AND THE FUND, REFERENCE SHOULD BE
MADE TO THE PERTINENT CODE SECTIONS AND THE TREASURY REGULATIONS PROMULGATED
THEREUNDER. THE CODE AND THE TREASURY REGULATIONS ARE SUBJECT TO CHANGE BY
LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY OR
RETROACTIVELY.
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<PAGE> 34
CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter and By-Laws (together, in
each case, its "Governing Documents") which could have the effect of limiting,
in each case, (i) the ability of other entities or persons to acquire control of
the Fund, (ii) the Fund's freedom to engage in certain transactions, or (iii)
the ability of the Fund's Directors or stockholders to amend the Governing
Documents or effectuate changes in the Fund's management. These provisions of
the Governing Documents of the Fund may be regarded as "antitakeover"
provisions. The Board of Directors of the Fund is divided into three classes,
each having a term of no more than three years. Each year the term of one class
of Directors will expire. Accordingly, only those Directors in one class may be
changed in any one year, and it would require two years to change a majority of
the Board of Directors. Such system of electing Directors may have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the stockholders of the Fund to change the majority of Directors. See
"Management of the Fund" in the SAI. A Director of the Fund may be removed with
or without cause by a vote of a majority of the votes entitled to be cast for
the election of Directors of the Fund. In addition, the affirmative vote of the
holders of 66 2/3% of each class of its outstanding voting shares is required to
authorize the conversion of the Fund from a closed-end to an open-end investment
company or generally to authorize any of the following transactions:
(i) merger or consolidation of the Fund with or into any other
corporation;
(ii) issuance of any securities of the Fund to any person or entity
for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Fund, in exchange for securities
of the Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund. However, such vote would not be required when, under certain
conditions, the Board of Directors approves the transaction. Reference is made
to the Governing Documents of the Fund on file with the Commission; for the full
text of these provisions, see "Additional Information."
The provisions of the Governing Documents described above could have the
effect of depriving the owners of shares in the Fund of opportunities to sell
their shares at a premium over prevailing market prices, by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or similar
transaction. The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a principal
stockholder. The Board of Directors has determined that the foregoing voting
requirements are in the best interests of the stockholders generally.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company serves as Custodian for the Fund's cash
and securities as well as the Transfer Agent and Dividend-Disbursing Agent for
its shares. Boston EquiServe LP, an affiliate of State Street, performs the
stockholder services on behalf of State Street and is located at 150 Royall
Street, Mail Stop 45-02-62, Canton, MA 02021. State Street does not assist in
and is not responsible for investment decisions involving assets of the Fund.
34
<PAGE> 35
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below for whom Smith
Barney Inc., Gabelli & Company, Inc., PaineWebber Incorporated and Prudential
Securities Incorporated are acting as the Representatives (the
"Representatives") has severally agreed to purchase, and the Fund has agreed to
sell to such Underwriter, the number of shares of Cumulative Preferred Stock set
forth opposite the name of such Underwriter:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Smith Barney Inc. .......................................... 1,095,000
Gabelli & Company, Inc. .................................... 1,085,000
PaineWebber Incorporated.................................... 1,085,000
Prudential Securities Incorporated.......................... 1,085,000
Bear, Stearns & Co. Inc. ................................... 50,000
Cowen & Company............................................. 25,000
Dain Rauscher Wessels, A Division of Dain Rauscher
Incorporated.............................................. 50,000
EVEREN Securities, Inc. .................................... 50,000
Fahnestock & Co. Inc. ...................................... 25,000
Fidelity Capital Markets, A Division of National Financial
Services Corporation...................................... 25,000
Gibraltar Securities Co. ................................... 25,000
Gruntal & Co., L.L.C........................................ 25,000
J.C. Bradford & Co. ........................................ 25,000
Janney Montgomery Scott Inc. ............................... 25,000
Legg Mason Wood Walker, Incorporated........................ 25,000
McDonald & Company Securities, Inc. ........................ 25,000
McGinn, Smith & Co., Inc. .................................. 25,000
Morgan Keegan & Company, Inc. .............................. 25,000
Oppenheimer & Co., Inc. .................................... 50,000
Piper Jaffray Inc. ......................................... 25,000
Raymond James & Associates, Inc. ........................... 50,000
The Robinson-Humphrey Company, LLC ......................... 50,000
Tucker Anthony Incorporated................................. 25,000
Wheat First Securities, Inc. ............................... 25,000
---------
Total.................................................. 5,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the approval of certain legal
matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares of Cumulative Preferred Stock offered
hereby if any are taken.
The Underwriters propose to offer part of the shares of Cumulative
Preferred Stock offered hereby directly to the public at the public offering
price set forth on the cover page of this Prospectus and part of the shares to
certain dealers at a price which represents a concession not in excess of $0.50
per share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.30 per share to certain
other dealers. After the initial offering of the shares of Cumulative Preferred
Stock to the public, the public offering price and such concessions may be
changed by the Underwriters. The underwriting discount of $0.7875 per share is
equal to 3.15% of the initial offering price. Investors must pay for any shares
of Cumulative Preferred Stock purchased on or before June 9, 1998.
The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the 1933 Act.
35
<PAGE> 36
The Fund has granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional 750,000 shares
of the Cumulative Preferred Stock at a price per share equal to the purchase
price for the shares of Cumulative Preferred Stock set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise the option only to cover over-allotments of shares of the Cumulative
Preferred Stock in connection with the offering.
The Underwriters have advised the Fund 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 the Cumulative Preferred Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the
Cumulative Preferred Stock. A "syndicate covering transaction" is a bid for or
purchase of the 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 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 or
otherwise and, if commenced, may be discontinued at any time.
The Underwriters have acted in the past and may continue to act from time
to time during and subsequent to the completion of the offering of Cumulative
Preferred Stock hereunder as a broker or dealer in connection with the execution
of portfolio transactions for the Fund. See "Portfolio Transactions" in the SAI.
Prior to the Offering, there has been no public market for the Cumulative
Preferred Stock. The Cumulative Preferred Stock has been approved for listing,
subject to official notice of issuance, on the NYSE. However, during an initial
period which is not expected to exceed 30 days after the date of this
Prospectus, the Cumulative Preferred Stock will not be listed on any 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.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli Securities,
Inc., which is a majority-owned subsidiary of the Adviser which is, in turn,
majority-owned by Mario J. Gabelli. As a result of these relationships, Mr.
Gabelli, the Fund's President and Chief Investment Officer, may be deemed to be
a "controlling person" of Gabelli & Company, Inc. For additional Information
regarding these affiliations, see "Management of the Funds."
Salomon Smith Barney and Gabelli & Company, Inc. have provided investment
banking and financial advisory services to the Fund.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Miles & Stockbridge P.C.,
Baltimore, Maryland. Certain legal matters will be passed on by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York, special counsel to the Fund in
connection with the offering of the Cumulative Preferred Stock, and by Simpson
Thacher & Bartlett, New York, New York, counsel to the Underwriters. Skadden,
Arps, Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett will each rely as
to matters of Maryland law on the opinion of Miles & Stockbridge P.C.
EXPERTS
Price Waterhouse LLP, independent accountants, are the independent
accountants of the Fund. The audited financial statements of the Fund and the
information appearing under the caption "Financial Highlights" included in this
Prospectus have been audited by Price Waterhouse LLP for the periods indicated
36
<PAGE> 37
in its report with respect thereto, and are included in reliance upon such
report and upon the authority of such firm as experts in accounting and
auditing. Price Waterhouse LLP has an office at 1177 Avenue of the Americas, New
York, New York 10036, and also performs tax and other professional services for
the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
files reports and other information with the SEC. Reports, proxy statements and
other information filed by the Fund with the SEC pursuant to the informational
requirements of such Acts can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the SEC: 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 SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the SEC.
The Fund's Common Stock is listed on the NYSE, and reports, proxy
statements and other information concerning the Fund and filed with the SEC by
the Fund can be inspected at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the SEC under the 1933 Act and the 1940 Act. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Fund and the 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.
37
<PAGE> 38
TABLE OF CONTENTS OF SAI
An SAI dated June 4, 1998 has been filed with the SEC and is incorporated
by reference in this Prospectus. An SAI may be obtained without charge by
writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or by calling the Fund toll-free at (800) GABELLI (422-3554). The
Table of Contents of the SAI is as follows:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.......................... B- 2
INVESTMENT RESTRICTIONS..................................... B- 7
MANAGEMENT OF THE FUND...................................... B- 9
PORTFOLIO TRANSACTIONS...................................... B-14
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH
PURCHASE PLAN............................................. B-15
TAXATION.................................................... B-16
MOODY'S DISCOUNT FACTORS.................................... B-20
NET ASSET VALUE............................................. B-23
GENERAL INFORMATION......................................... B-24
BENEFICIAL OWNER............................................ B-25
FINANCIAL STATEMENTS........................................ B-25
</TABLE>
38
<PAGE> 39
GLOSSARY
"Adjusted Assets" means the aggregate Adjusted Value of all Moody's
Eligible Assets.
"Adjusted Value" of each Moody's Eligible Asset shall be computed as
follows:
(i) Cash shall be valued at 100% of the face value thereof; and
(ii) all other Moody's Eligible Assets shall be valued at the
Discounted Value thereof; and
(iii) each asset that is not a Moody's Eligible Asset shall be valued
at zero.
"Articles Supplementary" means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
"Asset Coverage" has the meaning set forth on page 25 of this Prospectus.
"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 each
series of Cumulative Preferred Stock outstanding on such Valuation Date
multiplied by the liquidation preference per share; (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 a series of the Cumulative Preferred Stock, then from the Date of
Original Issue) through the Valuation Date plus all dividends to accumulate on
the Preferred Stock then outstanding during the 70 days following such Valuation
Date or, if less, during the number of days following such Valuation Date that
shares of Preferred Stock called for redemption are scheduled to remain
outstanding; (C) the Fund's other liabilities due and payable as of such
Valuation Date (except that dividends and other distributions payable by the
Fund on Common Stock will not be included as a liability) and such liabilities
projected to become due and payable by the Fund 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);
and (D) any current liabilities of the Fund 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 Fund pursuant to reverse repurchase agreements and any payables for assets
purchased as of such Valuation Date) less (ii) (A) the Adjusted Value of any of
the Fund's assets or (B) the face value of any of the Fund's assets if, in the
case of both (ii)(A) and (ii)(B), such assets are either cash or evidences of
indebtedness which mature prior to or on the date of redemption or repurchase of
shares of Preferred Stock or payment of another liability and are either U.S.
Government Obligations or evidences of indebtedness 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-1
or A-1, and are irrevocably held by the Fund's custodian bank in a segregated
account or deposited by the Fund with the Dividend Disbursing Agent for the
payment of the amounts needed to redeem or repurchase Preferred Stock subject to
redemption or repurchase or any of (i)(B) through (i)(D); and provided that in
the event the Fund has repurchased Cumulative Preferred 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-Disbursing
Agent for the payment of the repurchase price the Fund may deduct 100% of the
liquidation preference of such Cumulative Preferred Stock to be repurchased from
(i) above.
"Basic Maintenance Report" has the meaning set forth on page 26 of this
Prospectus.
"Business Day" means a day on which the NYSE 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.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund on file in the State
Department of Assessments and Taxation of the State of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Fund.
39
<PAGE> 40
"Cumulative Preferred Stock" means the 7.25% Cumulative Preferred Stock,
par value $.001 per share, of the Fund.
"Cure Date" has the meaning set forth on page 26 of this Prospectus.
"Date of Original Issue" means June 9, 1998.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S.
Government Obligations. Except for determining whether the Fund has Adjusted
Assets equal to or greater than the Basic Maintenance Amount, each Deposit Asset
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 Asset
but only if payable on or prior to the applicable payment date in advance of
which the relevant deposit is made.
"Discounted Value" means, with respect to a Moody's Eligible Asset, the
quotient of (A) in the case of a non-convertible fixed income instrument, the
lower of the principal amount (accreted principal to the extent such instrument
accrues interest) or liquidation preference and the market value thereof or (B)
in the case of any other Moody's Eligible Asset, the market value thereof,
divided by the applicable Moody's Discount Factor.
"Dividend-Disbursing Agent" means State Street Bank and Trust Company and
its successors or any other dividend-disbursing agent appointed by the Fund.
"Dividend Payment Date" has the meaning set forth on page 24 of this
Prospectus.
"Fund" means The Gabelli Equity Trust Inc., a Maryland corporation.
"Liquidation Payment" has the meaning set forth on page 27 of this
Prospectus.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" means, with respect to a Moody's Eligible Asset
specified below, the numbers set forth in the SAI under the heading "Moody's
Discount Factors."
"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 NYSE,
the American Stock Exchange or the Nasdaq National Market System, (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 "aa3" 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,
40
<PAGE> 41
that for this purpose the aggregate market value of the Fund's holdings of
any single issue of auction rate preferred stock will not be more than 1%
of the Fund's total assets;
v. common stocks (A)(i) which are traded on a nationally recognized
stock exchange or in the over-the-counter market, (ii) if cash dividend
paying, pay cash dividends in U.S. dollars and (iii) which may be sold
without restriction by the Fund; provided, however, that (1) common stock
which, while a Moody's Eligible Asset owned by the Fund, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
until 71 days after the date of the announcement of such cessation, unless
the issuer of the common stock has senior debt securities rated at least A3
by Moody's and (2) the aggregate market value of the Fund's holdings of the
common stock of any issuer in excess of 4% in the case of utility common
stock and 6% in the case of non-utility common stock of the aggregate
market value of the Fund's holdings shall not be Moody's Eligible Assets,
(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 and the District of Columbia for
which there are dollar-denominated American Depository Receipts ("ADRs") or
their equivalents which are traded in the United States on exchanges or
over-the-counter and are issued by banks formed under the laws of the
United States, its states or the District of Columbia or (C) which are
securities of issuers formed under the laws of jurisdictions other than the
United States (and in existence for at least five years) for which no ADRs
are traded; provided, however, that the aggregate market value of the
Fund's holdings of securities denominated in currencies other than the U.S.
dollar and ADRs in excess of (i) 6% of the aggregate market value of the
outstanding shares of common stock of such issuer thereof or (ii) in excess
of 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 evidences of indebtedness (A) which may be sold without
restriction by the Fund and which are rated at least B3 (Caa subordinate)
by Moody's (or, in the event the security is not rated by Moody's, the
security is rated at least BB- by S&P and which for this purpose is
assigned a Rating Agency equivalent rating of one full rating category
lower), with such rating confirmed by the Fund 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 not
convertible or exchangeable into equity of the issuing corporation and have
a maturity of not more than 30 years and (D) for which, if rated below
Baa3, the aggregate market value of the Fund's holdings do not exceed 10%
of the aggregate market value of any individual issue of corporate
evidences of indebtedness calculated at the time of original issuance;
viii. convertible corporate evidences of indebtedness (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 NYSE 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 evidences of
indebtedness 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;
provided, however, that the Fund's investments in auction rate preferred
stocks described in clause (iv) above shall be included in Moody's Eligible
Assets only to the extent that the aggregate market value of such stocks
does not exceed 10% of the aggregate market value of all of the Fund's
investments meeting the criteria set forth in clauses (i) through (vii)
above less the aggregate market value of those investments excluded from
Moody's Eligible Assets pursuant to the provision appearing after clause
(ix) below; and
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<PAGE> 42
ix. no assets which are subject to any lien or irrevocably deposited
by the Fund for the payment of amounts needed to meet the obligations
described in clauses (i)(A) through (i)(D) of the definition of "Basic
Maintenance Amount" may be includible in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses (i)-(ix),
the Fund's investment in preferred stock, common stock, corporate evidences of
indebtedness and convertible corporate evidences of indebtedness shall not be
treated as Moody's Eligible Assets except to the extent they satisfy the
following diversification requirements (utilizing Moody's industry and
sub-industry categories) with respect to the market value of the Fund's
holdings:
ISSUER:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY MAXIMUM SINGLE
MOODY'S RATING(1)(2) (3)(4) ISSUER(3)(4)
-------------------- ----------- ----------------------
<S> <C> <C>
"aaa", Aaa.................................................. 100% 100%
"aa", Aa.................................................... 20% 20%
"a"......................................................... 10% 10%
CS/CB, "Baa", Baa(5)........................................ 6% 4%
Ba.......................................................... 4% 4%
B1/B2....................................................... 3% 3%
B3 (Caa subordinate)........................................ 2% 2%
</TABLE>
<TABLE>
<CAPTION>
NON-UTILITY UTILITY
MAXIMUM MAXIMUM SINGLE SUB UTILITY MAXIMUM
MOODY'S RATING(1) SINGLE UTILITY(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 evidences of indebtedness and convertible
corporate evidences of indebtedness rated by S&P but not by Moody's.
(2) Corporate evidences of indebtedness from issues ranging $50,000,000 to
$100,000,000 are limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate evidences of
indebtedness, which are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility,
evidences of indebtedness and utility convertible evidences of indebtedness,
the definition of industry refers to sub-industries (electric, water, hydro
power, gas, diversified). Investments in other sub-industries are eligible
only to the extent that the combined sum represents a percentage position of
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.
"1933 Act" means The Securities Act of 1933, as amended. "1940 Act" means
the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth on page 26 of this
Prospectus.
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<PAGE> 43
"Preferred Stock" means the preferred stock, par value $.001 per share, of
the Fund, and includes the Cumulative Preferred Stock.
"Quarterly Valuation Date" means the last Valuation Date in March, June,
September and December of each year, commencing June, 1998.
"Redemption Price" has the meaning set forth on page 26 of this Prospectus.
"SEC" means the Securities and Exchange Commission.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the Fund
(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 Aa3
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 Aa3 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 Fund, 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 credit rating
requirements (including the preceding provision in the case of investments
that mature in no more than one Business Day from the date of purchase or
other acquisition by the Fund);
(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 Fund will be payable in U.S.
dollars and will not be subject to any withholding or similar taxes.
"S&P" means Standard & Poor's Ratings Services or its successors.
"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 the day of the week specified by the Board of
Directors for the weekly determination of net asset value of the Fund.
43
<PAGE> 44
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Financial Highlights.................. 11
Use of Proceeds....................... 13
Capitalization........................ 13
The Fund.............................. 14
Investment Objectives and Policies.... 14
Special Investment Methods............ 15
Risk Factors and Special
Considerations...................... 19
Management of the Fund................ 21
Dividend and Distribution Policy...... 22
Description of Cumulative Preferred
Stock............................... 23
Description of Capital Stock and Other
Securities.......................... 30
Taxation.............................. 30
Certain Provisions of the Charter and
By-laws............................. 34
Custodian, Transfer Agent and
Dividend-Disbursing Agent........... 34
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Additional Information................ 37
Table of Contents of SAI.............. 38
Glossary.............................. 39
</TABLE>
======================================================
======================================================
5,000,000 SHARES
[THE GABELLI EQUITY TRUST LOGO]
7.25% TAX ADVANTAGED CUMULATIVE
PREFERRED STOCK
------------
PROSPECTUS
JUNE 4, 1998
---------------
SALOMON SMITH BARNEY
GABELLI & COMPANY, INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
======================================================
<PAGE> 45
THE GABELLI EQUITY TRUST INC.
------------------------
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Equity Trust Inc. (the "Fund") is a non-diversified, closed-end
management investment company that seeks long-term growth of capital by
investing primarily in a portfolio of equity securities selected by Gabelli
Funds, Inc., the investment adviser to the Fund. Income is a secondary
investment objective. It is the policy of the Fund, under normal market
conditions, to invest at least 65% of its total assets in equity securities.
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated June 4,
1998 (the "Prospectus"). This SAI does not include any information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling the Fund at
1-800-GABELLI (1-800-422-3554) or (914) 921-5070. This SAI incorporates by
reference the entire Prospectus.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... B- 2
Investment Restrictions..................................... B- 7
Management of the Fund...................................... B- 9
Portfolio Transactions...................................... B-14
Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan...................................................... B-15
Taxation.................................................... B-16
Moody's Discount Factors.................................... B-20
Net Asset Value............................................. B-23
General Information......................................... B-24
Beneficial Owner............................................ B-25
Financial Statements........................................ B-25
</TABLE>
------------------------
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the Securities
and Exchange Commission upon payment of the fee prescribed, or inspected at the
Securities and Exchange Commission's office at no charge.
------------------------
This Statement of Additional Information is dated June 4, 1998.
<PAGE> 46
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is long-term growth of capital.
Income is a secondary objective. Under normal market conditions, the Fund will
invest at least 65% of its total assets in equity securities. See "Investment
Objectives and Policies" in the Prospectus.
INVESTMENT PRACTICES
Special Situations. Although the Fund typically invests in the securities
of companies on the basis of their fundamental value, the Fund from time to time
may invest in companies that are determined by Gabelli Funds, Inc. (the
"Adviser") to possess "special situation" characteristics. In general, a special
situation company is a company whose securities are expected to increase in
value solely by reason of a development particularly or uniquely applicable to
the company. Developments that may create special situations include, among
others, a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough or new management or management policies.
The principal risk associated with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investment therefore may not appreciate in value or may decline in
value.
Temporary Investments. Although under normal market conditions at least
65% of the Fund's assets will consist of equity securities, when a temporary
defensive posture is believed by the Adviser to be warranted ("temporary
defensive periods"), the Fund may hold, without limitation, cash or invest its
assets in money market instruments and repurchase agreements in respect of those
instruments. The money market instruments in which the Fund may invest are
obligations of the United States government, its agencies or instrumentalities
("U.S. Government Securities"); commercial paper rated A-1 or higher by Standard
& Poor's Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's"); and certificates of deposit and bankers' acceptances issued by
domestic branches of U.S. banks that are members of the Federal Deposit
Insurance Corporation. The Fund may also invest up to 10%; of the market value
of its total assets during temporary defensive periods in shares of money market
mutual funds that invest primarily in U.S. Government Securities and repurchase
agreements in respect of those securities. Money market mutual funds are
investment companies and the investments by the Fund in those companies are
subject to certain other limitations. See "Investment Restrictions." As a
stockholder in a mutual fund, the Fund will bear its ratable share of such money
market funds' expenses, including management fees, and will remain subject to
payment of the fees to the Adviser with respect to assets so invested.
Lower Rated Securities. The Fund may invest up to 10% of its total assets
in fixed-income securities rated in the lower rating categories of recognized
statistical rating agencies, such as securities rated "CCC" or lower by S&P or
"Caa" or lower by Moody's, or non-rated securities of comparable quality. These
debt securities are predominantly speculative and involve major risk exposure to
adverse conditions and are often referred to in the financial press as "junk
bonds."
Generally, such lower rated securities and unrated securities of comparable
quality offer a higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than higher
quality bonds. In addition, such lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, the Adviser, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its
B-2
<PAGE> 47
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
such lower rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its portfolio and calculating its net asset value. Moreover,
the lack of a liquid trading market may restrict the availability of securities
for the Fund to purchase and may also have the effect of limiting the ability of
the Fund to sell securities at their fair value to respond to changes in the
economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a typical
feature of fixed income securities), the Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in interest
rates, in the event of rising interest rates the value of the securities held by
the Fund may decline proportionately more than a portfolio consisting of higher
rated securities. Investments in zero coupon bonds may be more speculative and
subject to greater fluctuations in value due to changes in interest rates than
bonds that pay interest currently.
Within the Fund's limitation on the purchase of fixed-income securities,
the Fund may invest in securities of issuers in default. The Fund will invest in
securities of issuers in default only when the Adviser believes that such
issuers will honor their obligations or emerge from bankruptcy protection and
the value of these securities will appreciate. By investing in securities of
issuers in default, the Fund bears the risk that these issuers will not continue
to honor their obligations or emerge from bankruptcy protection or that the
value of the securities will not appreciate.
In addition to using recognized rating agencies and other sources, the
Adviser also performs its own analysis of issues in seeking investments that it
believes to be underrated (and thus higher-yielding) in light of the financial
condition of the issuer. Its analysis of issuers may include, among other
things, current and anticipated cash flow and borrowing requirements, value of
assets in relation to historical cost, strength of management, responsiveness to
business conditions, credit standing and current anticipated results of
operations. In selecting investments for the Fund, the Adviser may also consider
general business conditions, anticipated changes in interest rates and the
outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced. In addition, it is possible that
statistical rating agencies might not change their ratings of a particular issue
or reflect subsequent events on a timely basis. None of these events will
require the sale of the securities by the Fund, although the Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.
The market for certain lower rated and comparable unrated securities has in
the past experienced a major economic recession. The recession adversely
affected the value of such securities as well as the ability of certain issuers
of such securities to repay principal and pay interest thereon. The market for
those securities could react in a similar fashion in the event of any future
economic recession.
Options. A call option is a contract that, in return for a premium, gives
the holder of the option the right to buy from the writer of the call option the
security underlying the option at a specified exercise price at any time during
the term of the option. The writer of the call option has the obligation, upon
exercise of the option, to deliver the underlying security upon payment of the
exercise price during the option period. A put option is the reverse of a call
option, giving the holder the right to sell the security to the writer and
obligating the writer to purchase the underlying security from the holder.
B-3
<PAGE> 48
A call option is "covered" if the Fund owns the underlying security covered
by the call or has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security as the call written where the exercise price
of the call held is (1) equal to or less than the exercise price of the call
written or (2) greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, U.S. Government Securities or
other high grade short-term obligations in a segregated account held with its
custodian. A put option is "covered" if the Fund maintains cash or other high
grade short-term obligations with a value equal to the exercise price in a
segregated account held with its custodian, or else holds a put on the same
security as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once it has
been assigned an exercise notice, the Fund will be unable to effect a closing
purchase transaction. Similarly, if the Fund is the holder of an option it may
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that a closing purchase or sale transaction
can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in the
price of the underlying security, any loss resulting from the repurchase of a
call option may also be wholly or partially offset by unrealized appreciation of
the underlying security. Other principal factors affecting the market value of a
put or a call option include supply and demand, interest rates, the current
market price and price volatility of the underlying security and the time
remaining until the expiration date. Gains and losses on investments in options
depend, in part, on the ability of the Adviser to predict correctly the effect
of these factors. The use of options cannot serve as a complete hedge since the
price movement of securities underlying the options will not necessarily follow
the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event, it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and sell
call and put options on securities indexes. A stock index reflects in a single
number the market value of many different stocks. Relative values are assigned
to the stocks included in an index and the index fluctuates with changes in the
market values of the stocks. The options give the holder the right to receive a
cash settlement during the term of the option based on the difference between
the exercise price and the value of the index. By writing a put or call option
on a securities index, the Fund is obligated, in return for the premium
received, to make delivery of this amount. The Fund may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
The Fund also may buy or sell put and call options on foreign currencies. A
put option on a foreign currency gives the purchaser of the option the right to
sell a foreign currency at the exercise price until the
B-4
<PAGE> 49
option expires. A call option on a foreign currency gives the purchaser of the
option the right to purchase the currency at the exercise price until the option
expires. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of the Fund to reduce foreign
currency risk using such options. over-the-counter options differ from
exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller and generally do not have as
much market liquidity as exchange-traded options. Over-the-counter options are
illiquid securities.
Use of options on securities indexes entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market and
the Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of the Adviser to predict correctly movements in the direction of the
stock market generally or of a particular industry. Because options on
securities indexes require settlement in cash, the Adviser may be forced to
liquidate portfolio securities to meet settlement obligations.
Although the Adviser will attempt to take appropriate measures to minimize
the risks relating to the Fund's writing of put and call options, there can be
no assurance that the Fund will succeed in any option-writing program it
undertakes.
Futures Contracts and Options on Futures. The Fund will not enter into
futures contracts or options on futures contracts unless (i) the aggregate
initial margins and premiums do not exceed 5% of the fair market value of its
assets and (ii) the aggregate market value of its outstanding futures contracts
and the market value of the currencies and futures contracts subject to
outstanding options written by the Fund, as the case may be, do not exceed 50%
of the market value of its total assets. It is anticipated that these
investments, if any, will be made by the Fund solely for the purpose of hedging
against changes in the value of its portfolio securities and in the value of
securities it intends to purchase. Such investments will only be made if they
are economically appropriate to the reduction of risks involved in the
management of the Fund. In this regard, the Fund may enter into futures
contracts or options on futures for the purchase or sale of securities indices
or other financial instruments including but not limited to U.S. Government
Securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A "purchaser" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified future time. Certain futures contracts, including stock and bond index
futures, are settled on a net cash payment basis rather than by the sale and
delivery of the securities underlying the futures contracts.
No consideration will be paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required to deposit with
the broker an amount of cash or cash equivalents equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the exchange or
board of trade on which the contract is traded and brokers or members of such
board of trade may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract. Subsequent payments, known as "variation margin," to and from the
broker will be made daily as the price of the index or security underlying the
futures contract fluctuates. At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate its existing position in the contract.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract at a specified
exercise price at any time prior to the expiration of the option. Upon exercise
of an option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer' s futures margin account attributable to that contract,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures
B-5
<PAGE> 50
contract. The potential loss related to the purchase of an option on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option purchased is fixed at the point of sale,
there are no daily cash payments by the purchaser to reflect changes in the
value of the underlying contract; however, the value of the option does change
daily and that change would be reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the Investment Company Act of 1940,
as amended (the "1940 Act") an amount of cash, U.S. Government Securities or
other high grade debt securities equal to the market value of the contract must
be deposited and maintained in a segregated account with the custodian of the
Fund to collateralize the positions, thereby ensuring that the use of the
contract is unleveraged. For short positions in futures contracts and sales of
call options, the Fund may establish a segregated account (not with a futures
commission merchant or broker) with cash, U.S. Government Securities or other
high grade debt securities that, when added to amounts deposited with a futures
commission merchant or a broker as margin, equal the market value of the
instruments or currency underlying the futures contracts or call options,
respectively (but are not less than the stock price of the call option or the
market price at which the short positions were established).
Forward Currency Transactions. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which its securities are or may be denominated.
Forward currency contracts are agreements to exchange one currency for another
at a future date. The date (which may be any agreed upon fixed number of days in
the future) , the amount of currency to be exchanged and the price at which the
exchange takes place will be negotiated and fixed for the term of the contract
at the time that the Fund enters into the contract. Forward currency contracts
(1) are traded in a market conducted directly between currency traders
(typically, commercial banks or other financial institutions) and their
customers, (2) generally have no deposit requirements and (3) are typically
consummated without payment of any commissions. The Fund, however, may enter
into forward currency contracts requiring deposits or involving the payment of
commissions. To assure that its forward currency contracts are not used to
achieve investment leverage, the Fund will segregate liquid assets consisting of
cash, U.S. Government Securities or other liquid high grade debt obligations
with its custodian, or a designated sub-custodian, in an amount at all times
equal to or exceeding its commitment with respect to the contracts.
The dealings of the Fund in forward foreign exchange is limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of one forward foreign currency for another
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities or its
payment of dividends and distributions. Position hedging is the purchase or sale
of one forward foreign currency for another currency with respect to portfolio
security positions denominated or quoted in the foreign currency to offset the
effect of an anticipated substantial appreciation or depreciation, respectively,
in the value of the currency relative to the U.S. dollar. In this situation, the
Fund also may, for example, enter into a forward contract to sell or purchase a
different foreign currency for a fixed U.S. dollar amount where it is believed
that the U.S. dollar value of the currency to be sold or bought pursuant to the
forward contract will fall or rise, as the case may be, whenever there is a
decline or increase, respectively, in the U.S. dollar value of the currency in
which its portfolio securities are denominated (this practice being referred to
as a "cross-hedge").
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Adviser. The
B-6
<PAGE> 51
amount the Fund may invest in forward currency contracts is limited to the
amount of its aggregate investments in foreign currencies.
The use of forward currency contracts may involve certain risks, including
the failure of the counterparty to perform its obligations under the contract,
and that such use may not serve as a complete hedge because of an imperfect
correlation between movements in the prices of the contracts and the prices of
the currencies hedged or used for cover. The Fund will only enter into forward
currency contracts with parties which it believes to be creditworthy
institutions.
Leveraging. As provided in the 1940 Act and subject to compliance with the
Fund's investment objectives, policies and restrictions, the Fund may issue debt
or preferred stock so long as the Fund's net assets exceed 300% of the amount of
the debt outstanding and exceed 200% of the amount of preferred stock
outstanding. Such debt or preferred stock may be convertible in accordance with
SEC staff guidelines which may permit the Fund to obtain leverage at attractive
rates. Leverage entails two primary risks. The first risk is that the use of
leverage magnifies the impact on the common stockholders of changes in net asset
value. For example, a fund that uses 33% leverage will show a 1.5% increase or
decline in net asset value for each 1% increase or decline in the value of its
total assets. The second risk is that the cost of leverage will exceed the
return on the securities acquired with the proceeds of leverage, thereby
diminishing rather than enhancing the return to common stockholders. These two
risks would generally make the Fund's total return to common stockholders more
volatile. In addition, the Fund may be required to sell investments in order to
meet dividend or interest payments on the debt or preferred stock when it may be
disadvantageous to do so.
A decline in net asset value could affect the ability of the Fund to make
common stock dividend payments and such a failure to pay dividends or make
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended ("the
Code"). See "Taxation". Finally, if the asset coverage for preferred stock or
debt securities declines to less than 200% or 300%, respectively (as a result of
market fluctuations or otherwise), the Fund may be required to sell a portion of
its investments to redeem the preferred stock or repay the debt when it may be
disadvantageous to do so.
Prior to May 12, 1997, the Fund was prohibited from issuing preferred stock
by a fundamental investment restriction preventing the Fund from issuing senior
securities. At its annual meeting of stockholders held on May 12, 1997, the
stockholders approved an amendment to such restriction to permit the issuance of
senior securities in accordance with the requirements of the 1940 Act. The Fund,
its directors, and the Adviser were named as defendants in a putative class
action filed March 9, 1998, alleging violations of Section 14(a) of the
Securities Exchange Act of 1934 and Section 20(a) of the 1940 Act, and (as
against the Fund's directors) breach of fiduciary duty (Carter v. Gabelli Equity
Trust Inc., et al., United States District Court, Southern District of New York,
98 Civ. 1710 (CLB)), seeking an injunction to enjoin the issuance of the
Cumulative Preferred Stock. The principal allegation of the complaint is that
the defendants made material misrepresentations and omissions in a proxy
statement, by which defendants solicited proxies from holders of the Fund's
Common Stock to remove the prohibition on the issuance of senior securities.
Plaintiff further contends that issuance by the Fund of Cumulative Preferred
Stock would deprive holders of the Fund's Common Stock of the ability to control
major business decisions of the Fund, specifically including any decision to
convert the Fund into an "open-end" mutual fund.
The Fund believes that the provision of the Fund's Cumulative Preferred
Stock requiring the Board of Directors to call the Cumulative Preferred Stock at
any time if the Board of Directors and the requisite percentage of shares of the
Fund's Common Stock have approved all requisite charter amendments and other
actions necessary for the Fund to convert to open-end status eliminates any
possibility that the holders of the Fund's Common Stock would be disadvantaged
with respect to consideration of open-ending by the issuance of the Preferred
Stock. Moreover, at its annual meeting of stockholders held on May 22, 1998, the
Funds' stockholders ratified the proposal approved in 1997 after disclosure of
information Plaintiff claimed was omitted from the earlier proxy statement. The
Fund believes that such stockholder ratification renders this action moot.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority of the outstanding voting securities of the
B-7
<PAGE> 52
Fund (as defined in the 1940 Act). All percentage limitations set forth below
apply immediately after a purchase or initial investment and any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any security from the portfolio. The Fund may not:
1. Invest 25% or more of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry. This restriction does not apply to investments in U.S. Government
Securities.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, if
more than 10% of the market value of the total assets of the Fund would be
invested in securities of other investment companies, more than 5% of the
market value of the total assets of the Fund would be invested in the
securities of any one investment company or the Fund would own more than 3%
of any other investment company's securities; provided, however, this
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a dividend to
its stockholders.
3. Purchase or sell commodities or commodity contracts except that the
Fund may purchase or sell futures contracts and related options thereon if
immediately thereafter (i) no more than 5% of its total assets are invested
in margins and premiums and (ii) the aggregate market value of its
outstanding futures contracts and market value of the currencies and
futures contracts subject to outstanding options written by the Fund do not
exceed 50% of the market value of its total assets. The Fund may not
purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase any securities on margin or make short sales of
securities, except that the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities.
5. Make loans of money, except by the purchase of a portion of
publicly distributed debt obligations in which the Fund may invest, and
repurchase agreements with respect to those obligations, consistent with
its investment objectives and policies. The Fund reserves the authority to
make loans of its portfolio securities to financial intermediaries in an
aggregate amount not exceeding 20% of its total assets. Any such loans will
only be made upon approval of, and subject to any conditions imposed by,
the Board of Directors of the Fund. Because these loans would at all times
be fully collateralized, the risk of loss in the event of default of the
borrower should be slight.
6. Borrow money, except that the Fund may borrow from banks and other
financial institutions on an unsecured basis, in an amount not exceeding
10% of its total assets, to finance the repurchase of its shares. See
"Common Stock -- Repurchase of Shares" in the Prospectus. The Fund also may
borrow money on a secured basis from banks as a temporary measure for
extraordinary or emergency purposes. Temporary borrowings may not exceed 5%
of the value of the total assets of the Fund at the time the loan is made.
The Fund may pledge up to lot of the lesser of the cost or value of its
total assets to secure temporary borrowings. The Fund will not borrow for
investment purposes. Immediately after any borrowing, the Fund will
maintain asset coverage of not less than 300% with respect to all
borrowings. While the borrowing of the Fund exceeds 5% of its respective
total assets, the Fund will make no further purchases of securities,
although this limitation will not apply to repurchase transactions as
described above.
7. Issue senior securities, except to the extent permitted by
applicable law.
8. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities; provided, however, this restriction shall
not apply to securities of any investment company organized by the Fund
that are to be distributed pro rata as a dividend to its stockholders.
B-8
<PAGE> 53
9. Invest more than 10% of its total assets in illiquid securities,
such as repurchase agreements with maturities in excess of seven days, or
securities that at the time of purchase have legal or contractual
restrictions on resale.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund rests
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and the companies that furnish the Fund with
services, including agreements with the Adviser, the Fund's custodian and the
Fund's transfer agent. The day-to-day operations of the Fund are delegated to
the Adviser.
The names and business addresses of the Directors and principal officers of
the Fund are set forth in the following table, together with their positions and
their principal occupations during the past five years and, in the case of the
Directors, their positions with certain other organizations and companies.
Directors who are "interested persons" of the Fund, as defined by the 1940 Act,
are indicated by an asterisk. Cumulative Preferred Stock directors are indicated
by a "+".
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS (AGE) POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ---------------------- --------------------------------------
<S> <C> <C>
Dr. Thomas E. Bratter (57)...... Director Director, President and Founder, The
One Corporate Center John Dewey Academy (residential
Rye, New York 10580-1434 college preparatory therapeutic high
school).(10)
Bill Callaghan (53)............. Director President of Bill Callaghan Associates
One Corporate Center Ltd., (an executive search
Rye, New York 10580-1434 company).(3)(10)
+Felix J. Christiana (72)....... Director Retired; formerly Senior Vice
One Corporate Center President of Dollar Dry Dock Savings
Rye, New York 10580-1434 Bank.(1)(2)(3)
(4)(5)(8)(10)(13)
+James P. Conn (60)............. Director Managing Director and Chief Investment
One Corporate Center Officer of Financial Security
Rye, New York 10580-1434 Assurance Holdings Ltd. since 1992;
Director of Meditrust Corporation
(real estate investment trust);
Director of First Republic
Bank.(1)(2)(10)(14)
Frank J. Fahrenkopf, Jr. (58)... Director President and CEO of the American
One Corporate Center Gaming Association since June 1995;
Rye, New York 10580-1434 Partner of Hogan & Hartson; Chairman
of the International Trade Practice
Group; Co-Chairman of the Commission
on Presidential Debates; former
Chairman of the Republican National
Committee.
</TABLE>
B-9
<PAGE> 54
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS (AGE) POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ---------------------- --------------------------------------
<S> <C> <C>
*Mario J. Gabelli (55).......... Chairman of the Chairman of the Board, Chief Executive
One Corporate Center Board, President and Officer and Chief Investment Officer
Rye, New York 10580-1434 Chief Investment of the Adviser and GAMCO Investors,
Officer Inc.; Chairman of the Board and Chief
Executive Officer of Lynch corporation
(diversified manufacturing and
communications services company);
Director and Adviser of Gabelli
International Ltd.; Director of
East/West Communications, Inc.
(communications services company);
Governor of the American Stock
Exchange.(1)(2)
(3)(4)(5)(6)(7) (8)(9)(10)(11)(12)
*Karl Otto Pohl (68)............ Director Member of the Shareholder Committee of
One Corporate Center Sal. Oppenheim Jr. & Cie (private
Rye, New York 10580-1434 investment bank); currently Board
Member of Trizec Corporation (real
estate company), Zurich Versicherungs-
Gesellschaft (insurance company);
Former President of the Deutsche
Bundesbank and Chairman of its Central
Bank Council from 1980 through
1991.(1)(2)(3)(4)(5)(6)(7)
(8)(9)(10)(11)(12)(13)(14)
Anthony R. Pustorino (72)....... Director Certified Public Accountant, Professor
One Corporate Center of Accounting, Pace University, since
Rye, New York 10580-1434 1965.(1)(2)(3)(4)(5)(10)(11)(13)
*Salvatore J. Zizza (52)........ Director Executive Vice President of FMG Group
One Corporate Center (a healthcare provider); Chairman of
Rye, New York 10580-1434 the Bethlehem Corp.; board member of
Hollis Eden Pharmaceuticals. Former
President and Chief Executive Officer
of the Lehigh Group Inc., (an
electrical supply wholesaler); Former
Chairman of the Executive Committee
and Director of Binnings Building
Products, Inc.(1)(4)(10)
Bruce N. Alpert (46)............ Vice President and Vice President and Chief Operating
One Corporate Center Treasurer Officer of the investment advisory
Rye, New York 10580-1434 division of the Adviser since June
1988; Chief Operating Officer, Vice
President and Treasurer of The Gabelli
Value Fund Inc. since September 1989;
President and Treasurer of The Gabelli
Asset Fund and The Gabelli Growth
Fund; Vice President and Treasurer of
all other registered investment
companies advised by the Adviser. Vice
President of The Treasurer's Fund Inc.
</TABLE>
B-10
<PAGE> 55
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS (AGE) POSITION WITH THE FUND PAST FIVE YEARS
- ------------------------------- ---------------------- --------------------------------------
<S> <C> <C>
James E. Mckee (35)............. Secretary Vice President, General Counsel and
One Corporate Center Secretary of the Adviser (since 1995)
Rye, New York 10580-1434 and Vice President and General Counsel
of GAMCO Investors, Inc. (since 1993);
Secretary of the registered investment
companies advised by the Adviser;
branch chief of the Securities and
Exchange Commission -- Northeast
Regional Office (1992-1993).
Marc Diagonale (31)............. Vice President Client services representative of
One Corporate Center Gabelli & Company, Inc. from March
Rye, New York 10580-1434 1993 to May 1994.
</TABLE>
- ---------------
* "Interested person" of the Fund, as defined in the 1940 Act. Mr. Gabelli is
an "interested person" of the Fund as a result of his employment as an
officer of the Fund and the Adviser. Mr. Gabelli is also a registered
representative of an affiliated broker-dealer. Mr. Pohl receives fees from
the Adviser but has no obligation to provide any services to it. Although
this relationship does not appear to require designation of Mr. Pohl as an
"interested person," the Fund is currently making such designation in order
to avoid the possibility that Mr. Pohl's independence would be questioned.
Mr. Zizza may be an "interested person" as a result of his previous
affiliation within the past two years with Binnings Building Products,
Inc., an entity controlled by GLI Inc., an affiliate of the Adviser.
(1) Trustee of The Gabelli Asset Fund
(2) Trustee of The Gabelli Growth Fund
(3) Director of The Gabelli Value Fund Inc.
(4) Director of The Gabelli Convertible Securities Fund, Inc.
(5) Director of Gabelli Equity Series Funds, Inc.
(6) Trustee of The Gabelli Money Market Funds
(7) Director of Gabelli Investor Funds, Inc.
(8) Director of Gabelli Global Series Funds, Inc.
(9) Director of Gabelli Gold Fund, Inc.
(10) Director of The Gabelli Global Multimedia Trust Inc.
(11) Director of Gabelli Capital Series Funds
(12) Director of Gabelli International Growth Fund, Inc.
(13) Director of The Treasurer's Fund, Inc.
(14) Trustee of The Gabelli Westwood Funds
The Board of Directors of the Fund are divided into three classes, with a
class having a term of three years. Each year the term of office of one class of
directors expires. See "Common Stock -- Certain Provisions of the Articles of
Incorporation and By-Laws of the Fund" in the Prospectus.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the Adviser or its
affiliates a fee of $10,000 per year plus $1,000 per Directors' meeting
attended, together with each Director's actual out-of-pocket expenses relating
to attendance at such meetings. The aggregate remuneration paid by the Fund to
such Directors during fiscal year 1997 amounted to $105,000.
The following table shows certain compensation information for the
Directors and Officers of the Fund for the fiscal year ended December 31, 1997.
Mr. Diagonale is employed by the Fund and is not employed by
B-11
<PAGE> 56
the Adviser. Officers who are employed by the Adviser receive no compensation or
expense reimbursement from the Fund.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM
NAME OF COMPENSATION FUND AND FUND COMPLEX
DIRECTOR/OFFICERS FROM FUND PAID TO DIRECTORS/OFFICERS+
----------------- ------------ ---------------------------
<S> <C> <C>
Dr. Thomas E. Bratter..................................... $ 18,000 $ 23,500
Bill Callaghan............................................ $ 18,000 $ 37,500
Felix J. Christiana....................................... $ 20,000 $ 85,000
James P. Conn............................................. $ 18,000 $ 42,500
Karl Otto Pohl............................................ $ 16,500 $ 85,620
Anthony R. Pustorino...................................... $ 20,000 $ 95,500
Salvatore J. Zizza........................................ $ 18,000 $ 47,500
Marc S. Diagonale......................................... $105,000 $105,000
</TABLE>
- ---------------
+ See "Principal Occupation During Past Five Years" in previous table for the
number of Boards of other registered investment companies advised by the
Adviser on which such Director serves.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
The By-Laws of the Fund provide that the Fund will indemnify its Directors
and officers and may indemnify its employees or agents against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Fund, to the fullest extent permitted by law
except that such indemnity shall not protect any such person against any
liability to the Fund or its stockholders to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office. In
addition, the Articles of Incorporation of the Fund provide that the Fund's
Directors and officers will not be liable to stockholders for money damages,
except in limited instances. However, nothing in the Articles of Incorporation
or the By-Laws protects or indemnifies a Director, officer, employee or agent of
the Fund against any liability to which such person would otherwise be subject
in the event of such person's active or deliberate dishonesty which is material
to the cause of action or to the extent that the person received an improper
benefit or profit in money, property or services to the extent of such money,
property or services. In addition, indemnification is not permitted for any act
or omission committed in bad faith which is material to the cause of action or,
with respect to any criminal proceeding, if the person had reasonable cause to
believe that the act or omission was unlawful. In addition, indemnification may
not be provided in respect of any proceeding in which the person had been
adjudged to be liable to the Fund.
INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS
Gabelli Funds, Inc. acts as the Fund's investment adviser pursuant to an
advisory agreement with the Fund (the "Advisory Agreement"). The Adviser is a
New York corporation with principal offices located at One Corporate Center,
Rye, New York 10580-1434. The Adviser also serves as adviser to other closed-end
and open-end investment companies with net assets in excess of $5.5 billion as
of December 31, 1997.
Under the terms of the Advisory Agreement, the Adviser manages the
portfolio of the Fund in accordance with its stated investment objectives and
policies, makes investment decisions for the Fund, places orders to purchase and
sell securities on behalf of the Fund and manages its other business and
affairs, all subject to the supervision and direction of the Fund's Board of
Directors. In addition, under the Advisory Agreement, the Adviser oversees the
administration of all aspects of the Fund's business and affairs and provides,
or arranges for others to provide, at the Adviser's expense, certain enumerated
services, including maintaining the Fund's books and records, preparing reports
to the Fund's stockholders and supervising the calculation of the net asset
value of its shares. All expenses of computing the net asset value of the Fund,
including any equipment or services obtained solely for the purpose of pricing
shares or valuing its investment
B-12
<PAGE> 57
portfolio, would be an expense of the Fund under its Advisory Agreement, but are
currently assumed by the Adviser.
The Advisory Agreement combines investment advisory and administrative
responsibilities in one agreement. The Adviser has in turn retained First Data
Investor Services Group, Inc. to act as sub-administrator to the Fund. See
"Management of the Fund -- Sub-Administrator" in the Prospectus.
For services rendered by the Adviser on behalf of the Fund under the
Advisory Agreement, the Fund pays the Adviser a fee computed daily and paid
monthly at the annual rate of 1.00% of the average weekly net assets of the
Fund. The fees payable under the Advisory Agreement are higher than the fees
payable by most registered investment companies. Notwithstanding the foregoing,
the Adviser will waive the portion of its investment advisory fee attributable
to an amount of assets of the Fund equal to the aggregate stated value of the
Cumulative Preferred Stock for any calendar year in which the total return of
the Fund, including distributions and the advisory fee subject to potential
waiver, allocable to net asset value common stock is less than the stated
dividend rate of the Cumulative Preferred Stock (prorated during the initial and
final year the Cumulative Preferred Stock is outstanding).
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard for its obligations and duties
thereunder, the Adviser is not liable for any error or judgment or mistake of
law or for any loss suffered by the Fund. As part of the Advisory Agreement, the
Fund has agreed that the name "Gabelli" is the Adviser's property, and that in
the event the Adviser ceases to act as an investment adviser to the Fund, the
Fund will change its name to one not including the word "Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in effect with
respect to the Fund until June 27, 1998, and from year to year thereafter if
approved annually (i) by the Fund's Board of Directors or by the holders of a
majority of its outstanding voting securities (as defined in the 1940 Act) and
(ii) by a majority of the Directors who are not "interested persons" (as defined
in the 1940 Act) of any party to the Advisory Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement was initially approved by the Board of Directors at a meeting held on
July 17, 1986 and was approved most recently by the Board of Directors on May
14, 1997. The Advisory Agreement terminates automatically on its assignment and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the holders of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act).
For the fiscal years ended December 31, 1997, December 31, 1996 and
December 31, 1995, the Adviser was paid $11,136,210, $10,364,591 and $9,060,694,
respectively, for advisory and administrative services rendered to the Fund.
B-13
<PAGE> 58
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Adviser is responsible for placing purchase and sale orders and the allocation
of brokerage on behalf of the Fund. Transactions in equity securities are in
most cases effected on U.S. stock exchanges and involve the payment of
negotiated brokerage commissions. In general, there may be no stated commission
in the case of securities traded in over-the counter markets, but the prices of
those securities may include undisclosed commissions or mark-ups. Principal
transactions are not entered into with affiliates of the Fund. However, Gabelli
& Company, Inc. ("Gabelli & Company") may execute transactions in the
over-the-counter markets on an agency basis and receive a stated commission
therefrom. To the extent consistent with applicable provisions of the 1940 Act
and the rules and exemptions adopted by the Commission thereunder, as well as
other regulatory requirements, the Fund's Board of Directors have determined
that portfolio transactions may be executed through Gabelli & Company and its
broker-dealer affiliates if, in the judgment of the Adviser, the use of those
broker-dealers is likely to result in price and execution at least as favorable
as those of other qualified broker-dealers, and if, in particular transactions,
those broker-dealers charge the Fund a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. The Fund has no
obligation to deal with any broker or group of brokers in executing transactions
in portfolio securities. In executing transactions, the Adviser seeks to obtain
the best price and execution for the Fund, taking into account such factors as
price, size of order, difficulty of execution and operational facilities of the
firm involved and the firm's risk in positioning a block of securities. while
the Adviser generally seeks reasonably competitive commission rates, the Fund
does not necessarily pay the lowest commission available.
For the fiscal years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the Fund paid a total of $361,176, $439,741 and $846,195,
respectively, in brokerage commissions, of which Gabelli & Company received
$84,868, $119,897 and $170,831, respectively, and of which Keeley Investment
Corp., an entity treated as an affiliate of Gabelli Funds, Inc., received
$5,550, $2,100 and $8,005, respectively. The amount received by Gabelli &
Company, Inc. and Keeley Investment Corp. from the Fund in respect of brokerage
commissions for the fiscal year ended December 31, 1997 represented 20.2% and
0.9%, respectively, of the aggregate dollar amount of brokerage commissions paid
by the Fund for such period. In addition, for the fiscal year ended December 31,
1997, the Fund paid brokerage commissions to Gabelli & Company, Inc. and Keeley
Investment Corp. with respect to 27.5% and 1.3%, respectively, of the aggregate
dollar amount of transactions by the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information to the Adviser or its
affiliates may receive orders for transactions by the Fund. The term "research,
market and statistical information" includes advice as to the value of
securities, and advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Adviser under the Advisory Agreement and the
expenses of the Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. Such information may be useful to the
Adviser and its affiliates in providing services to clients other than the Fund,
and not all such information is used by the Adviser in connection with the Fund.
Conversely, such information provided to the Adviser and its affiliates by
brokers and dealers through whom other clients of the Adviser and its affiliates
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser and its affiliates,
investments of the kind made by the Fund may also be made by those other
accounts. When the same securities are purchased for or sold by the Fund and any
of such other accounts, it is the policy of the Adviser and its affiliates to
allocate such purchases and sales in the manner deemed fair and equitable to all
of the accounts, including the Fund.
B-14
<PAGE> 59
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal year ended December 31,
1996 and December 31, 1997 were 18.9% and 39.2%, respectively. Portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities by the monthly average value of securities in
its portfolio during the year, excluding portfolio securities the maturities of
which at the time of acquisition were one year or less. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expense than a
lower rate, which expense must be borne by the Fund and its stockholders.
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a stockholder whose shares of the Fund's Common
Stock is registered in his own name will have all distributions reinvested
automatically by State Street Bank and Trust Company ("State Street"), which is
agent under the Plan, unless the stockholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the stockholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
investors who do not participate in the Plan will be paid by check mailed
directly to the record holder by State Street as dividend disbursing agent.
Under the Plan, whenever the market price of the Common Stock is equal to
or exceeds net asset value at the time shares are valued for purposes of
determining the number of shares equivalent to the cash dividend or capital
gains distribution, participants in the Plan are issued shares of Common Stock,
valued at the greater of (i) the net asset value as most recently determined or
(ii) 95% of the then current market price of the Common Stock. The valuation
date is the dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next preceding trading day. If the net
asset value of the Common Stock at the time of valuation exceeds the market
price of the Common Stock, participants will receive shares from the Fund,
valued at market price. If the Fund should declare a dividend or capital gains
distribution payable only in cash, State Street will buy the Common Stock for
such Plan in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts, except that State Street will endeavor to terminate
purchases in the open market and cause the Fund to issue shares at net asset
value if, following the commencement of such purchases, the market value of the
Common Stock exceeds net asset value.
Participants in the Plan have the option of making additional cash payments
to State Street, monthly, for investment in the shares as applicable. Such
payments may be made in any amount from $250 to $10,000. State Street will use
all funds received from participants to purchase shares of the Fund in the open
market on or about the 15th of each month. State Street will charge each
stockholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that
participants send voluntary cash payments to State Street in a manner that
ensures that State Street will receive these payments approximately 10 days
before the 15th of the month. Funds not received at least 5 days before the
investment date shall be held for investment in the following month. A
participant may without charge withdraw a voluntary cash payment by written
notice, if the notice is received by State Street at least 48 hours before such
payment is to be invested.
State Street maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by stockholders for personal and tax records. Shares in the account of
each Plan participant will be held by State Street in noncertificated form in
the name of the participant. A Plan participant may send its share certificates
to State Street so that the shares represented by such certificates will be held
by State Street in the participant's stockholder account under the Plan.
In the case of stockholders such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, State Street will administer
the Plan on the basis of the number of shares certified from
B-15
<PAGE> 60
time to time by the stockholder as representing the total amount registered in
the stockholder's name and held for the account of beneficial owners who
participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the Plan members at
least 90 days before the record date for such dividend or distribution. The Plan
also may be amended or terminated by State Street on at least 90 days' written
notice to the Plan participants.
TAXATION
The following discussion is a brief summary of certain additional tax
considerations affecting the Fund 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 here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with any specific questions relating to federal, state, local and foreign taxes.
The discussion reflects applicable tax laws of the United States as of the date
of this SAI, which tax laws may be changed or subject to new interpretations by
the courts or the Internal Revenue Service (the "IRS") retroactively or
prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as and elect
to be a regulated investment company (a "RIC") under Subchapter M of the Code.
If it so qualifies, the Fund will not be subject to U.S. Federal income tax on
the portion of its net investment income (i.e., its investment company taxable
income as defined in the Code without regard to the deduction for dividends
paid) and its net capital gain (i.e., the excess of its net realized long-term
capital gain over its net realized short-term capital loss) which it distributes
to its stockholders in each taxable year, provided that it distributes to its
stockholders at least 90% of its net investment income for such taxable year.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, 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 Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other RICs).
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. To qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to Cumulative
Preferred Stockholders and Common Stockholders as a dividend taxable at ordinary
rates, its earnings and profits attributable to non-RIC years reduced by an
interest charge on 50% of such earnings and profits payable by the Fund to the
IRS. In addition, if the Fund failed to qualify as a RIC for a period greater
than one taxable year, then the Fund would be required to recognize and pay tax
on any net built-in gains (the excess of aggregate gains, including items of
income, over aggregate losses that would have been realized if the Fund had been
liquidated) in order to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each
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<PAGE> 61
calendar year, an amount equal to, at a minimum, the sum of (1) 98% of its net
investment income for the calendar year, (2) 98% of its capital gain net income
for the one year period ending on October 31 of such year, (unless, as in the
case of the Fund, an election is made by a fund with a November or December
year-end to use the fund's fiscal year), and (3) all ordinary income and capital
gain net income for previous years that were not previously distributed. For
purposes of the excise tax, any income or capital gain retained by and taxed in
the hands of the Fund will be treated as having been distributed. A distribution
will be treated as paid during the calendar year if it is paid during the
calendar year or declared by the Fund in October, November or December of the
year, payable to stockholders of record on a date during such month and paid by
the Fund during January of the following year. Any such distributions paid
during January of the following year will be deemed to be received by
stockholders of the Fund on December 31 of the year the distributions are
declared, rather than when the distributions are received. While the Fund
intends to distribute its ordinary income and capital gain net income in the
manner necessary to minimize imposition of the 4% excise tax, there can be no
assurance that sufficient amounts of the Fund's ordinary income and capital gain
net income will be distributed to avoid entirely the imposition of the tax. In
that event, the Fund will be liable for the tax only on the amount by which it
does not meet the foregoing distribution requirements.
Foreign currency gain or loss on non-U.S. dollar denominated bonds and
other similar debt instruments and on any non-U.S. dollar denominated futures
contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as net investment income and loss.
If the Fund invests in stock of a passive foreign investment company
("PFIC"), the Fund may be subject to Federal income tax on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock even if such income is distributed as a taxable dividend by the Fund to
its Stockholders. The tax would be determined by allocating such distribution or
gain ratably to each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable year in which
the excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal income tax rate in effect for the year to which it was
allocated, and the tax would be further increased by an interest charge. The
amount allocated to the taxable year of the distribution or disposition would be
included in the Fund's net investment income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as Ordinary Income
Dividends to stockholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect that
the PFIC be a "qualified electing fund," in lieu of being taxable in the manner
described in the above paragraph and to include annually in income its pro rata
share of the ordinary earnings and net capital gain (whether or not distributed)
of the PFIC. In order to make this election, the Fund would be required to
obtain annual information from the PFICs in which it invests, which may be
difficult to obtain. Alternatively, the Fund may elect to mark-to-market its
PFIC stock, resulting in the stock being treated as sold at fair market value on
the last business day of each taxable year. Any resulting gain would be reported
as net investment income, and any resulting loss would be recognized to the
extent it does not exceed prior increases included in income.
The Fund may invest in securities purchased at a discount and may therefore
cause the Fund to accrue income before amounts due under the securities are
paid. The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"). A portion of the interest payments on such
high yield securities may be treated as dividends for Federal income tax
purposes.
As a result of investing in stock of PFICs or securities purchased at a
discount or any other investment that produces income that is not matched by a
corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income would
be treated as income earned by the Fund and therefore would be subject to the
distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income, as is required in order to avoid
Fund-level taxation on the Fund's distributions, 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 Fund may
be required to borrow money or dispose of other securities to be able to make
distributions to its investors.
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<PAGE> 62
If the Fund does not meet the asset coverage requirements of the 1940 Act
and the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage is
restored. See "Description of Cumulative Preferred Stock -- Dividends" and
"Description of Capital Stock and Other Securities." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to avoid Fund-level taxation on the Fund's
distributions, or might prevent it from distributing enough income and capital
gain to avoid completely imposition of the excise tax. Upon any failure to meet
the asset coverage requirements of the 1940 Act or the Articles Supplementary,
the Fund may, and in certain circumstances will, be required to partially redeem
the shares of Cumulative Preferred Stock in order to restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its stockholders of
failing to qualify as a RIC. If asset coverage were restored, the Fund would
again be able to pay dividends and might be able to avoid Fund-level taxation on
the Fund's undistributed income.
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures contracts are
"section 1256 contracts". Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year are "marked-to-the-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
accelerate the recognition of gain or loss from the affected straddle positions.
Because application of the straddle rules may affect the character and
timing of the Fund's gains, losses and deductions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. It is anticipated that the Fund
will not invest more than 35% of its total assets in foreign securities.
Accordingly, the Fund will not be eligible to elect to "pass-through" to
stockholders of the Fund the ability to use the foreign tax deduction or foreign
tax credit for foreign taxes paid with respect to qualifying taxes. In order to
make such an election, at least 50% of the Fund's total assets would be required
to be invested in foreign securities.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund from its net investment income (such dividends
referred to hereafter as "Ordinary Income Dividends") are taxable to
stockholders as ordinary income. Distributions made from net capital gains
(including gains or losses from certain transactions in warrants, rights and
options) and properly designated by the Fund ("Capital Gain Dividends") are
taxable to stockholders as long-term capital gain, regardless of the length of
time the stockholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any
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capital gain dividends received by the stockholder. Distributions in excess of
the Fund's earnings and profits will first be a non-taxable reduction in the
adjusted tax basis of a holder's shares and, thereafter, will constitute capital
gain to such holder (provided that the shares are held as a capital asset).
Capital Gain Dividends may be taxed at a lower rate than Ordinary Income
Dividends for certain non-corporate taxpayers. Under recent legislation, net
"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, 28% Rate Gain and certain other categories of gain that
the Fund does not expect to realize. 28% Rate Gain on securities held longer
than one year but not longer than 18 months is taxed at the taxpayer's marginal
Federal income tax rate, but not higher than 28%. 20% Rate Gain on securities
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 Fund 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
such dividends that constitute 20% Rate Gain and 28% Rate Gain. If the Fund pays
a dividend in January which was declared in the previous October, November or
December to stockholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its stockholders on December 31, of the year in which such
dividend was declared.
Stockholders may be entitled to offset their Capital Gain Dividends with
capital losses. There are a number of statutory provisions that affect 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.
The Code provides that capital gain recognized on the termination of a
position held as part of a "conversion transaction" will be treated as ordinary
income, to the extent it does not exceed the interest that would have accrued on
the net investment in the conversion transaction at an interest rate prescribed
by the Code. A "conversion transaction," for these purposes, is a transaction
substantially all of the return from which is attributable to the time value of
the net investment in the transaction, and which is marketed as producing
capital gains, but having the characteristics of a loan. Although there are no
regulations construing this provision, the conversion transaction rules would
not apply to an investment in the Cumulative Preferred Stock because dividends
paid with respect to the Cumulative Preferred Stock will not constitute gain
which is recognized on the disposition or other termination of any position
which was held as part of a conversion transaction.
Ordinary Income Dividends (but not Capital Gain Dividends) paid to
stockholders who are non-resident aliens or foreign entities generally will be
subject to a 30% United States withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Non-resident stockholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
At the time of a stockholder's purchase, the market price of the Fund's
Common Stock or Cumulative Preferred Stock may reflect undistributed net
investment income or net capital gain. A subsequent distribution of these
amounts by the Fund will be taxable to the stockholder even though the
distribution economically is a return of part of the stockholder's investment.
Investors should carefully consider the tax implications of acquiring shares
just prior to a distribution, as they will receive a distribution that would
nevertheless be taxable to them.
Gain or loss, if any, recognized on the sale or other disposition of shares
of the Fund including, without limitation, a redemption by the Fund, will be
taxed as a capital gain or loss if the shares are capital assets in the
stockholder's hands and will be taxed as long-term or short-term gain or loss,
as the case may be. A loss realized on a sale or exchange of shares of the Fund
will be disallowed if other Fund shares of the same class
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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.
BACKUP WITHHOLDING
Under certain provisions of the Code, some stockholders may be subject to a
31% withholding tax on Ordinary Income Dividends, Capital Gain Dividends and
redemption payments ("backup withholding"). A stockholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form with the payor (i.e., the financial institution or brokerage firm where the
stockholder maintains his or her account), certifying under penalties of perjury
that such stockholder's taxpayer identification number is correct and that such
stockholder (i) has never been notified by the IRS that he or she is subject to
backup withholding, (ii) has been notified by the IRS that he or she is no
longer subject to backup withholding, or (iii) is exempt from backup
withholding. Corporate stockholders and certain other stockholders are exempt
from backup withholding. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules from payments made to a
stockholder may be credited against such stockholder's Federal income tax
liability.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICATION
PROVISION OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. FOR THE
COMPLETE PROVISIONS, REFERENCE SHOULD BE MADE TO THE PERTINENT CODE SECTIONS AND
THE TREASURY REGULATIONS PROMULGATED THEREUNDER. THE CODE AND THE TREASURY
REGULATIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE
ACTION, EITHER PROSPECTIVELY OR RETROACTIVELY. PERSONS CONSIDERING AN INVESTMENT
IN CUMULATIVE PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING
THE PURCHASE, OWNERSHIP AND DISPOSITION OF CUMULATIVE PREFERRED STOCK.
MOODY'S DISCOUNT FACTORS
The following table identifies the Moody's Discount Factors used to
discount particular Moody's Eligible Assets, as defined in the Prospectus, for a
two-week exposure period.
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
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 Rating Agency 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 Underlying
Other repurchase obligations................................ Assets
U.S. Common Stock and Common Stock of foreign issuers for
which ADRs are traded..................................... 3.00
Common Stock of foreign issuers (in existence for at least
five years) for which no ADRs are traded.................. 4.00
Convertible preferred stocks................................ 3.00
Preferred stocks:
Auction rate preferred stocks.......................... 3.50
Other preferred stocks issued by issuers in the
financial and industrial industries................... 1.62
Other preferred stocks issued by issuers in the
utilities industry.................................... 1.40
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
U.S. Government Obligations (other than U.S. Treasury
Securities Strips set forth below) with remaining terms to
maturity of:
1 year or less........................................ 1.04
2 years or less....................................... 1.09
3 years or less....................................... 1.12
4 years or less....................................... 1.15
5 years or less....................................... 1.18
7 years or less....................................... 1.21
10 years or less....................................... 1.24
15 years or less....................................... 1.25
20 years or less....................................... 1.26
30 years or less....................................... 1.26
U.S. Treasury Securities Strips with remaining terms to
maturity of:
1 year or less........................................ 1.04
2 years or less....................................... 1.10
3 years or less....................................... 1.14
4 years or less....................................... 1.18
5 years or less....................................... 1.21
7 years or less....................................... 1.27
10 years or less....................................... 1.34
15 years or less....................................... 1.45
20 years or less....................................... 1.54
30 years or less....................................... 1.66
Corporate evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 with
remaining terms to maturity of:
1 year or less........................................ 1.10
2 years or less....................................... 1.13
3 years or less....................................... 1.18
4 years or less....................................... 1.21
5 years or less....................................... 1.23
7 years or less....................................... 1.27
10 years or less....................................... 1.30
15 years or less....................................... 1.31
20 years or less....................................... 1.32
30 years or less....................................... 1.33
Corporate evidences of indebtedness rated Aa3 with remaining
terms to maturity of:
1 year or less........................................ 1.15
2 years or less....................................... 1.20
3 years or less....................................... 1.23
4 years or less....................................... 1.27
5 years or less....................................... 1.29
7 years or less....................................... 1.33
10 years or less....................................... 1.36
15 years or less....................................... 1.37
20 years or less....................................... 1.38
30 years or less....................................... 1.39
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Corporate evidences of indebtedness rated A3 with remaining
terms to maturity of:
1 year or less........................................ 1.20
2 years or less....................................... 1.26
3 years or less....................................... 1.29
4 years or less....................................... 1.33
5 years or less....................................... 1.35
7 years or less....................................... 1.39
10 years or less....................................... 1.42
15 years or less....................................... 1.43
20 years or less....................................... 1.45
30 years or less....................................... 1.45
Corporate evidences of indebtedness rated at least Baa3 with
remaining terms of maturity of:
1 year or less........................................ 1.25
2 years or less....................................... 1.31
3 years or less....................................... 1.35
4 years or less....................................... 1.38
5 years or less....................................... 1.41
7 years or less....................................... 1.45
10 years or less....................................... 1.48
15 years or less....................................... 1.50
20 years or less....................................... 1.51
30 years or less....................................... 1.52
Corporate evidences of indebtedness rated at least Ba3 with
remaining terms of maturity of:
1 year or less........................................ 1.36
2 years or less....................................... 1.42
3 years or less....................................... 1.46
4 years or less....................................... 1.50
5 years or less....................................... 1.53
7 years or less....................................... 1.57
10 years or less....................................... 1.61
15 years or less....................................... 1.62
20 years or less....................................... 1.64
30 years or less....................................... 1.64
Corporate evidences of indebtedness rated at least B1 and B2
with remaining terms of maturity of:
1 year or less........................................ 1.46
2 years or less....................................... 1.53
3 years or less....................................... 1.57
4 years or less....................................... 1.61
5 years or less....................................... 1.65
7 years or less....................................... 1.70
10 years or less....................................... 1.73
15 years or less....................................... 1.75
20 years or less....................................... 1.76
30 years or less....................................... 1.77
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Convertible corporate evidences of indebtedness with senior
debt securities rated Aa3 issued by the following type of
issuers:
Utility................................................ 1.28
Industrial............................................. 1.75
Financial.............................................. 1.53
Transportation......................................... 2.13
Convertible corporate evidences of indebtedness with senior
debt securities rated A3 issued by the following type of
issuers:
Utility................................................ 1.33
Industrial............................................. 1.80
Financial.............................................. 1.58
Transportation......................................... 2.18
Convertible corporate evidences of indebtedness with senior
debt securities rated Baa3 issued by the following type of
issuers:
Utility................................................ 1.48
Industrial............................................. 1.95
Financial.............................................. 1.73
Transportation......................................... 2.33
Convertible corporate bonds with senior debt securities
rated Ba3 issued by the following type of issuers:
Utility................................................ 1.49
Industrial............................................. 1.96
Financial.............................................. 1.74
Transportation......................................... 2.34
Convertible corporate bonds with senior debt securities
rated B1 or B2 issued by the following type of issuers:
Utility................................................ 1.59
Industrial............................................. 2.06
Financial.............................................. 1.84
Transportation......................................... 2.44
</TABLE>
NET ASSET VALUE
The net asset value of the Fund's shares is computed based on the market
value of the securities it holds and determined daily as of the close of regular
trading on the New York Stock Exchange and reported in financial newspapers of
general circulation as of the last day of each week.
Portfolio securities which are traded on a nationally recognized stock
exchange or Nasdaq National Market System are valued at the last sale price as
of the close of regular trading on the day the securities are being valued, or
lacking any sales, at the mean between closing bid and asked prices. Other
over-the-counter securities are valued at the mean of the current bid and asked
prices as reported by Nasdaq, or in the case of securities not quoted by Nasdaq,
the National Quotation Bureau or other comparable source as the Board of
Directors deems appropriate to reflect their fair value. If no asked prices are
quoted on such day, then the security is valued at the closing bid price on such
day. If no bid or asked prices are quoted on that day, then the security is
valued by such method as the Board of Directors shall determine in good faith to
reflect its fair market value. Portfolio securities traded on more than one
national securities exchange or market are valued according to the broadest and
most representative market, as determined by the Adviser. Securities traded
primarily on foreign exchanges are valued at the closing price on such exchanges
immediately prior to the close of the New York Stock Exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors. Short-term investments that mature in more than 60 days are valued at
the highest bid price
B-23
<PAGE> 68
obtained from a dealer maintaining an active market in that security or on the
basis of prices obtained from a pricing service approved as reliable by the
Board of Directors. Short-term investments that mature in 60 days or fewer are
valued at amortized cost, unless the Board of Directors determines that such
valuation does not constitute fair value.
Net asset value per share is calculated by dividing the value of the
securities held plus any cash or other assets minus all liabilities, including
accrued expenses, by the total number of shares outstanding at such time.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
The Depository Trust Company ("DTC") 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
offered hereby initially will be issued only as fully-registered securities
registered in the name of Cede & Co. (as nominee for DTC). One or more
fully-registered global Security certificates initially will be issued,
representing in the aggregate the total number of Securities, and deposited with
DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants
("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").
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for the Securities on DTC's
records. The ownership interest of each actual purchaser of a security
("Beneficial Owner") is in turn to be recorded on the Direct or Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Securities. Transfers of ownership
interests in Securities are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in Securities,
except as provided herein.
DTC has no knowledge of the actual Beneficial Owners of the Securities;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Payments on the Securities will be made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices and will
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<PAGE> 69
be the responsibility of such Participant and not of DTC or the Fund, subject to
any statutory or regulatory requirements as may be in effect from time to time.
Payment of dividends to DTC is the responsibility of the Fund, disbursement of
such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and indirect Participants. Furthermore each Beneficial Owner must rely on
the procedures of DTC to exercise any rights under the Securities.
Beneficial Owners may obtain certificates representing the Securities by
contacting State Street Bank and Trust Company, which acts as transfer agent for
the Fund's shares.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the Fund.
Under such circumstances, in the event that a successor securities depository is
not obtained, certificates representing the Securities will be printed and
delivered.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New
York 10022 is special counsel to the Fund in connection with the offering of the
Cumulative Preferred Stock.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, has been selected as independent accountants for the Fund.
BENEFICIAL OWNER
There are no persons known to the Fund who may be deemed beneficial owners
of 5% or more of shares of the Fund's Common Stock because they possessed or
shared voting or investment power with respect to shares of the Fund's Common
Stock except that, as of December 31, 1997, 86,642,202 shares were held of
record by Cede & Co., a nominee partnership of DTC. Of such shares, 19,831,290
shares, representing 18.9% of the outstanding shares of the Fund, were held by
DTC as nominee for Smith Barney Inc., representing approximately 13,961
discretionary and non-discretionary accounts. As of December 31, 1997, the
officers and Directors of the Fund, as a group, beneficially owned 1,296,518
shares of the Fund, representing 1.24% of the Fund's outstanding shares.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended December 31, 1997 which
either accompanies this SAI or has previously been provided to the person to
whom the Prospectus is being sent, is incorporated herein by reference with
respect to all information other than the information set forth in the Letter to
Stockholders included therein. The Fund will furnish, without charge, a copy of
its Annual Report upon request to the Fund at One Corporate Center, Rye, New
York 10580 or by telephone at (914) 921-5070.
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