As filed with the Securities and Exchange Commission on February 10, 1998
Securities Act File No. 333-_____
Investment Company Act File No. 811-4700
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
------------------------
[X] Registration Statement under the Securities Act of 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940 Amendment No. 1
(Check Appropriate Box or Boxes)
------------------------
THE GABELLI EQUITY TRUST INC.
(Exact Name of Registrant as Specified in Charter)
------------------------
One Corporate Center
Rye, New York 10580-1434
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Bruce N. Alpert
The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1434
(914) 921-5100
(Name and Address of Agent for Service)
------------------------
Copies to:
Richard T. Prins, Esq. James E. McKee, Esq. Gary S. Schpero, Esq.
Skadden, Arps, Slate, The Gabelli Equity Trust Inc. Simpson Thacher &
Meagher & Flom LLP One Corporate Center Bartlett
919 Third Avenue Rye, New York 10580-1434 425 Lexington Avenue
New York, New York 10022 (914) 921-5100 New York, New York 10017
(212) 735-3000 (212) 455-2000
------------------------
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on
a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, as amended, other than securities offered in
connection with a dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check
appropriate box)
[ ] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
[ ] This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is .
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following
box. [X]
------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed
Maximum Maximum Proposed
Offering Aggregate Amount of
Title of Securities Amount Being Price Offering Registration
Being Registered Registered Per Share Price(1) Fee
- -------------------- ------------ --------- --------- ------------
% Cumulative Preferred
Stock............... 400,000 Shares $25 $10,000,000 $2,950
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
N-2 Item Number Location in Part A (Caption)
- ------------------------------------------------------------------------------
PART A
1. Outside Front Cover............... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page............................ Outside Front Cover Page; Inside
Front Cover Page
3. Fee Table and Synopsis............ Not Applicable
4. Financial Highlights.............. Financial Highlights
5. Plan of Distribution.............. Outside Front Cover Page; Prospectus
Summary; Underwriting
6. Selling Shareholders.............. Not Applicable
7. Use of Proceeds................... Use of Proceeds; Investment
Objectives and Policies
8. General Description of the
Registrant...................... Outside Front Cover Page; Prospectus
Summary; The Fund; Investment
Objectives and Policies; Other
Investments; Special Investment
Methods; Risk Factors & Special
Considerations; Description of
Cumulative Preferred Stock
9. Management........................ Outside Prospectus Summary;
Management of the Fund;
Custodian, Transfer Agent and
Dividend-Disbursing Agent
10. Capital Stock, Long-Term Debt,
and Other Securities............ Outside Front Cover Page; Prospectus
Summary; Capitalization; Investment
Objectives and Policies;
Description of Cumulative
Preferred Stock; Description of
Capital Stock and Other
Securities; Taxation
11. Defaults and Arrears on Senior
Securities...................... Not Applicable
12. Legal Proceedings................. Not Applicable
13. Table of Contents of the Statement
of Additional Information....... Table of Contents of the Statement
of Additional Information
PART B Location in Statement of
Additional Information
- ------------------------------------------------------------------------------
14. Cover Page........................ Outside Front Cover Page
15. Table of Contents................. Outside Front Cover Page
16. General Information and History... The Fund
17. Investment Objectives and
Policies........................ Investment Objectives and Policies;
Investment Restrictions
18. Management........................ Management of the Fund
19. Control Persons and Principal
Holders of Securities........... Management of the Fund; Beneficial
Owner
20. Investment Advisory and Other
Services........................ Management of the Fund
21. Brokerage Allocation and Other
Practices....................... Portfolio Transactions
22. Tax Status........................ Taxation
23. Financial Statements.............. Financial Statements
PART C
Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration
Statement.
SUBJECT TO COMPLETION, DATED __________, 1998
PROSPECTUS
__________ Shares
The Gabelli Equity
Trust Inc.
____% Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
[GABELLI LOGO]
-----------------
The ____% 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 ____% of the liquidation preference of $25 per share, are
cumulative from the Date of Original Issue (as hereinafter defined)
thereof and are payable semi-annually on June 26 and December 26 in each
year, commencing on June 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, short-term capital gains and, in unusual
circumstances, return of capital. Over the past one, three and five fiscal
years ending December 31, the income 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 the Rating Agency (the "Rating Agency"). 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 the
Rating Agency. 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 the Rating
Agency and the Investment Company Act of 1940, as amended or if certain
corporate actions are authorized by the Fund's Board of Directors and
Common Stockholders. Commencing ______, 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 ______, 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."
If the Fund voluntarily terminates compliance with the Rating
Agency guidelines, the dividend rate payable on the Cumulative Preferred
Stock will be increased and, among other things, the Fund will no longer
be required to maintain the discounted asset coverage required by the
Rating Agency. See "Description of Cumulative Preferred Stock - Rating
Agency Guidelines" and "-Termination of Rating Agency Guidelines."
APPLICATION WILL BE MADE TO LIST THE CUMULATIVE PREFERRED STOCK
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.
==============================================================================
Underwriting
Price to Discounts or
Public (1) Commissions (2) Proceeds to Fund (3)
==============================================================================
Per Share...... $ $
- ------------------------------------------------------------------------------
Total.......... $ $
==============================================================================
- --------------------
(1) Plus accumulated 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
$----------.
-----------------
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 ______________, 1998.
----------------
Salomon Smith Barney Inc. Gabelli & Company, Inc.
_____________, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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 ______, 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 __ 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."
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.
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 September 30, 1997, the
net assets of the Fund were approximately
$1.20 billion.
Dividends and Distributions Dividends on the Cumulative Preferred Stock, at
the annual rate of ___% 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,
semi-annually on June 26 and December 26
in each year, commencing June 26, 1998.
The Fund may from time to time, at its
option, pay dividends on the Cumulative
Preferred Stock on a quarterly basis at
the annual rate of ___%. 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 realized capital gain allocable to
the Cumulative Preferred Shares, 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). 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. Such excess,
however, will be treated as ordinary
dividend income up to the amount of the
Fund's current and accumulated earnings
and profits. Such distribution policy
may, under certain circumstances, have
certain adverse consequences to the Fund
and its stockholders.
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 $0.25
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 $0.75 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").
The Offering............... The Fund is offering __________ shares of ___%
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").
Potential Tax Benefit to
Certain Investors....... Under recently adopted legislation, gain on
assets held for longer than 18 months
is now taxed to individuals at a maximum
federal rate of 20% ("20% Rate Gain") and
gain on assets held for longer than 12
months but not longer than 18 months is
taxed to individuals at a maximum federal
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) income, 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, short-term capital
gain and, in unusual circumstances,
return of capital. Net investment income
and short-term capital gain distributions
("Ordinary Income") are taxed at ordinary
income rates. Over the past one, three
and five fiscal years ending December 31,
the income 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 the less highly taxed
long-term capital gain. See "-Tax
Attributes of Preferred Stock Dividend."
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,
which is taxed at lower rates than
ordinary income and short-term capital
gain. To the extent that dividends on the
shares of Cumulative Preferred Stock are
not paid from long-term capital gain,
they will be paid from net investment
income and short-term capital gain 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 the Rating Agency.
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 the
Rating Agency (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."
Although it is the Fund's present
intention to continue to comply with the
Rating Agency Guidelines, the Board of
Directors of the Fund may determine that
it is not in the best interests of the
Fund to do so. See "Description of
Cumulative Preferred Stock -- Termination
of 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 the Rating Agency 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."
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 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 ______, 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
______, 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 and 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. Application has been made to list
the shares of Cumulative Preferred Stock
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 Investment Company Act of 1940,
as amended (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 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 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.
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 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."
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 ___% 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 and mid-term capital gain, short-term capital
gain, ordinary income and/or returns of capital.
Capital gain on assets held longer than 12 months but not longer
than 18 months by the Fund ("20% Rate Gain") generally is currently
taxable to individuals at a maximum rate of 20%. 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%. Net investment income and short-term capital gain of
the Fund ("Ordinary Income") 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 advantage 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,, the income of
the Fund consisted of 90%, 72% and 60% of long-term capital gain and the
Fund has no reason to expect that these percentages will decrease
materially in the future
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 five 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
and pass-throughs of the 20% Rate Gain and 28% Rate Gain maximum tax
rates. 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
----------------------
<S> <C> <C> <C>
7.5% 7.375% 7.25%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF CUMULATIVE PREFERRED STOCK
STATED ANNUAL DIVIDEND COMPRISED OF IS EQUIVALENT FOR AN
------------------------------------------------------ INDIVIDUAL IN THE 31%
ORDINARY FEDERAL INCOME TAX BRACKET
20% RATE GAIN 28% RATE GAIN INCOME TO AN ORDINARY INCOME YIELD OF
------------- ------------- -------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
75.0% 15.0% 10.0% 8.45% 8.31% 8.16%
50.0% 25.0% 25.0% 8.18% 8.04% 7.91%
33.3% 33.3% 33.3% 8.01% 7.88% 7.74%
25.0% 25.0% 50.0% 7.88% 7.75% 7.62%
16.7% 16.7% 66.6% 7.75% 7.63% 7.50%
-- -- 100.0% 7.50% 7.375% 7.25%
</TABLE>
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.
A CUMULATIVE PREFERRED
STOCK STATED ANNUAL
DIVIDEND RATE OF
----------------------
7.50% 7.375% 7.25%
IS EQUIVALENT
TO AN ORDINARY
1997 FEDERAL INCOME TAX BRACKET1 INCOME YIELD OF
- ------------------------------- ---------------
39.6%........................... 8.80% 8.65% 8.50%
36.0%........................... 8.44% 8.30% 8.16%
31.0%........................... 8.01% 7.88% 7.74%
28.0%........................... 7.78% 7.65% 7.52%
15.0%2.......................... 7.65% 7.52% 7.39%
- --------
1 ANNUAL TAXABLE INCOME LEVELS CORRESPONDING TO THE 1997 FEDERAL
MARGINAL TAX BRACKETS ARE AS FOLLOWS:
1997 Federal Income
Tax Bracket Single Joint
------------------- ------ -----
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 up to and including
$24,650 $41,200
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.
FINANCIAL HIGHLIGHTS
THE SELECTED DATA SET FORTH BELOW IS FOR SHARES OF COMMON STOCK
OUTSTANDING FOR THE PERIODS PRESENTED. THE FINANCIAL INFORMATION WAS
DERIVED FROM AND SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS OF THE FUND INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND
THE SAI. THE FINANCIAL INFORMATION FOR EACH OF THE TEN YEARS ENDED
DECEMBER 31, 1996 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>
Six Months Year Ended December 31,
Ended ---------------------------------------------------------
06/30/97
<S> <C> <C> <C> <C> <C> <C>
(Unaudited) 1996(a) 1995(a) 1994(a) 1993(a) 1992
Operating performance:
Net asset value, beginning of
period........................... $ 9.77 $ 9.95 $ 9.46 $11.23 $10.58 $10.61
------ ------ ------ ------ ------ ------
Net investment income............ 0.06 0.11 0.13 0.14 0.14 0.19
Net realized and unrealized gain
(loss) on investments............ 1.40 0.71 1.74 (0.08) 2.13 1.21
Provision for income taxes....... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total from investment operations. 1.46 0.82 1.87 0.06 2.27 1.40
Increase (decrease) in net asset
value from Equity Trust share
transactions..................... -- -- (0.37) -- (0.50) (0.36)
Offering expenses charged to
capital surplus.................. -- -- (0.01) -- (0.01) (0.01)
Distributions to stockholders
from:
Net investment income.......... (0.06) (0.11) (0.13) (0.14)(b) (0.11) (0.19)
Distributions in excess of net
investment income............ (0.44) -- -- -- -- --
Net realized gains............. -- (0.78) (0.47) (0.37) (0.77) (0.38)
Distributions in excess of net
realized gains............... -- (0.00)(d) (0.02) -- (0.02) --
Paid-in capital................ -- (0.11) (0.38) (1.32)(b) (0.21) (0.49)
------- ------ ------ ------ ------ ------
Total distributions.............. (0.50) (1.00) (1.00) (1.83) (1.11) (1.06)
======= ====== ====== ====== ====== ======
Net asset value, end of period... $10.73 $9.77 $9.95 $ 9.46 $11.23 $10.58
======= ====== ====== ====== ====== ======
Market value, end of period...... $10.063 $ 9.375 $ 9.375 $ 9.625 $12.125 $10.250
======= ======= ======= ======= ======= =======
Total Investment Return*......... 12.9% 11.0% 11.7% (5.1)% 36.5% 15.9%
====== ====== ======= ======== ====== ======
Net Asset Value Total Return**... 15.5% 9.0% 20.6% 0.5% 22.4% 14.2%
====== ====== ====== ======= ====== ======
Ratios to average net
assets/supplemental data:
Net assets, end of period (in
000's)........................... $1,114,745 $1,015,437 $1,034,091 $825,193 $937,773 $725,263
Net investment income.......... 1.20%+ 1.07% 1.26% 1.29% 1.25% 1.88%
Operating expenses............. 1.16%+ 1.18% 1.21% 1.19% 1.20% 1.22%
Portfolio turnover rate.......... 18.4% 18.9% 25.1% 22.2% 24.4% 12.5%
Average commission rate (per
share of security(c)............. $0.0287 $0.0335 N/A 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.
+ Annualized.
(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 Equity
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.
FINANCIAL HIGHLIGHTS (CONT.)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1991 1990 1989 1988 1987
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of $10.49 $13.34 $11.22 $ 9.82 $ 9.40
period........................... ------ ------ ------ ------ ------
Net investment income............ 0.27 0.44 0.38 0.14 0.16
Net realized and unrealized gain 1.37 2.11 3.26*** 2.32*** 0.89
(loss) on investments............
Provision for income taxes....... -- -- (0.21) (0.09) --
------ ------ ------ ----- ------
Total from investment operations. 1.64 1.67 3.43 2.37 1.05
Increase (decrease) in net asset
value from Equity Trust share
transactions..................... (0.42) -- -- 0.02 0.01
Offering expenses charged to
capital surplus.................. (0.01) -- -- -- --
Distributions to stockholders
from:
Net investment income.......... (0.27) (0.53) (0.29 ) (0.21) (0.19)
Distributions in excess of net
investment income................ -- -- -- -- --
Net realized gains............. (0.14) (0.23) (1.02) (0.78) (0.45)
Distributions in excess of net
realized gains................... -- -- -- -- --
Paid-in capital................ (0.68) (0.42) -- -- --
------ ------ ------ ----- ------
Total distributions.............. (1.09) (1.18) (1.31) (0.99) (0.64)
======= ====== ====== ====== ======
Net asset value, end of period... $10.61 $10.49 $13.34 $11.22 $9.82
====== ======= ------ ====== ======
Market value, end of period...... $10.125 $10.500 $14.000 $ 9.875 $7.625
======= ======= ======= ======= =======
Total Investment Return*......... 10.9% (16.7)% 59.0% 37.8% (0.9)%
====== ======= ====== ======= =======
Net Asset Value Total Return**... 16.2% (12.7)% 33.2% 21.5% 17.1%
====== ======= ====== ====== ======
Ratios to average net
assets/supplemental data:
Net assets, end of period (in
000's)........................... $595,151 $479,863 $589,990 $484,792 $429,490
Net investment income.......... 2.34% 3.84% 2.82% 1.36% 1.50%
Operating expenses............. 1.24% 1.18% 1.18% 1.25% 1.24%
Portfolio turnover rate.......... 11.2% 15.5% 28.1% 51.5% 96.5%
</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.
***Before provision for income taxes.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $_______, after
deduction of the underwriting discounts and estimated offering expenses
payable by the Fund. The 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.
Actual As Adjusted(a)
Stockholders' equity:
Preferred Stock, $.001 par value:
Authorized 0 shares; as adjusted
_______ shares authorized; issued
and outstanding 0 shares; as
adjusted, ______ shares of ____%
Cumulative Preferred Stock issued
and outstanding......................... $__________ $__________
Common Stock, $.001 par value:
Authorized ______ shares; as adjusted
______ authorized; issued and
outstanding _______ shares.............. $ $__________
Additional paid-in capital................. $ $__________
Distributions in excess of net realized
gain on investments..................... $ $__________
Undistributed net investment income........ $ $__________
Net unrealized appreciation of
investments.......................... $ $__________
Net assets.............................. $ $__________
Net assets applicable to outstanding
Common Stock.......................... $ $__________
- ---------------
(a) After deducting underwriting discounts and estimated costs of the
Offering of $__________.
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 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 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 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 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 stockholders of
another closed-end fund managed by the Adviser, The Gabelli Global
Multimedia Trust Inc. (the "Multimedia Fund"), approved an identical
amendment on the same date regarding this matter with the same proxy
statement disclosure utilized by the Fund in connection with its
stockholders meeting. Subsequent to the issuance of preferred stock by
the Multimedia Fund, the Multimedia Fund and its Directors were named as
defendants in several actions in federal court for the Southern District
of New York alleging, as pertinent to the Fund, that the Multimedia
Fund's proxy statement failed to disclose that the issuance of preferred
stock would materially alter the governance of such fund as a result of
the right of preferred stockholders to elect two directors and would
significantly hinder the ability of the common stockholders to cause the
Multimedia Fund to become an open-end fund as a result of the class vote
of the preferred stock on any such proposal.
The Fund believes that the provision of the Fund's Cumulative
Preferred Stock permitting 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.
Accordingly, the Fund believes that any similar action seeking to prevent
or rescind issuance of the Cumulative Preferred Stock or obtain damages
therefore would be meritless.
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, 1996 and 1995, the portfolio turnover of the
Fund was 25.1% 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.
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 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.
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 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.
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, 1994, 1995 and 1996
the Fund paid a management fee of $8,978,663, $9,060,694 and $10,364,591,
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 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.
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 $5.5 billion as of December 31, 1997. GAMCO
Investors, Inc. ("GAMCO"), a subsidiary of the Adviser, acts as
investment adviser for individuals, pension trusts, profit sharing trusts
and endowments. As of December 31, 1997, GAMCO had aggregate assets in
excess of $6 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
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 02109-2
DIVIDEND AND DISTRIBUTION POLICY
Distribution Policy
The Fund's policy is to make quarterly distributions of $0.25 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 $0.75 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.
The Fund reserves the right, but does not currently intend, to
retain for reinvestment and pay federal income taxes on the excess of its
net realized long-term capital gains over its net short-term capital
losses, if any. If for any calendar year, the total distributions exceed
net investment income and net realized capital gains, 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.
Such excess, however, will be treated as ordinary dividend income up to
the amount of the Fund's current and accumulated earnings and profits.
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' 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 up to shares of Cumulative Preferred Stock, _________ 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
The Rating Agency 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 the Rating Agency. The Rating Agency, 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 the Rating Agency 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 the Rating Agency 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. The Rating Agency 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
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 the Rating Agency'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 the
Rating Agency. Failure to adopt such modifications, however, may result
in a change in the Rating Agency's rating or a withdrawal of a rating
altogether. In addition, the Rating Agency 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 the Rating
Agency'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 the Rating Agency 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 ____% of the liquidation preference of $25 per share,
payable semi-annually on June 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 June 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 originally issued (the
"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), (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 $______), would have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $____________
________________________ = _____%
Senior securities representing indebtedness
plus liquidation preference of the
Cumulative Preferred Stock $____________
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 Rating Agency'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
Rating Agency 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 Rating Agency. This feature will permit the Fund to respond to
changes required or permitted by the Rating Agency 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.
On or before the fifth Business Day after each Quarterly Valuation
Date, the Fund is required to deliver to the Rating Agency 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 the Rating Agency 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 and unpaid
dividends through the date of redemption (whether or not earned or
declared) (the "Redemption Price"), certain of the shares of Cumulative
Preferred Stock (to the extent permitted under the 1940 Act 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 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 (a) the dissolution
of the Fund, (b) 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), (c) any plan of
reorganization (as that term is defined in the 1940 Act) adversely
affecting the Cumulative Preferred Stock or (d) any other action requiring
a vote of the Fund's security holders as provided in Section 13(a) of the
1940 Act.
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.
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
written notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be
redeemed, such redemption will be made pro rata from each holder of
shares in accordance with the respective number of shares held by each
such holder on the record date for such redemption. If fewer than all
shares of Cumulative Preferred Stock held by any holder are to be
redeemed, the Notice of Redemption mailed to such holder will specify the
number of shares to be redeemed from such holder. Unless all accumulated
and unpaid dividends for all past dividend periods will have been or are
contemporaneously paid or declared and Deposit Assets for the payment
thereof deposited with the Dividend-Disbursing Agent, no redemptions of
Cumulative Preferred Stock may be made.
Optional Redemption. Prior to ______, 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 ______, 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.
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 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 Notice of Redemption with respect to
the redemption of all shares of the Cumulative Preferred Stock then
outstanding and redeem such shares.
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 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.
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 single class, will be entitled at all times to elect two of
the Fund's directors, and the remaining directors will be elected by
holders of shares of Common Stock and holders of shares of 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 single 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 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 except in the event the Board of
Directors and the requisite majority of the holders 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. To the extent
permitted under the 1940 Act, in the event shares of more than one series
of Preferred Stock are outstanding, the Fund will not approve any of the
actions set forth in the preceding sentence which materially adversely
affects the contract rights expressly set forth in the Charter of a
holder of shares of a series of Preferred Stock differently than those of
a holder of shares of any other series of Preferred Stock without the
affirmative vote of at least a majority of votes entitled to be cast by
holders of the Preferred Stock of each series materially adversely
affected and outstanding at such time (each such materially adversely
affected series voting separately as a class). 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
the Rating Agency that any such amendment, alteration or repeal would not
impair the rating then assigned to the Cumulative Preferred Stock.
Furthermore, under certain circumstances, without the vote of
stockholders, the Board of Directors of the Fund may determine that it is
not in the best interests of the Fund to continue to comply with the
Rating Agency Guidelines. See "-- Termination of Rating Agency
Guidelines" below. Unless a higher percentage is provided for under the
Charter or applicable provisions of Maryland General Corporation Law, the
affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of the 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.
Termination of Rating Agency Guidelines
The Articles Supplementary provide that the Board of Directors of
the Fund may determine that it is not in the best interests of the Fund
to continue to comply with the Rating Agency Guidelines, in which case
the Fund will no longer be required to comply with such guidelines,
provided that (i) the Fund has given the Dividend Disbursing Agent, the
Rating Agency and holders of the Cumulative Preferred Stock at least 20
calendar days written notice of such termination of compliance, (ii) the
Fund is in compliance with the Rating Agency Guidelines at the time the
notice required in clause (i) above is given and at the time of
termination of compliance with the Rating Agency Guidelines and (iii) at the
time the notice required in clause (i) above is given and at the time of
termination of compliance with the Rating Agency Guidelines, the
Cumulative Preferred Stock is listed on an exchange registered with the
Commission as a national securities exchange.
If the Fund terminates compliance with the Rating Agency
Guidelines, the Rating Agency may change its rating on the Cumulative
Preferred Stock or withdraw its rating altogether, which may have an
adverse effect on the market value of the Cumulative Preferred Stock. It
is the Fund's present intention to continue to comply with the Rating
Agency Guidelines.
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 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 200,000,000
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 __________ 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 ________ shares of Preferred Stock as the
Cumulative Preferred Stock 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 unissued and (iii) capital stock
outstanding for each class of authorized securities of the Fund as of ,
1997 as if the Offering had been completed by such date.
Amount Amount Amount
Title of Class Authorized Unissued Outstanding
- -------------- ---------- -------- -----------
Common Stock............ __________ __________ __________
Preferred Stock......... __________ __________ __________
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.
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. 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 in warrants, rights, futures and options) and properly
designated by the Fund ("Capital Gain Dividends") are taxable to
stockholders as long-term capital gains, regardless of the length of time
the stockholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
stockholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gain
to such holder (assuming the shares are held as a capital asset).
Capital Gain Dividends may be taxed at a lower rate than Ordinary
Income Dividends for certain non-corporate taxpayers. Under recent
legislation, "long-term capital gain" has been broken down into
additional categories of gain, taxable at different rates for individual
taxpayers. These categories include 20% Rate Gain and 28% Rate Gain and
certain other categories of gain that the Fund does not expect to
realize. Net 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%. Net 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 affecting
when capital losses may be offset against capital gains, and limiting the
use of losses from certain investments and activities. Accordingly,
stockholders with capital losses are urged to consult their tax advisers.
Gain or loss, if any, recognized on the sale of other disposition
of shares of the Fund, including, without limitation, a redemption by the
Fund will be taxed as a capital gain or loss if the shares are capital
assets in the stockholder's hands and will be taxed as long-term,
mid-term or short-term gain or loss, as the case may be. A loss realized
on a sale or exchange of shares of the Fund will be disallowed if other
Fund shares of the same class are acquired within a 61-day period
beginning 30 days before and ending 30 days after the date that the
shares are disposed of. In such a case, the basis of the shares acquired
will be adjusted to reflect the disallowed loss.
The Code provides that capital gain recognized on the termination
of a position held as part of a "conversion transaction" will be treated
as ordinary income, to the extent 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.
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.
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 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. Consequently, the Fund will designate distributions
made to the Common Stock and Cumulative Preferred Stock and any other
Preferred Stock series as consisting of particular types of income in
accordance with the classes' proportionate shares of such income. Because
of this rule, the 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.
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.
UNDERWRITING
Upon the terms and subject to the conditions contained in the
Underwriting Agreement dated the date hereof, each Underwriter named
below for whom Salomon Smith Barney Inc. and Gabelli & Company, Inc. 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:
Number of
Name Shares
----------------------------- ---------
Total............... ________
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 $____ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ 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 $ per share is equal to ____%
of the initial offering price. Investors must pay for any shares of
Cumulative Preferred Stock purchased on or before , 1997.
The Fund and the Adviser have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the 1933 Act.
The Fund, in its sole discretion, may grant to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to
purchase up to an additional _________ shares of the Cumulative Preferred
Stock at a price per share equal to the Underwriters' purchase price for
__________ shares of the Cumulative Preferred Stock. 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 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. Application has been made to list the
Cumulative Preferred Stock 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 Inc. 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,
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 (a partnership which includes
professional corporations), 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 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.
TABLE OF CONTENTS OF SAI
An SAI dated _________, 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
PAGE
INVESTMENT OBJECTIVES AND POLICIES ........................ B-
INVESTMENT RESTRICTIONS.................................... B-
MANAGEMENT OF THE FUND..................................... B-
PORTFOLIO TRANSACTIONS .................................... B-
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN............................. B-
TAXATION .................................................. B-
RATING AGENCY DISCOUNT FACTORS ............................ B-
NET ASSET VALUE............................................ B-
BENEFICIAL OWNER........................................... B-
GENERAL INFORMATION........................................ B-
FINANCIAL STATEMENTS....................................... B-
GLOSSARY
"Adjusted Assets" means the aggregate Adjusted Value of all the
Rating Agency's Eligible Assets.
"Adjusted Value" of each Rating Agency Eligible Asset shall be
computed as follows:
(i) Cash shall be valued at 100% of the face value thereof; and
(ii) all other Rating Agency Eligible Assets shall be valued at the
Discounted Value thereof; and
(iii) each asset that is not a Rating Agency 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 ____ of this
Prospectus.
"Basic Maintenance Amount" means, as of any Valuation Date, the
dollar amount equal to (i) the sum of (A) the product, calculated
separately for each series of Cumulative Preferred Stock, 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 by the issuance of 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); (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 and/or (B) the face value
of any of the Fund's assets if, in the case of both (ii)(A) and (ii)(B),
if 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 ____ 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 Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of
the Fund.
"Cumulative Preferred Stock" means the ______% Cumulative Preferred
Stock, par value $.001 per share, of the Fund.
"Cure Date" has the meaning set forth on page _____ of this
Prospectus.
"Date of Original Issue" has the meaning set forth on page ____ of
this Prospectus.
"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 Rating Agency Eligible
Asset, the quotient of (A) in the case of a non-convertible fixed income
instrument, the lower of the principal amount or liquidation preference
and the market value thereof or (B) in the case of any other Rating
Agency Eligible Asset, the market value thereof, divided by the
applicable Rating Agency Discount Factor.
"Dividend-Disbursing Agent" means State Street Bank and Trust
Company and its successors or any other paying agent appointed by the
Fund.
"Dividend Payment Date" has the meaning set forth on page _____ of
this Prospectus.
"Fund" means The Gabelli Equity Trust Inc., a Maryland corporation.
"Liquidation Payment" has the meaning set forth on page _____ of
this Prospectus.
"Moody's" means Moody's Investors Service, Inc.
"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 ____ of this
Prospectus.
"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 March, 1998.
"Rating Agency Discount Factor" means, with respect to a Rating
Agency Eligible Asset specified below, the numbers set forth in the SAI
under the heading "Rating Agency Discount Factors."
"Rating Agency 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 the Rating Agency or a counterparty approved by the Rating Agency
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 the Rating
Agency 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 the Rating Agency
or (2) are rated at least "Baa3" by the Rating Agency (or in the event an
issuer's senior debt securities or preferred stock is not rated by the
Rating Agency, 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 the Rating Agency
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 or ADRs 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 the
Rating Agency or, if not rated by the Rating Agency, are rated at least
AA by S&P), (E) which pay cumulative cash dividends, (F) which are not
convertible into any other class of stock and do not have warrants
attached, (G) which are not issued by issuers in the transportation
industry and (H) in the case of auction rate preferred stocks, which are
rated at least "aa" by the Rating Agency, or if not rated by the Rating
Agency, AAA by S&P or are otherwise approved in writing by the Rating
Agency and have never had a failed auction; provided, however, that for
this purpose the market value of the Fund's holdings of any single issue
of auction rate preferred stock will not be more than $5,000,000;
v. common stocks (A) which are traded on the NYSE, the American
Stock Exchange or through the Nasdaq system in the over-the-counter
market, (B) which may be sold without restriction by the Fund; provided,
however, that (1) common stock which, while a Rating Agency Eligible
Asset owned by the Fund, ceases paying any regular cash dividend will no
longer be considered a Rating Agency 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 the Rating
Agency 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 number of
outstanding shares times the market value of such common stock shall not
be a Rating Agency Eligible Asset, or (C) which are securities
denominated in any currency other than the U.S. dollar and 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") 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; 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 the issuer thereof or
(ii) in excess of 10% of the market value of the Rating Agency 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 Rating Agency 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 the Rating Agency (or, in the event the security is not
rated by the Rating Agency, the security is rated at least BB- by S&P and
which for this purpose is assigned a the 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 U.S. dollar denominated and pay interest in cash
in U.S. dollars, (D) which are not convertible or exchangeable into
equity of the issuing corporation and have a maturity of not more than 30
years and (E) 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
the Rating Agency (or, in the event an issuer's senior debt securities
are not rated by the Rating Agency, 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 the Rating Agency 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 Rating Agency Eligible Asset;
provided, however, that the Fund's investments in auction rate preferred
stocks described in clause (iv) above shall be included in the Rating
Agency 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 the Rating Agency Eligible Assets pursuant to the provision
appearing after clause (ix) below; and
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 the Rating Agency
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 the Rating Agency's Eligible
Assets except to the extent they satisfy the following diversification
requirements (utilizing the Rating Agency industry and sub-industry
categories):
Issuer:
NON-UTILITY UTILITY MAXIMUM SINGLE
RATING AGENCY RATING(1)(2) (3)(4) ISSUER(3)(4)
- -------------------------- ----------- ----------------------
"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>
<CAPTION>
NON-UTILITY UTILITY
RATING AGENCY MAXIMUM MAXIMUM SINGLE SUB UTILITY MAXIMUM
RATING(1) SINGLE INDUSTRY(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 Rating Agency rating must be lowered one full rating
category for preferred stocks, corporate bonds and convertible
corporate bonds rated by S&P but not by the Rating Agency.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are
limited to 20% of the Rating Agency Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only
for the related Rating Agency rating category and each lower Rating
Agency rating category.
(4) Issuers subject to common ownership of 25% or more are considered as
one name.
(5) CS/CB refers to common stock and convertible corporate evidences of
indebtedness, which are diversified independently from the rating
level.
(6) In the case of utility common stock, utility preferred stock,
utility, evidences of indebtedness and utility convertible
evidences of indebtedness, the definition of industry refers to
sub-industries (electric, water, hydro power, gas, diversified).
Investments in other sub-industries are eligible only to the extent
that the combined sum represents a percentage position of the Rating
Agency 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.
"Redemption Price" has the meaning set forth on page ____ 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 the Rating Agency 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 the Rating Agency;
(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 the Rating Agency of at
least P-1 in the case of commercial paper and (2) credit ratings from the
Rating Agency 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 the Rating
Agency 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 the Rating Agency 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.
======================
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
Page
----
Prospectus Summary................................................
Financial Highlights..............................................
Use of Proceeds...................................................
Capitalization....................................................
The Fund..........................................................
Investment Objectives and Policies................................
Special Investment Methods........................................
Risk Factors and Special Considerations...........................
Management of the Fund............................................
Dividend and Distribution Policy..................................
Description of Cumulative Preferred Stock.........................
Description of Capital Stock and Other Securities.................
Taxation..........................................................
Certain Provisions of the Charter and By-laws.....................
Custodian, Transfer Agent and Dividend-Disbursing Agent...........
Underwriting......................................................
Legal Matters.....................................................
Experts...........................................................
Additional Information............................................
Table of Contents of SAI..........................................
Glossary..........................................................
==========================================================================
___________ Shares
THE GABELLI EQUITY TRUST INC.
% Cumulative Preferred Stock
------------
PROSPECTUS
_________, 1998
------------
Salomon Smith Barney Inc.
Gabelli & Company, Inc.
===========================================================================
SUBJECT TO COMPLETION DATED __________, 1998
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 _______ __, 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
PAGE
----
Investment Objectives and Policies................................ B-
Investment Restrictions........................................... B-
Management of the Fund............................................ B-
Portfolio Transactions............................................ B-
Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan............................................. B-
Taxation.......................................................... B-
Rating Agency Discount Factors.................................... B-
Net Asset Value................................................... B-
General Information............................................... B-
BENEFICIAL OWNER.................................................. B-
Financial Statements.............................................. B-
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 _______, __, 1998.
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 the 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 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.
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 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 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 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 stockholders of
another closed-end fund managed by the Adviser, The Gabelli Global
Multimedia Trust Inc. (the "Multimedia Fund"), approved an identical
amendment on the same date regarding this matter with the same proxy
statement disclosure utilized by the Fund in connection with its
stockholders meeting. Subsequent to the issuance of preferred stock by
the Multimedia Fund, the Multimedia Fund and its Directors were named as
defendants in several actions in federal court for the Southern District
of New York alleging, as pertinent to the Fund, that the Multimedia
Fund's proxy statement failed to disclose that the issuance of preferred
stock would materially alter the governance of such fund as a result of
the right of preferred stockholders to elect two directors and would
significantly hinder the ability of the common stockholders to cause the
Multimedia Fund to become an open-end fund as a result of the class vote
of the preferred stock on any such proposal.
The Fund believes that the provision of the Fund's Cumulative
Preferred Stock permitting 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.
Accordingly, the Fund believes that any action seeking to prevent or
rescind issuance of the Cumulative Preferred Stock or obtain damages
therefore would be meritless.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that
constitute fundamental policies that cannot be changed without the
affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act). All percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage
resulting from market fluctuations does not require elimination of any
security from the portfolio. The Fund may not:
1. Invest 25% or more of its total assets, taken at market
value at the time of each investment, in the securities of issuers
in any particular industry. This restriction does not apply to
investments in U.S. Government Securities.
2. Purchase securities of other investment companies, except
in connection with a merger, consolidation, acquisition or
reorganization, if more than 10% of the market value of the total
assets of the Fund would be invested in securities of other
investment companies, more than 5% of the market value of the total
assets of the Fund would be invested in the securities of any one
investment company or the Fund would own more than 3% of any other
investment company's securities; provided, however, this
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a
dividend to its 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.
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 "+".
Position with Principal Occupation
Name and Business Address(Age) the Fund During Past Five Years
- ------------------------------ ------------- ----------------------
Dr. Thomas E. Bratter (56) Director Director, President and
The John Dewey Academy Founder, The John Dewey
Searles Castle Academy (residential
Main Street college preparatory
Great Barrington, therapeutic high school).
Massachusetts 01230 Director of one other
registered investment
company advised by the
Adviser. (10)
Bill Callaghan (53) Director President of Bill
Director Callaghan Associates
225 West 33th Street Ltd., an executive search
New York, New York 10018 company. Director of two
other registered
investment companies
advised by the Adviser.
(3)(10)
+Felix J. Christiana (71) Director Retired; formerly
45 Pondfield Parkway Senior Vice President of
Mt. Vernon, New York 10552 Dollar Dry Dock Savings
Bank. Director/Trustee of
eight other registered
investment companies
advised by the Adviser.
(1)(2)(3)(4)(5)(8)(10)
(13)
+James P. Conn (59) Director Managing Director of
One Corporate Center Financial Security
Rye, New York 10580-1434 Assurance since 1992;
Director of Meditrust
First Republic Bank;
President and Chief
Executive Officer of Bay
Meadows Operating Company
from 1988 through 1992.
Director/Trustee of four
other registered
investment companies
advised by the Adviser.
(1)(2)(10)(14)
*Mario J. Gabelli (54) Chairman of Chairman of the Board,
One Corporate Center the Board, Chief Executive officer
Rye, New York 10580-1434 President and Chief Investment
and Chief Officer of the Adviser;
Investment Chief Investment Officer
Officer of GAMCO Investors
Inc.; Chairman of the
Board and Chief
Executive Officer of
Lynch corporation;
Director and Adviser
of Gabelli
International Ltd.;
Director of East/West
Communications Inc.;
Director/Trustee of
twelve other
registered investment
companies advised by
the Adviser.
(1)(2)(3)(4)(5)(6)(7)
(8)(9)(10)(11)(12)
*Karl Otto Pohl (67) Director Partner of Sal. Oppenheim
One Corporate Center Jr. & Cie (private
Rye, New York 10580-1434 investment bank);
President of the
Deutsche Bundesbank and
Chairman of its Central
Bank Council from 1980
through 1991; currently
Board Member of Zurich
Versicherungs-Gesellschaft
(Insurance); the
International Council
for JP Morgan & Co.;
Supervisory Board
Member of Royal Dutch;
ROBECo/o Group; and
Advisory Director of
Unilever N.V. and
Unilever Deutschland;
German Governor of The
International Monetary
Fund (1980-1991); Board
Member, Bank for
International Settlements
(1980-1991); and Chairman
of the European Economic
Community Central Bank
Governors (1990-1991).
Director/Trustee of all
other registered
investment companies
advised by the Adviser.
Anthony R. Pustorino (71) Director Certified Public
121 Arleigh Road Accountant, Professor of
Douglaston, New York 11363 Accounting, Pace
University, since 1965.
Director, President and
stockholder of
Pustorino, Puglisi Co.,
P.C., Certified public
accountants, from 1961
to 1990. Director/
Trustee of eight other
registered investment
companies advised by
the Adviser. (1)(2)(3)
(4)(5)(10)(11) (12)
Salvatore J. Zizza (51) Director President and Chief
The Lehigh Group, Inc. Executive Officer of The
810 Seventh Avenue, 27th Floor Lehigh Group, Inc. (an
New York, New York 10019 electrical supply
wholesaler).
Director/Trustee of
three other registered
investment companies
advised by the Adviser.
(1)(4)(10)
Bruce N. Alpert (46) Vice President Vice President and Chief
One Corporate Center and Treasurer Financial and
Rye, New York 10580-1434 Administrative officer
of the investment
advisory 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.
James E. Mckee (34) Secretary Vice President, General
One Corporate Center Counsel and Secretary
Rye, New York 10580-1434 of the Adviser (since
1995) and Vice
President and General
Counsel of Gamco
Investors, Inc. (since
1993); Secretary of the
registered investment
companies advised by
the Adviser; staff
attorney from 1989-1992
and a branch chief from
1992-1993 of the
Securities and Exchange
Commission -- Northeast
Regional Office.
Marc Diagonale (31) Vice President Client services
One Corporate Center representative of
Rye, New York 10580-1434 Gabelli & Company, Inc.
since March 1993;
masters of business
administration student
at New York University
from September 1990 to
May 1992.
- ---------------------------
*"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.
(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) Trustee 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 the Adviser. Officers who are employed by the Adviser receive
no compensation or expense reimbursement from the Fund.
Total Compensation From
Aggregate Fund and Fund Complex
Name of Compensation Paid to
Director/Officers from Fund Directors/Officers+
- ------------------ ------------ ----------------------
Dr. Thomas E. Bratter $14,000 $14,000
Bill Callaghan $14,000 $28,000
Felix J. Christiana $15,000 $64,500
James P. Conn $14,000 $30,000
Karl Otto Pohl $13,000 $64,750
Anthony R. Pustorino $15,000 $69,000
Salvatore J. Zizza $14,000 $35,000
Marc S. Diagonale $105,000 $105,000
- -----------------------
+ 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 Director, Liability
The By-Laws of the Fund provide that the Fund will indemnify
its Directors and officers and may indemnify its employees or agents
against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, to
the fullest extent permitted by law 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 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 common stock is less than the stated dividend rate of the Cumulative
Preferred Stock.
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, 1996, December 31,
1995 and December 31, 1994, the Adviser was paid $10,364,591, $9,060,694
and $ 8,978,663, respectively, for advisory and administrative services
rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of
the Fund, the 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, 1994, December 31,
1995 and December 31, 1996, the Fund paid a total of $161,163, $361,180,
$439,723, respectively, in brokerage commissions, of which Gabelli &
Company received $15,226, $84,868 and $119,880, respectively, and of
which Keeley Investment Corp., an entity treated as an affiliate of
Gabelli Funds, Inc., received $1,250, $5,550 and $2,100, 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, 1996 represented 27.3% and 0.5%, 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, 1996,
the Fund paid brokerage commissions to Gabelli & Company, Inc. and Keeley
Investment Corp. with respect to 30.1% and 0.6%, 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.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal year ended
December 31, 1995 and December 31, 1996 were 25.1% and 18.9%,
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. A participant may without charge withdraw a voluntary cash payment
by written notice, if the notice is received by State Street at least 48
hours before such payment is to be invested.
State Street maintains all stockholder accounts in the Plan
and furnishes written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax
records. Shares in the account of each Plan participant will be held by
State Street in noncertificated form in the name of the participant. A
Plan participant may send its share certificates to State Street so that
the shares represented by such certificates will be held by State Street
in the participant's stockholder account under the Plan.
In the case of stockholders such as banks, brokers or
nominees, which hold shares for others who are the beneficial owners,
State Street will administer the Plan on the basis of the number of
shares certified from time to time by the stockholder as representing the
total amount registered in the stockholder's name and held for the
account of beneficial owners who participate in the Plan.
Experience under the Plan may indicate that changes are
desirable. Accordingly, the Fund reserves the right to amend or terminate
the Plan as applied to any voluntary cash payments made and any dividend
or distribution paid subsequent to written notice of the change sent to
the Plan members at least 90 days before the record date for such
dividend or distribution. The Plan also may be amended or terminated by
State Street on at least 90 days' written notice to the Plan
participants.
TAXATION
The following discussion is a brief summary of certain
additional 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 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 paid out of net investment income (an "Ordinary Income
Dividend"), 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 calendar year, an amount equal to, at the 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. 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 such 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 Dividend
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.
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 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
capital gain dividends received by the stockholder. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis
of a holder's shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such holder (assuming the shares are held
as a capital asset).
Capital Gain Dividends may be taxed at a lower rate than
ordinary income dividends for certain non-corporate taxpayers. Under recent
legislation, "long-term capital gain" has been broken down into additional
categories of gain, taxable at different rates for individual taxpayers.
These categories include 20% Rate Gain, 28% Rate Gain and certain other
categories of gain that the Fund does not expect to realize. Net 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%. Net 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 its Capital Gain Dividends that constitute mid- term
gain and long-term 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
affecting when capital losses may be offset against capital gains, and
limiting the use of losses from certain investments and activities.
Accordingly, stockholders with capital losses are urged to consult their
tax advisers.
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.
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 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, mid-term or short-term gain or loss, as the case may be. A loss
realized on a sale or exchange of shares of the Fund will be disallowed if
other Fund shares of the same class are acquired within a 61-day period
beginning 30 days before and ending 30 days after the date that the shares
are disposed of. in such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
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
APPLICABLE PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN
EFFECT. FOR THE COMPLETE PROVISIONS, REFERENCE SHOULD BE MADE TO THE
PERTINENT CODE SECTIONS AND THE TREASURY REGULATIONS PROMULGATED
THEREUNDER. THE CODE AND THE TREASURY REGULATIONS ARE SUBJECT TO CHANGE
BY LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY
OR RETROACTIVELY. PERSONS CONSIDERING AN INVESTMENT IN CUMULATIVE
PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
PURCHASE, OWNERSHIP AND DISPOSITION OF CUMULATIVE PREFERRED STOCK.
RATING AGENCY DISCOUNT FACTORS
The following table identifies the Rating Agency Discount
Factors used to discount particular Rating Agency Eligible Assets, as
defined in the Prospectus, for a two-week exposure period.
RATING AGENCY
DISCOUNT
TYPE OF RATING AGENCY ELIGIBLE ASSET: FACTOR:
- ------------------------------------ -------------
Short Term Money Market Instruments (other than U.S.
Government Obligations set forth below) and other
commercial paper:
Demand or time deposits, certificates of deposit
and bankers' acceptances includible in Rating
Agency Short Term Money Market Instruments...........
Commercial paper rated P-1 by The Rating Agency
maturing in 30 days or less..........................
Commercial paper rated P-1 by The Rating Agency
maturing in more than 30 days but in 270 days
or less..............................................
Commercial paper rated A-1+ by S&P maturing in
270 days or less.....................................
Repurchase obligations includible in Rating
Agency Short Term Money Market Instruments if
term is less than 30 days and counterparty
is rated at least A2.................................
Other repurchase obligations...........................
Common stocks..............................................
Convertible preferred stocks...............................
Preferred stocks:
Auction rate preferred stocks..........................
Other preferred stocks issued by issuers in the
financial and industrial industries..................
Other preferred stocks issued by issuers in the
utilities industry...................................
U.S. Government Obligations (other than U.S. Treasury
Securities Strips set forth below) with remaining
terms to maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years of less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
U.S. Treasury Securities Strips with remaining terms
to maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 with
remaining terms to maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness rated Aa3 with
remaining terms to maturity of:
1 year or less.........................................
2 years of less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness rated A3 with
remaining terms to maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness rated at least
Baa3 with remaining terms of maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness rated at least
Ba3 with remaining terms of maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Corporate evidences of indebtedness rated at least
B1 and B2 with remaining terms of maturity of:
1 year or less.........................................
2 years or less........................................
3 years or less........................................
4 years or less........................................
5 years or less........................................
7 years or less........................................
10 years or less.......................................
15 years or less.......................................
20 years or less.......................................
30 years or less.......................................
Convertible corporate evidences of indebtedness with
senior debt securities rated Aa3 Issued by the
following type of issuers:
Utility................................................
Industrial.............................................
Financial..............................................
Transportation.........................................
Convertible corporate evidences of indebtedness with
senior debt securities rated A3 issued by the
following type of issuers:
Utility................................................
Industrial.............................................
Financial..............................................
Transportation.........................................
Convertible corporate evidences of indebtedness with
senior debt securities rated Baa3 issued by the
following type of issuers:
Utility................................................
Industrial.............................................
Financial..............................................
Transportation.........................................
Convertible corporate bonds with senior debt
securities rated Ba3 issued by the following
type of issuers:
Utility................................................
Industrial.............................................
Financial..............................................
Transportation.........................................
Convertible corporate bonds with senior debt
securities rated B1 or B2 issued by the
following type of issuers:
Utility................................................
Industrial.............................................
Financial..............................................
Transportation.........................................
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 only on stock exchanges
are valued at the last sale price as of the close of regular trading on
the day the securities are being valued, or lacking any sales, at the
mean between closing bid and asked prices. Securities traded in the
over-the-counter market which are Nasdaq National Market securities are
valued at the last sale price as of the close of regular trading on the
day the securities are being valued. other over-the-counter securities
are valued at the most recent bid prices as obtained from one or more
dealers that make markets in the securities. Portfolio securities which
are traded both in the over-the-counter market and on a stock exchange
are valued according to the broadest and most representative market, as
determined by the Adviser. Securities traded primarily on foreign
exchanges are valued at the closing values of such securities on their
respective exchanges as of the day the securities are being valued.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund. Short-term
investments that mature in 60 days or less are valued at amortized cost,
unless the Board of Directors of the Fund determines that such valuation
does not constitute fair value.
Net asset value per share is calculated by dividing the value
of the securities held plus any cash or other assets minus all
liabilities, including accrued expenses, 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 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 The Depository Trust Company. Of such shares, 19,831,290
shares, representing 18.9% of the outstanding shares of the Fund, were
held by The Depository Trust Company as nominee for Salomon 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, 1996 and its unaudited Semi-Annual Report for the fiscal period ended
June 30, 1997 (the "Reports") , which either accompany this SAI or have
previously been provided to the person to whom the Prospectus is being
sent, are 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 Reports, upon request to the Fund at One Corporate Center,
Rye, New York 10580 or by telephone at (914) 921-5070.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements(1)
(2)(a)(1) Articles of Incorporation(3)
(2) Articles Supplementary(3)
(b) Amended and Restated By-Laws(3)
(c) Not Applicable
(d) Specimen Stock Certificate(3)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan(3)
(f) Not Applicable
(g) Investment Advisory Agreement(2)
(h)(1) Form of Underwriting Agreement(3)
(2) Form of Master Agreement Among Underwriters(3)
(i) Not Applicable
(j) Custodian Agreement(3)
(k) Not Applicable
(l) Opinion and Consent of Counsel(3)
(m) Not Applicable
(n) Consent of Price Waterhouse LLP(3)
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Financial Data Schedule
- -------------
(1) Incorporated by reference from Registrant's Annual Report for the
year ended December 31, 1996, File No. 811-4700, as filed with the
Securities and Exchange Commission on March 31, 1997.
(2) Incorporated by reference from the Registrant's Registration
Statement on Form N-2, File Nos. 33-62323 and 811-4700, as filed
with the Securities and Exchange Commission on October 13, 1995.
(3) To be filed by amendment.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this Registration Statement:
SEC Registration fees........................... $2,950
New York Stock Exchange listing fee............. _______
Rating Agency fee............................... _______
Printing and engraving expenses................. _______
Auditing fees and expenses...................... _______
Legal fees and expenses......................... _______
Blue Sky fees and expenses...................... _______
Miscellaneous................................... _______
Total..................................... $
========
Item 27. Persons Controlled by or Under Common Control with Registrant
Insofar as the following have substantially identical boards of
directors or trustees they may be deemed with Registrant to be under
common control: The Gabelli Asset Fund, The Gabelli Growth Fund and The
Gabelli Westwood Funds, each a Massachusetts Business Trust, The Gabelli
Money Market Funds, a Delaware Business Trust, The Gabelli Global
Multimedia Trust Inc., The Gabelli Value Fund Inc., The Gabelli Investor
Fund, Inc., Gabelli Capital Series Funds, Inc., The Gabelli Global Series
Funds, Inc., The Gabelli Convertible Securities Fund, Inc., Gabelli
International Growth Fund, Inc., Gabelli Gold Fund, Inc. and Gabelli
Equity Series Funds, Inc., each a Maryland corporation.
Item 28. Number of Holders of Securities as of ________, 1997
Number of
Title of Class Record Holders
-------------- --------------
Capital Stock, par value $.001 per share..... ________
Item 29. Indemnification
Under the Fund's Articles of Incorporation and Amended and Restated
By-Laws, the directors and officers of the Company and Fund will be
indemnified to the fullest extent allowed and in the manner provided by
Maryland law and applicable provisions of the Investment Company Act of
1940, as amended, including advancing of expenses incurred in connection
therewith. Indemnification shall not be provided however to any officer
or director against any liability to the Registrant or its
security-holders to which he or she would otherwise be subject by reasons
of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Insofar as indemnification for liabilities under the Securities Act
of 1933 may be permitted to the directors and officers, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
such Act and is therefore unenforceable. If a claim for indemnification
against such liabilities under the Securities Act of 1933 (other than for
expenses incurred in a successful defense) is asserted against the
Company by the directors or officers in connection with the Shares, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in such Act and will be governed by
the final adjudication of such issue.
Item 30. Business and Other Connections of Adviser
For information as to the business, profession, vocation or
employment of a substantial nature of each of the officers and directors
of Gabelli Funds, Inc., reference is made to the Adviser's current Form
ADV filed under the Investment Advisers Act of 1940, incorporated herein
by reference.
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part
at the office of the Advisor at One Corporate Center, Rye, New York
10580-1434, in part at the offices of the Custodian, State Street Bank
and Trust Company, with offices at 1776 Heritage Drive, North Quincy, MA
02171, at the offices of the Fund's Administrator, First Data Investor
Services, One Exchange Place, Boston, MA 02109, and in part at the
offices of Boston EquiServe, 150 Royall Street, Mail Stop 45-02-62,
Canton, MA 02021.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until
the prospectus is amended, if subsequent to the effective
date of this registration statement, its net asset value
declines more than ten percent from its net asset value, as
of the effective date of the registration statement or its
net asset value increases to an amount greater than its net
proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant
pursuant to Rule 497(h) will be deemed to be a part of the
Registration Statement as of the time it was declared
effective.
Registrant undertakes that, for the purpose of determining
any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be deemed
to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering
thereof.
6. Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information constituting Part B of
this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rye, State of New York on
the 10th day of February, 1998.
THE GABELLI EQUITY TRUST INC.
By: /s/ BRUCE N. ALPERT
Bruce N. Alpert
Vice President and Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears
below nominates, constitutes and appoints Mario J. Gabelli, Bruce N.
Alpert, and James E. McKee (with full power to each of them to act alone)
his true and lawful attorney-in-fact and agent, for him and on his behalf
and in his place and stead in any and all capacities, to make, execute
and sign all amendments and supplements to the Registration Statement on
Form N-2 under the Securities Act of 1933 and the Investment Company Act
of 1940 of THE GABELLI EQUITY TRUST INC. (the "Fund"), and to file with
the Securities and Exchange Commission, and any other regulatory
authority having jurisdiction over the offer and the sale of shares of
the Fund, and any and all amendments and supplements to such Registration
Statement, and any and all exhibits and other documents requisite in
connection therewith, granting unto said attorneys and each of them, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to
all intents and purposes as the undersigned officers and Directors
themselves might or could do.
IN WITNESS WHEREOF, the undersigned officers and Directors have
hereunto set their hands this 10th Day of February, 1998.
Name Title Date
- ---- ----- ----
/s/ MARIO J. GABELLI Chairman of the Board February 10, 1998
Mario J. Gabelli and President
/s/ DR. THOMAS E. BRATTER Director February 10, 1998
Dr. Thomas E. Bratter
/s/ BILL CALLAGHAN Director February 10, 1998
Bill Callaghan
/s/ FELIX J. CHRISTIANA Director February 10, 1998
Felix J. Christiana
/s/ JAMES P. CONN Director February 10, 1998
James P. Conn
/s/ KARL OTTO POHL Director February 10, 1998
Karl Otto Pohl
/s/ ANTHONY R. PUSTORINO Director February 10, 1998
Anthony R. Pustorino
/s/ SALVATORE J. ZIZZA Director February 10, 1998
Salvatore J. Zizza
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit Page
Number Exhibit Number
Exhibit A (1) Articles of Incorporation......................
(2) Articles Supplementary.........................
Exhibit B Amended and Restated By-Laws.......................
Exhibit C Not Applicable.....................................
Exhibit D Specimen Stock Certificate.........................
Exhibit E Automatic Dividend Reinvestment and Voluntary
Cash Purchase Plan
Exhibit F Not Applicable.....................................
Exhibit G Investment Advisory Agreement*.....................
Exhibit H (1) Form of Underwriting Agreement.................
(2) Form of Master Agreement Among Underwriters....
Exhibit I Not Applicable.....................................
Exhibit J Custodian Agreement................................
Exhibit K Not Applicable.....................................
Exhibit L Opinion and Consent of Counsel.....................
Exhibit M Not Applicable.....................................
Exhibit N Consent of Price Waterhouse LLP....................
Exhibit O Not Applicable.....................................
Exhibit P Not Applicable.....................................
Exhibit Q Not Applicable.....................................
Exhibit R Financial Data Schedule............................
- ----------
* Previously filed.
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