<PAGE> 1
PROSPECTUS
108,688,408 RIGHTS FOR 18,114,735 SHARES
[GABELLI EQUITY TRUST LOGO]
THE GABELLI
EQUITY TRUST INC.
COMMON STOCK
The Gabelli Equity Trust Inc. (the "Fund") is issuing transferable rights
("Rights") to its shareholders. These Rights will allow you to subscribe for new
shares of common stock of the Fund. For every six Rights that you receive, you
may buy one new Fund share. You will receive one Right for each outstanding Fund
share you own on January 10, 2001 (the "Record Date"). Fractional shares will
not be issued upon the exercise of the Rights. Accordingly, shares may be
purchased only pursuant to the exercise of Rights in integral multiples of six.
The number of Rights issued to a shareholder on the Record Date will be rounded
up to the nearest number of Rights evenly divisible by six. In the case of
shares of common stock held of record by Cede & Co. ("Cede"), as nominee for the
Depository Trust Company ("DTC"), or any other depository or nominee, the number
of Rights issued to Cede or such other depository or nominee will be adjusted to
permit rounding up (to the nearest number of Rights evenly divisible by six) of
the Rights to be received by beneficial owners for whom it is the holder of
record only if Cede or such other depository or nominee provides to the Fund on
or before the close of business on January 31, 2001 written representation of
the number of Rights required for such rounding. Also, shareholders on the
Record Date may purchase shares not acquired by other shareholders in this
Rights offering (the "Offer"), subject to limitations discussed in this
prospectus.
The Rights are transferable and will be admitted for trading on the New York
Stock Exchange ("NYSE") under the symbol "GAB RT." The Fund's shares of common
stock are listed, and the shares issued pursuant to this Offer will be listed,
on the NYSE under the symbol "GAB." On January 5, 2001 (the last date prior to
the Fund's shares trading ex-Rights), the last reported net asset value per
share of the Fund's shares was $10.99 and the last reported sales price of a
share on the NYSE was $11.44. THE PURCHASE PRICE PER SHARE (the "Subscription
Price") WILL BE $7.00. THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON
February 7, 2001, unless the Offer is extended as described in this Prospectus
(the "Expiration Date").
The Fund is a non-diversified, closed-end management investment company. The
Fund's primary investment objective is long-term growth of capital, primarily
through investing in a portfolio of equity securities selected by Gabelli Funds,
LLC, (the "Investment Adviser"). Income is a secondary objective of the Fund. An
investment in the Fund is not appropriate for all investors. No assurances can
be given that the Fund's objectives will be achieved. FOR A DISCUSSION OF
CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT TO OWNING SHARES OF
THE FUND, SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" ON PAGE 21 OF THIS
PROSPECTUS. The Fund has outstanding a class of preferred stock which has
resulted in a leveraged capital structure. For a discussion of the effects and
certain risks associated with the use of leverage see "Capital Stock -- Effects
of Leverage" on page 31 of this Prospectus. The address of the Fund is One
Corporate Center, Rye, New York 10580 and its telephone number is (914)
921-5070.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIME.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
SUBSCRIPTION PRICE SALES LOAD PROCEEDS TO FUND(1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $7.00 None $7.00
---------------------------------------------------------------------------------------------------------
Total.................................. $126,803,145 None $126,803,145
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deduction of expenses incurred by the Fund, estimated at $500,000.
------------------------
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS SHOULD EXPECT THAT THEY WILL,
AT THE COMPLETION OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN THE FUND
THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFER YOU MAY EXPERIENCE
AN IMMEDIATE DILUTION, WHICH COULD BE SUBSTANTIAL, OF THE AGGREGATE NET ASSET
VALUE OF YOUR SHARES. This is because the Subscription Price per share and/or
the net proceeds to the Fund for each new share sold are likely to be less than
the Fund's net asset value per share on the Expiration Date. The Fund cannot
state precisely the extent of this dilution at this time because the Fund does
not know what the net asset value per share will be when the Offer expires or
what proportion of the Rights will be exercised. The Investment Adviser's parent
company, Gabelli Asset Management Inc. and its affiliates ("Affiliated Parties")
may purchase through the primary subscription and the over-subscription
privilege Shares with an aggregate Subscription Price of up to $20 million. Mr.
Mario J. Gabelli, who may be deemed to control the Fund's investment adviser, or
his affiliated entities may also purchase additional Shares in such manner and
on the same terms as other shareholders.
------------------------
This Prospectus sets forth concisely certain information about the Fund that
a prospective investor should know before investing. Investors are advised to
read and retain it for future reference. A Statement of Additional Information
dated January 10, 2001 (the "SAI") containing additional information about the
Fund has been filed with the SEC and is incorporated by reference in its
entirety into this Prospectus. A copy of the SAI, the table of contents of which
appears on page 36 of this Prospectus, may be obtained without charge by
contacting the Fund at (800) GABELLI ((800) 422-3554) or (914) 921-5070. The SAI
will be sent within two business days of receipt of a request. Shareholder
inquiries should be directed to the Subscription Agent, EquiServe, at (800)
336-6983 or (781) 575-2000.
------------------------
January 10, 2001
<PAGE> 2
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this Prospectus. It may not contain all of the information that is
important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its existing shareholders to increase the assets
of the Fund so that the Fund may be in a better position to take advantage of
investment opportunities that may arise. The Offer seeks to reward existing
shareholders by giving them the opportunity to purchase additional shares at a
price that may be below market and/or net asset value without incurring any
commission charge. The distribution of the Rights, which themselves may have
intrinsic value, will also give non-participating shareholders the potential of
receiving a cash payment upon the sale of their rights, which may be viewed as
partial compensation for the possible dilution of their interests in the Fund as
a result of the Offer.
The Board of Directors believes that increasing the size of the Fund may
lower the Fund's expenses as a proportion of average net assets because the
Fund's fixed costs can be spread over a larger asset base. There can be no
assurance that by increasing the size of the Fund, the Fund's expense ratio will
be lowered. The Board of Directors also believes that a larger number of
outstanding shares and a larger number of beneficial owners of shares could
increase the level of market interest in and visibility of the Fund and improve
the trading liquidity of the Fund's shares on the NYSE.
IMPORTANT TERMS OF THE OFFER
<TABLE>
<S> <C>
Total number of shares available for primary
subscription....................................... 18,114,735
Number of Rights you will receive for each
outstanding share you own on the Record Date....... One Right for every one share*
Number of shares you may purchase with your Rights at
the Subscription Price per share................... One share for every six Rights
Subscription Price................................... $7.00
</TABLE>
---------------
* The number of Rights to be issued to a Shareholder on the Record Date will be
rounded up to the nearest number of Rights evenly divisible by six.
============================================================
Shareholders' inquiries should be directed to:
EquiServe
(800) 336-6983 or (781) 575-2000
============================================================
OVER-SUBSCRIPTION PRIVILEGE
Shareholders on the Record Date who fully exercise all Rights initially
issued to them are entitled to buy those shares that were not bought by other
Rights holders. If enough shares are available, all shareholder requests to buy
shares that were not bought by other Rights holders will be honored in full. If
the requests for shares exceed the shares available, the available shares will
be allocated pro rata among those shareholders on the Record Date who
over-subscribe based on the number of Rights originally issued to them by the
Fund. Shares acquired pursuant to the over-subscription privilege are subject to
allotment, which is more fully discussed under "The Offer -- Over-Subscription
Privilege."
2
<PAGE> 3
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the Rights
("Subscription Certificates") will be sent to Record Date shareholders or their
nominees. If you wish to exercise your Rights, you may do so in the following
ways:
(1) Complete and sign the Subscription Certificate. Mail it in the
envelope provided or deliver it, together with payment in full to
EquiServe, Boston, Massachusetts (the "Subscription Agent") at the address
indicated on the Subscription Certificate. Your completed and signed
Subscription Certificate and payment must be received by the Expiration
Date.
(2) Contact your broker, banker or trust company, which can arrange,
on your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a notice of
guaranteed delivery ("Notice of Guaranteed Delivery") by the close of
business on the third business day after the Expiration Date. A fee may be
charged for this service. The Notice of Guaranteed Delivery must be
received by the Expiration Date.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received payment. See "The Offer -- Method of Exercise of
Rights" and "The Offer -- Payment for Shares."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date and have been
admitted for trading on the NYSE. Although no assurance can be given that a
market for the Rights will develop, trading in the Rights on the NYSE will begin
three Business Days prior to the Record Date and may be conducted until the
close of trading on the last NYSE trading day prior to the Expiration Date. The
value of the Rights, if any, will be reflected by the market price. Rights may
be sold by individual holders or may be submitted to the Subscription Agent for
sale. Any Rights submitted to the Subscription Agent for sale must be received
by the Subscription Agent on or before February 6, 2001, one business day prior
to the Expiration Date, due to normal settlement procedures. Trading of the
Rights on the NYSE will be conducted on a when-issued basis until and including
the date on which the Subscription Certificates are mailed to Record Date
shareholders and thereafter will be conducted on a regular way basis until and
including the last NYSE trading day prior to the Expiration Date. The shares
will begin trading ex-Rights two Business Days prior to the Record Date. If the
Subscription Agent receives Rights for sale in a timely manner, it will use its
best efforts to sell the Rights on the NYSE. The Subscription Agent will also
attempt to sell any Rights a Rights holder is unable to exercise because the
Rights represent the right to subscribe for less than one Share. Any commissions
will be paid by the selling Rights holders. Neither the Fund nor the
Subscription Agent will be responsible if Rights cannot be sold and neither has
guaranteed any minimum sales price for the Rights. For purposes of this
Prospectus, a "Business Day" shall mean any day on which trading is conducted on
the NYSE.
================================================================================
Shareholders are urged to obtain a recent trading price for the Rights on the
New York Stock Exchange from their broker, bank, financial advisor or the
financial press.
================================================================================
OFFERING FEES AND EXPENSES
Offering expenses incurred by the Fund are estimated to be $500,000.
RESTRICTIONS ON FOREIGN SHAREHOLDERS
The Fund will not mail Subscription Certificates to shareholders whose
record addresses are outside the United States and the Provinces of Quebec and
Ontario, Canada or who have an APO or FPO address. Shareholders whose addresses
are outside the United States and the Provinces of Quebec and Ontario, Canada or
who have an APO or FPO address and who wish to subscribe to the Offer either
partially or in full should contact the Subscription Agent, EquiServe, by
written instruction or recorded telephone conversation no later than three
Business Days prior to the Expiration Date. If the Subscription Agent has
received no instruction by such date, the Subscription Agent will attempt to
sell all Rights and remit the net proceeds, if any, to such shareholders. If the
Rights can be sold, sales of these Rights will be deemed to have been effected
3
<PAGE> 4
at the weighted average price received by the Subscription Agent on the day the
Rights are sold, less any applicable brokerage commissions, taxes and other
expenses.
USE OF PROCEEDS
We estimate the net proceeds of the Offer to be approximately $126,303,145.
This figure is based on the Subscription Price per share of $7.00 and assumes
all shares offered are sold and that the expenses related to the Offer estimated
at approximately $500,000 are paid.
Gabelli Funds, LLC (together with its predecessor, Gabelli Group Capital
Partners, Inc., formerly named Gabelli Funds, Inc., the "Investment Adviser")
anticipates that it will take approximately six months for the Fund to invest
these proceeds in accordance with its investment objective and policies under
current market conditions. Pending investment, the proceeds will be invested in
certain short-term debt instruments.
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change if the Offer is
extended.
<TABLE>
<CAPTION>
EVENT DATE
----- ------------------------------------------
<S> <C>
Record Date................................ January 10, 2001
Subscription Period........................ January 10, 2001 through February 7, 2001**
Expiration of the Offer*................... February 7, 2001**
Payment for Guarantees of Delivery Due*.... February 12, 2001**
Confirmation to Participants............... February 21, 2001**
</TABLE>
---------------
* A shareholder exercising Rights must deliver by February 7, 2001 either (a) a
Subscription Certificate and payment for shares or (b) a Notice of Guaranteed
Delivery.
** Unless the offer is extended to a date no later than February 21, 2001.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a non-diversified, closed-end
management investment company since August 21, 1986. The Fund's primary
investment objective is long-term growth of capital, primarily through
investment in a portfolio of equity securities selected by the Investment
Adviser. Equity securities in which the Fund may invest include common stock,
preferred stock, convertible securities and rights and warrants 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 is listed and
traded on the NYSE. The average weekly trading volume of the Fund's common stock
on the NYSE during the period from January 1, 2000 through December 31, 2000 was
108,917 shares. As of December 31, 2000, the net assets of the Fund were
approximately $1,304 million.
INFORMATION REGARDING THE INVESTMENT ADVISER
The Investment Adviser has served as the investment adviser to the Fund
since its inception. The Investment Adviser also provides certain administrative
services to the Fund. Mr. Mario J. Gabelli, the Chairman of the Board,
President, Chief Executive Officer, Chief Investment Officer and indirect
majority shareholder of the Investment Adviser, has been engaged in the business
of providing investment advisory and portfolio management services for over 23
years and is currently affiliated with investment advisers which, as of December
31, 2000, managed total assets of approximately $23.5 billion. The Fund pays the
Investment Adviser a monthly fee at the annual rate of 1.00% of the Fund's
average weekly net assets. See "Management of the Fund -- Investment Adviser."
Since the Investment Adviser's fees are based on the net assets of the Fund, the
Investment Adviser will benefit from the Offer. In addition, two Directors who
are "interested persons" of the Fund could benefit indirectly from the Offer
because of their interests in the Investment Adviser. See "The Offer -- Purpose
of the Offer."
4
<PAGE> 5
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes some of the matters that you should consider
before investing in the Fund through the Offer.
Dilution...................... Shareholders who do not exercise their Rights
should expect that they will, at the completion
of the Offer, own a smaller proportional
interest in the Fund than if they exercised
their Rights. As a result of the Offer you may
experience an immediate dilution, which could
be substantial, of the aggregate net asset
value of your shares. This is because the
Subscription Price per share and/or the net
proceeds to the Fund for each new share sold
are likely to be less than the Fund's net asset
value per share on the Expiration Date. The
Fund cannot state precisely the extent of this
dilution at this time because the Fund does not
know what the net asset value per share will be
when the Offer expires or what proportion of
the Rights will be exercised. For example,
assuming that all Rights are exercised and the
Subscription Price is $7.00, which is 36.3%
below the Fund's net asset value per share of
$10.99 per share as of January 5, 2001, the
Fund's net asset value per share (after payment
of estimated offering expenses) would be
reduced by approximately $0.57 per share (or
5.1%). See "Risk Factors and Special
Considerations -- Dilution."
If you do not wish to exercise your Rights, you
should consider selling these Rights as set
forth in this Prospectus. Any cash you receive
from selling your Rights should serve as
partial compensation for any possible dilution
of your interest in the Fund. The Fund cannot
give any assurance, however, that a market for
the Rights will develop or that the Rights will
have any marketable value.
Discount From Net Asset
Value......................... Shares of closed-end funds frequently trade at
a market price that is less then the value of
the net assets attributable to those shares.
The possibility that shares of the Fund will
trade at a discount from net asset value is a
risk separate and distinct from the risk that
the Fund's net asset value will decrease. The
risk of purchasing shares of a closed-end fund
that might trade at a discount is more
pronounced for investors who wish to sell their
shares in a relatively short period of time
because, for those investors, realization of a
gain or loss on their investments is likely to
be more dependent upon the existence of a
premium or discount than upon portfolio
performance. See "Capital Stock."
Repurchase and Charter
Provisions.................... You will be free to dispose of your shares on
the NYSE or other markets on which the shares
may trade, but, because the Fund is a
closed-end fund, you do not have the right to
redeem your Shares. The Fund is authorized to
repurchase its shares on the open market when
the shares are trading at a discount of 10% or
more from net asset value. Certain provisions
of the Fund's Articles of Incorporation and
By-Laws may be regarded as "anti-takeover"
provisions. These provisions include a system
in which only one of three classes of Directors
is elected each year and the requirement that
the affirmative vote of the holders of 66 2/3%
of the outstanding shares of each class of the
Fund is necessary to authorize the
5
<PAGE> 6
conversion of the Fund from a closed-end to an
open-end investment company or generally to
authorize certain business transactions with
the beneficial owner of more than 5% of the
outstanding shares of the Fund. The Fund
currently has a class of preferred stock
outstanding and, as required by law, the
conversion of the Fund from a closed-end
investment company to an open-end investment
company would require the approval of a
"majority" of the shareholders, as defined in
the Investment Company Act of 1940, as amended
(the "1940 Act"), of the outstanding shares of
preferred stock as well. The overall effect of
these provisions is to render more difficult
the accomplishment of a merger or the
assumption of control by a principal
shareholder. These provisions may have the
effect of depriving you of an opportunity to
sell your shares at a premium above the
prevailing market price. See "Capital
Stock -- Certain Provisions of the Articles of
Incorporation and By-Laws."
Non-Diversified Status........ As a non-diversified investment company under
the 1940 Act, the Fund is not limited in the
proportion of its assets that may be invested
in securities of a single issuer. As a result
of investing a greater portion of its assets in
the securities of a smaller number of issuers,
the Fund may be more vulnerable to events
affecting a single issuer and therefore subject
to greater volatility than a fund that is more
broadly diversified. Accordingly, an investment
in the Fund may, under some circumstances,
present greater risk to an investor than an
investment in a diversified company. See "Risk
Factors and Special
Considerations -- Non-Diversified Status."
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 generally are denominated in
foreign currencies, may involve certain risk
and opportunity considerations not typically
associated with investing in domestic companies
and could cause the 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."
Dependence on Key Personnel... The Investment Adviser is dependent upon the
expertise of Mr. Mario J. Gabelli in providing
advisory services with respect to the Fund's
investments. If the Investment Adviser were to
lose the services of Mr. Gabelli, its ability
to service the Fund could be adversely
affected. There can be no assurance that a
suitable replacement could be found for Mr.
Gabelli in the event of his death, resignation,
retirement or inability to act on behalf of the
Investment Adviser.
You should carefully consider your ability to assume the foregoing risks
before making an investment in the Fund. An investment in shares of the Fund is
not appropriate for all investors.
6
<PAGE> 7
FEE TABLE
The following table sets forth certain fees and expenses of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).............. 0%
Automatic Dividend Reinvestment and Cash Purchase Plan
Fees(a)................................................... $0.75
ANNUAL EXPENSES (as a percentage of net assets attributable
to common shares)
Management Fees............................................. 1.00%
Other Expenses.............................................. 0.27%
TOTAL ANNUAL EXPENSES....................................... 1.27%
</TABLE>
---------------
(a) A fee of $0.75 is charged with respect to each purchase by a participant in
the Fund's Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan
(the "Plan"). A fee of $2.50 is charged in connection with the sale of
shares that are held in book-entry form, such as shares held by a
shareholder through the Plan. See "Dividends and Distributions; Automatic
Dividend Reinvestment and Voluntary Cash Purchase Plan."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment assuming a 5% annual return(b).............. $13 $40 $70 $153
</TABLE>
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(b) Amounts are exclusive of fees discussed in Note (a) above.
THE PURPOSE OF THE FOREGOING TABLE AND EXAMPLE IS TO ASSIST RIGHTS HOLDERS
IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND
BEARS, DIRECTLY OR INDIRECTLY, BUT SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR RATES OF RETURN. THE ACTUAL EXPENSES OF THE FUND MAY
BE GREATER OR LESS THAN THOSE SHOWN. The figures provided under "Other Expenses"
are based upon estimated amounts for the current fiscal year. For more complete
descriptions of certain of the Fund's cost and expenses, see "Management of the
Fund" in this Prospectus and the SAI.
7
<PAGE> 8
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of Common
Stock outstanding throughout the period presented. The per share operating
performance and ratios for the period ended December 31, 1999 have been audited
by PricewaterhouseCoopers LLP, the Fund's independent accountants, as stated in
their report which is incorporated by reference into the SAI. The following
information should be read in conjunction with the Financial Statements and
Notes thereto, which are incorporated by reference into the SAI.
SELECTED DATA FOR AN EQUITY TRUST COMMON SHARE OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000(a) ------------------------------------------------------------------
(UNAUDITED) 1999(a) 1998(a) 1997(a) 1996(a) 1995(a)
---------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 12.75 $ 11.47 $ 11.56 $ 9.77 $ 9.95 $ 9.46
---------- ---------- ---------- ---------- ---------- ----------
Net investment income.................. 0.02 0.04 0.07 0.08 0.11 0.13
Net realized and unrealized gain(loss)
on investments....................... (0.12) 3.25 1.09 2.75 0.71 1.74
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations....... (0.10) 3.29 1.16 2.83 0.82 1.87
---------- ---------- ---------- ---------- ---------- ----------
Decrease in net asset value from Equity
Trust share transactions............. -- -- -- -- -- (0.37)
Offering expenses charged to capital
surplus.............................. -- -- (0.04) -- -- (0.01)
DISTRIBUTIONS TO COMMON STOCK
SHAREHOLDERS:
Net investment income.................. (0.02) (0.03)(c) (0.06) (0.08) (0.11) (0.13)(b)
In excess of net investment income..... -- -- -- (0.00)(d) -- --
Net realized gain on investments....... (0.52) (1.21)(c) (1.10) (0.92) (0.78) (0.47)(b)
In excess of net realized gain on
investments.......................... -- -- -- (0.01) (0.00)(d) (0.02)
Paid-in capital........................ -- (0.68)(c) -- (0.03) (0.11) (0.38)(b)
DISTRIBUTIONS TO PREFERRED STOCK
SHAREHOLDERS:
Net investment income.................. (0.00)(d) (0.00)(d) (0.00)(d) -- -- --
Net realized gain on investments....... (0.04) (0.09) (0.05) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions.................... (0.58) (2.01) (1.21) (1.04) (1.00) (1.00)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD........... $ 12.07 $ 12.75 $ 11.47 $ 11.56 $ 9.77 $ 9.95
========== ========== ========== ========== ========== ==========
Market value, end of period............ $ 12.19 $ 12.56 $ 11.56 $ 11.69 $ 9.38 $ 9.38
========== ========== ========== ========== ========== ==========
Net asset value total return++......... (1.06)% 29.49% 9.55% 30.46% 9.00% 20.60%
========== ========== ========== ========== ========== ==========
TOTAL INVESTMENT RETURN+................. 1.39% 26.57% 9.23% 37.46% 11.00% 11.70%
========== ========== ========== ========== ========== ==========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO
COMMON STOCK SHAREHOLDERS AND
SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)... $1,429,916 $1,503,641 $1,352,190 $1,210,570 $1,015,437 $1,034,091
Net assets attributable to common
shares, end of period (in 000's)..... $1,295,526 $1,368,981 $1,217,190 $1,210,570 $1,015,437 $1,034,091
Ratio of net investment income to
average net assets attributable to
common stock......................... 0.34%(g) 0.34% 0.60% 0.76% 1.07% 1.26%
Ratio of operating expenses to average
net assets attributable to common
stock................................ 1.25%(g) 1.27% 1.15% 1.14% 1.18% 1.21%
Ratio of operating expenses to average
total net assets(f).................. 1.13%(g) 1.15% 1.09% 1.14% 1.18% 1.21%
Portfolio turnover rate................ 15.7% 38.0% 39.8% 39.2% 18.9% 25.1%
PREFERRED STOCK:
Liquidation value, end of period (in
000's)............................... $ 134,390 $ 134,660 $ 135,000 -- -- --
Total shares outstanding (in 000's).... 5,376 5,386 5,400 -- -- --
Asset coverage......................... 1,064% 1,117% 1,001% -- -- --
Liquidation preference per share....... $ 25.00 $ 25.00 $ 25.00 -- -- --
Average market value(e)................ $ 22.19 $ 24.43 $ 25.63 -- -- --
</TABLE>
---------------
+ Based on market value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to previous
rights offering, assuming full subscription by shareholder.
++ Based on net asset value per share, adjusted for reinvestment of
distributions, including the effect of shares issued pursuant to previous
rights offering, assuming full subscription by shareholder.
(a) Per share amounts have been calculated using the monthly average shares
outstanding method.
(b) A distribution equivalent to $0.75 per share for The Gabelli Global
Multimedia Trust Inc. spin-off from net investment income, realized
short-term gains, and paid-in capital were $0.064, $0.031, and $0.655,
respectively.
(c) A distribution equivalent to $0.75 per share for the Gabelli Utility Trust
spin-off from net investment income, realized short-term gains, realized
long-term gains, and paid-in capital were $0.01029, $0.07453, $0.34218 and
$0.32300, respectively.
(d) Amount represents less than $0.005 per share.
(e) Based on weekly prices.
(f) Amounts are attributable to both common and preferred stock assets. Prior
to 1998, there was no preferred stock outstanding.
(g) Annualized.
8
<PAGE> 9
THE OFFER
TERMS OF THE OFFER
The Fund is issuing to shareholders on the Record Date ("Record Date
Shareholders") Rights to subscribe for the shares (the "Shares") of the Fund's
Common Stock ("Common Stock"). Each Record Date Shareholder is being issued one
transferable Right for each share of Common Stock owned on the Record Date. The
Rights entitle the holder to acquire at the Subscription Price one Share for
each six Rights held. Fractional shares will not be issued upon the exercise of
the Rights. Accordingly, shares may be purchased only pursuant to the exercise
of Rights in integral multiples of six. The number of Rights issued to a
shareholder on the Record Date will be rounded up to the nearest number of
Rights evenly divisible by six. In the case of shares of common stock held of
record by Cede & Co. ("Cede"), as nominee for the Depository Trust Company
("DTC"), or any other depository or nominee, the number of Rights issued to Cede
or such other depository or nominee will be adjusted to permit rounding up (to
the nearest number of Rights evenly divisible by six) of the Rights to be
received by beneficial owners for whom it is the holder of record only if Cede
or such other depository or nominee provides to the Fund on or before the close
of business on January 31, 2001 written representation of the number of Rights
required for such rounding. Rights may be exercised at any time during the
period (the "Subscription Period"), which commences on January 10, 2001, and
ends at 5:00 p.m., New York time, on February 7, 2001, unless extended by the
Fund to a date not later than February 21, 2001, 5:00 p.m., New York time. See
"Expiration of the Offer." The Right to acquire one additional Share for each
six Rights held during the Subscription Period at the Subscription Price is
hereinafter referred to as the "Primary Subscription."
In addition, any Record Date Shareholder who fully exercises all Rights
initially issued to him is entitled to subscribe for Shares that were not
otherwise subscribed for by others on Primary Subscription (the
"Over-Subscription Privilege"). For purposes of determining the maximum number
of Shares a Record Date Shareholder may acquire pursuant to the Offer,
broker-dealers whose shares are held of record by Cede & Co., Inc. ("Cede"),
nominee for The Depository Trust Company, or by any other depository or nominee,
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf. Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed below under "Over-Subscription Privilege."
Officers of the Investment Adviser have advised the Fund that the
Affiliated Parties, as Record Date Shareholders, have been authorized to
purchase through the Primary Subscription and the Over-Subscription Privilege
underlying Shares with an aggregate Subscription Price of up to $20 million to
the extent the Shares become available to it in accordance with the Primary
Subscription and the allotment provisions of the Over-Subscription Privilege. In
addition, Mario J. Gabelli individually or his affiliated entities, as a Record
Date Shareholder, may also purchase Shares through the Primary Subscription and
the Over-Subscription Privilege. Such over-subscriptions by the Affiliated
Parties and Mr. Gabelli may disproportionately increase their already existing
ownership resulting in a higher percentage ownership of outstanding shares of
the Fund. Any Shares so acquired by the Affiliated Parties or Mr. Gabelli, as
"affiliates" of the Fund as that term is defined under the Securities Act of
1933, as amended (the "Securities Act"), may only be sold in accordance with
Rule 144 under the Securities Act or another applicable exemption or pursuant to
an effective registration statement under the Securities Act. In general, under
Rule 144, as currently in effect, an "affiliate" of the Fund is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly reported trading volume of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Fund. In addition, any
profit resulting from the sale of Shares so acquired, if the Shares are held for
a period of less than six months, will be returned to the Fund.
Rights will be evidenced by Subscription Certificates. The number of Rights
issued to each holder will be stated on the Subscription Certificates delivered
to the holder. The method by which Rights may be exercised and Shares paid for
is set forth below in "Method of Exercise of Rights" and "Payment for Shares." A
Rights
9
<PAGE> 10
holder will have no right to rescind a purchase after the Subscription Agent has
received payment. See "Payment for Shares" below. Shares issued pursuant to an
exercise of Rights will be listed on the NYSE.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the NYSE. Assuming a market exists for the Rights, the Rights may
be purchased and sold through usual brokerage channels and sold through
EquiServe, Boston, Massachusetts (the "Subscription Agent"). Although no
assurance can be given that a market for the Rights will develop, trading in the
Rights on the NYSE will begin three Business Days before the Record Date and may
be conducted until the close of trading on the last Exchange trading day prior
to the Expiration Date. Trading of the Rights on the NYSE will be conducted on a
when-issued basis until and including the date on which the Subscription
Certificates are mailed to Record Date Shareholders and thereafter will be
conducted on a regular way basis until and including the last NYSE trading day
prior to the Expiration Date. The method by which Rights may be transferred is
set forth below in "Method of Transferring Rights." The Common Stock will begin
trading ex-Rights two Business Days prior to the Record Date. For purposes of
this Prospectus, a "Business Day" shall mean any day on which trading is
conducted on the NYSE.
Nominees who hold shares of the Fund's common stock for the account of
others, such as banks, brokers, trustees or depositories for securities, should
notify the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with proper payment. In addition, beneficial owners of the Fund's common stock
or Rights held through such a nominee should contact the nominee and request the
nominee to effect transactions in accordance with the beneficial owner's
instructions.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and the shareholders to increase the assets of the
Fund available for investment thereby permitting the Fund to be in a better
position to more fully take advantage of investment opportunities that may
arise. The Offer seeks to reward existing shareholders by giving them the right
to purchase additional shares at a price that may be below market and/or net
asset value without incurring any commission charge. The distribution to
shareholders of transferable Rights, which themselves may have intrinsic value,
will also afford non-subscribing shareholders the potential of receiving a cash
payment upon sale of such Rights, receipt of which may be viewed as partial
compensation for the possible dilution of their interests in the Fund.
The Fund's Investment Adviser will benefit from the Offer because the
Investment Adviser's fee is based on the average net assets of the Fund. See
"Management of the Fund." It is not possible to state precisely the amount of
additional compensation the Investment Adviser will receive as a result of the
Offer because the proceeds of the Offer will be invested in additional portfolio
securities which will fluctuate in value. However, assuming all Rights are
exercised and that the Fund receives the maximum proceeds of the Offer, the
annual compensation to be received by the Investment Adviser would be increased
by approximately $1.27 million. Two of the Fund's Directors including Mario J.
Gabelli who voted to authorize the Offer are "interested persons" of the
Investment Adviser within the meaning of the 1940 Act and may benefit indirectly
from the Offer because of their interest in the Investment Adviser. See
"Management of the Fund" in the SAI. While it was cognizant of the possible
participation of the Affiliated Parties and Mr. Gabelli in the Offer as
shareholders, the Fund's Board of Directors nevertheless concluded that the
Offer was in the best interest of shareholders, since all shareholders of the
Fund are treated equally under the terms of the Offer.
In October 1991, September 1992, July 1993 and October 1995, the Fund
issued transferable rights to stockholders entitling the holders thereof to
subscribe for an aggregate of 7,882,562 shares, 9,563,615 shares, 11,654,962 and
14,931,831 shares, respectively, of the Fund's Common Stock at the rate of one
share of Common Stock for each six rights held and entitling stockholders to
subscribe for any shares not acquired by exercise of primary subscription
rights. The subscription price in each of the offerings was $8.00 per share,
representing a discount to the prevailing net asset value of the Fund's Common
Stock at the time of the offer of approximately 23.8% in the 1991 offering,
24.7% in the 1992 offering, 29.7% in the 1993 offering, 13.5% in
10
<PAGE> 11
the 1995 offering and a discount from market value of approximately 22.1% in
each offering. Each of the rights offerings was substantially oversubscribed,
resulting in the issuance of the maximum number of shares being offered. The
Fund raised $63,060,496 in the 1991 offering, $76,508,920 in the 1992 offering,
$93,239,712 in the 1993 offering and $119,451,048 in the 1995 offering, while
subscriptions remitted to the Fund totaled more than $136,000,000, $164,000,000,
$176,000,000, and $200,000,000, respectively. As a percentage of the shares
outstanding on the record dates for the offering, more than 91% participated in
the 1991 offering, more than 92% participated in the 1992 offering, more than
93% participated in the 1993 offering and more than 88% participated in the 1995
offering. The Fund's net asset value per share immediately following the 1995
rights offering was reduced by approximately $0.37 per share. In the calendar
year following the 1995 rights offering, the Fund's annualized expense ratio was
1.18%.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act. Under the laws of
Maryland, the state in which the Fund is incorporated, the Board of Directors is
authorized to approve rights offerings without obtaining shareholder approval.
The staff of the Securities and Exchange Commission ("SEC") has interpreted the
1940 Act as not requiring shareholder approval of a rights offering at a price
below the then current net asset value so long as certain conditions are met,
including a good faith determination by the fund's board of directors that such
offering would result in a net benefit to existing shareholders.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised, any Shares for
which subscriptions have not been received will be offered, by means of the
Over-Subscription Privilege, to Record Date Shareholders who have exercised all
the Rights initially issued to them and who wish to acquire more than the number
of Shares for which the Rights issued to them are exercisable. Record Date
Shareholders who exercise all the Rights initially issued to them will have the
opportunity to indicate on the Subscription Certificate how many Shares they are
willing to acquire pursuant to the Over-Subscription Privilege. If sufficient
Shares remain after the Primary Subscriptions have been exercised, all
over-subscriptions will be honored in full. If sufficient Shares are not
available to honor all over-subscriptions, the available Shares will be
allocated among those who over-subscribe based on the number of Rights
originally issued to them by the Fund. The percentage of remaining Shares each
over-subscribing shareholder may acquire will be rounded down to result in
delivery of whole Shares. The allocation process may involve a series of
allocations in order to assure that the total number of Shares available for
over-subscriptions is distributed on a pro rata basis.
The method by which Shares will be distributed and allocated pursuant to
the Over-Subscription Privilege is as follows. Shares will be available for
purchase pursuant to the Over-Subscription Privilege only to the extent that the
maximum number of Shares is not subscribed for through the exercise of the
Primary Subscription by the Expiration Date. If the Shares so available ("Excess
Shares") are not sufficient to satisfy all subscriptions pursuant to the
Over-Subscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional Shares) among those holders of Rights
exercising the Over-Subscription Privilege, in proportion, not to the number of
Shares requested pursuant to the Over-Subscription Privilege, but to the number
of shares held on the Record Date; provided, however, that if this pro rata
allocation results in any holder being allocated a greater number of Excess
Shares than the holder subscribed for pursuant to the exercise of such holder's
Over-Subscription Privilege, then such holder will be allocated only such number
of Excess Shares as such holder subscribed for and the remaining Excess Shares
will be allocated among all other holders exercising Over-Subscription
Privileges. The formula to be used in allocating the Excess Shares is as
follows:
<TABLE>
<S> <C> <C>
Holder's Record Date Position
-------------------------------
Total Record Date Position X Excess Shares Remaining
of All Over-Subscribers
</TABLE>
The Fund will not offer or sell any Shares which are not subscribed for
under the Primary Subscription or the Over-Subscription Privilege.
11
<PAGE> 12
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be $7.00.
The Fund announced the Offer on August 31, 2000. The net asset value per
share of Common Stock at the close of business on August 30, 2000 and January 5,
2001 (the last date prior to the Fund's Shares trading ex-Rights), was $12.42
and $10.99, respectively. The last reported sale price of a share of the Fund's
Common Stock on the NYSE on those dates was $12.44 and $11.44, respectively,
representing a 0.14% and a 4.07% premium, respectively, in relation to the net
asset value per share of Common Stock at the close of business on these dates.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who do not wish to exercise any or all of their Rights
may instruct the Subscription Agent to sell any unexercised Rights. The
Subscription Certificates representing the Rights to be sold by the Subscription
Agent must be received on or before February 6, 2001. Upon the timely receipt of
appropriate instructions to sell Rights, the Subscription Agent will use its
best efforts to complete the sale and will remit the proceeds of sale, net of
commissions, to the holders. If the Rights can be sold, sales of the Rights will
be deemed to have been effected at the weighted average price received by the
Subscription Agent on the day such Rights are sold. The selling Rights holder
will pay all brokerage commissions incurred by the Subscription Agent. These
sales may be effected by the Subscription Agent through Gabelli & Company, Inc.,
a registered broker-dealer and an affiliate of the Investment Adviser, for up to
$0.02 per Right, provided that, if the Subscription Agent is able to negotiate a
lower brokerage commission with an independent broker, the Subscription Agent
will execute these sales through the broker. Gabelli & Company, Inc. may also
act on behalf of its clients to purchase or sell Rights in the open market and
be compensated therefor. The Subscription Agent will automatically attempt to
sell any unexercised Rights that remain unclaimed as a result of Subscription
Certificates being returned by the postal authorities as undeliverable as of the
fourth Business Day prior to the Expiration Date. These sales will be made net
of commissions on behalf of the nonclaiming shareholders. Proceeds from those
sales will be held by State Street Bank and Trust Company ("State Street"), in
its capacity as the Fund's transfer agent, for the account of the nonclaiming
shareholder until the proceeds are either claimed or escheated. There can be no
assurance that the Subscription Agent will be able to complete the sale of any
of these Rights and neither the Fund nor the Subscription Agent has guaranteed
any minimum sales price for the Rights. All of these Rights will be sold at the
market price, if any, on the NYSE or through an unaffiliated market maker if no
market exists on the NYSE.
METHOD OF TRANSFERRING RIGHTS
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register the portion of the
Rights evidenced thereby in the name of the transferee (and to issue a new
Subscription Certificate to the transferee evidencing the transferred Rights).
In this event, a new Subscription Certificate evidencing the balance of the
Rights will be issued to the Rights holder or, if the Rights holder so
instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow at least three Business Days prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained rights, if any, and (iii) the
Rights evidenced by the new Subscription Certificates to be exercised or sold by
the recipients thereof. Neither the Fund nor the Subscription Agent shall have
any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
12
<PAGE> 13
Except for the fees charged by the Subscription Agent (which will be paid
by the Fund as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of these commissions, fees or expenses will
be paid by the Fund or the Subscription Agent.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription and Over-Subscription may be
effected through, the facilities of DTC (Rights exercised through DTC are
referred to as "DTC Exercised Rights").
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York time, on February 7, 2001,
unless extended by the Fund to a date not later than February 21, 2001, 5:00
p.m., New York time (the "Expiration Date"). Rights will expire on the
Expiration Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is EquiServe, Att: Corporate Actions, P.O. Box 9573,
Boston, Massachusetts 02205-9573. The Subscription Agent will receive from the
Fund an amount estimated to be $125,000 comprised of the fee for its services
and the reimbursement for certain expenses related to the Offer. INQUIRIES BY
ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO P.O. BOX 9573, BOSTON, MASSACHUSETTS
02205-9573 (TELEPHONE (800) 336-6983 OR (781) 575-2000); HOLDERS MAY ALSO
CONSULT THEIR BROKERS OR NOMINEES.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side of the
Subscription Certificate and mailing it in the envelope provided, or otherwise
delivering the completed and signed Subscription Certificate to the Subscription
Agent, together with payment for the Shares as described below under "Payment
for Shares." Rights may also be exercised through a Rights holder's broker, who
may charge the Rights holder a servicing fee in connection with such exercise.
Completed Subscription Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York time, on the Expiration Date (unless payment
is effected by means of a notice of guaranteed delivery as described below under
"Payment for Shares"). The Subscription Certificate and payment should be
delivered to EquiServe at the following address:
<TABLE>
<S> <C>
If By Mail: EquiServe
Att: Corporate Actions
P.O. Box 9573
Boston, MA 02205-9573
If By Hand: Securities Transfer and Reporting Services, Inc.
c/o EquiServe
100 Williams St. Galleria
New York, NY 10038
If By Overnight
Courier: EquiServe
Att: Corporate Actions
40 Campanelli Drive
Braintree, MA 02184
</TABLE>
13
<PAGE> 14
PAYMENT FOR SHARES
Holders of Rights who acquire Shares on Primary Subscription or pursuant to
the Over-Subscription Privilege may choose between the following methods of
payment:
(1) A subscription will be accepted by the Subscription Agent if,
prior to 5:00 p.m., New York time, on the Expiration Date, the Subscription
Agent has received a notice of guaranteed delivery by telegram or otherwise
from a bank, a trust company, or a NYSE member, guaranteeing delivery of
(i) payment of the full Subscription Price for the Shares subscribed for on
Primary Subscription and any additional Shares subscribed for pursuant to
the Over-Subscription Privilege and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a notice of
guaranteed delivery if a properly completed and executed Subscription
Certificate and full payment is not received by the Subscription Agent by
the close of business on the third Business Day after the Expiration Date.
The notice of guaranteed delivery may be delivered to the Subscription
Agent in the same manner as Subscription Certificates at the addresses set
forth above, or may be transmitted to the Subscription Agent by facsimile
transmission (telecopy number (781) 575-4826; telephone number to confirm
receipt (781) 575-4816).
(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of a check for the Shares
subscribed for on Primary Subscription and additional Shares subscribed for
pursuant to the Over-Subscription Privilege to the Subscription Agent based
on the Subscription Price of $7.00 per Share. To be accepted, the payment,
together with the executed Subscription Certificate, must be received by
the Subscription Agent at the addresses noted above prior to 5:00 p.m., New
York time, on the Expiration Date. The Subscription Agent will deposit all
stock purchase checks received by it prior to the final due date into a
segregated interest-bearing account pending proration and distribution of
Shares. The Subscription Agent will not accept cash as a means of payment
for Shares. EXCEPT AS OTHERWISE SET FORTH BELOW, A PAYMENT PURSUANT TO THIS
METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A
BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO THE
GABELLI EQUITY TRUST INC., AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. If the aggregate Subscription Price paid by a
Record Date Shareholder is insufficient to purchase the number of shares of
Common Stock that the holder indicates are being subscribed for, or if a
Record Date Shareholder does not specify the number of shares of Common
Stock to be purchased, then the Record Date Shareholder will be deemed to
have exercised first, the Primary Subscription Rights (if not already fully
exercised) and second, the Over-Subscription Privilege to the full extent
of the payment tendered. If the aggregate Subscription Price paid by a
Record Date Shareholder is greater than the shares he has indicated an
intention to subscribe, then the Record Date Shareholder will be deemed to
have exercised first, the Primary Subscription Rights (if not already fully
subscribed) and second, the Over-Subscription Privilege to the full extent
of the excess payment tendered.
Within ten Business Days following the Expiration Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to each holder of
Rights (or, if the Fund's shares are held by Cede or any other depository or
nominee, to Cede or such other depository or nominee), showing (i) the number of
Shares acquired pursuant to the Primary Subscription, (ii) the number of Shares,
if any, acquired pursuant to the Over-Subscription Privilege, (iii) the per
Share and total purchase price for the Shares and (iv) any excess to be refunded
by the Fund to such holder as a result of payment for Shares pursuant to the
Over-Subscription Privilege which the holder is not acquiring. Any payment
required from a holder of Rights must be received by the Subscription Agent on
the Expiration Date, or if the Rights holder has elected to make payment by
means of a notice of guaranteed delivery, on the third Business Day after the
Expiration Date. Any excess payment to be refunded by the Fund to a holder of
Rights, or to be paid to a holder of Rights as a result of sales of Rights on
his behalf by the Subscription Agent or exercises by Record Date Shareholders of
their Over-Subscription Privileges, and all interest accrued on the holder's
excess payment will be mailed by the Subscription Agent to the holder within
fifteen Business Days after the Expiration Date. Interest on the excess payment
will accrue through the date that is one Business Day prior to the mail date of
the reimbursement check. All payments by a holder of Rights must be in United
States dollars by money order or check drawn on a bank located in the
14
<PAGE> 15
continental United States of America and payable to The Gabelli Equity Trust
Inc., except that holders of Rights who are residents of the province of Ontario
may make payment in U.S. dollars by money order or check drawn on a bank located
in the province of Ontario.
Whichever of the two methods described above is used, issuance and delivery
of certificates for the Shares purchased are subject to collection of checks and
actual payment pursuant to any notice of guaranteed delivery.
A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment either by means of a notice of
guaranteed delivery or a check.
If a holder of Rights who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, the Fund reserves the right to take any or all of the following
actions: (i) find other purchasers for such subscribed-for and unpaid-for
Shares; (ii) apply any payment actually received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such holder upon
exercise of the Primary Subscription or the Over-Subscription Privilege; (iii)
sell all or a portion of the Shares purchased by the holder, in the open market,
and apply the proceeds to the amounts owed; and (iv) exercise any and all other
rights or remedies to which it may be entitled, including, without limitation,
the right to set off against payments actually received by it with respect to
such subscribed Shares and to enforce the relevant guaranty of payment.
Holders who hold shares of Common Stock for the account of others, such as
brokers, trustees or depositaries for securities, should notify the respective
beneficial owners of the shares as soon as possible to ascertain the beneficial
owners' intentions and to obtain instructions with respect to the Rights. If the
beneficial owner so instructs, the record holder of the Rights should complete
Subscription Certificates and submit them to the Subscription Agent with the
proper payment. In addition, beneficial owners of Common Stock or Rights held
through such a holder should contact the holder and request the holder to effect
transactions in accordance with the beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
FUND.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE
AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE
FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. Neither the Fund nor the Subscription Agent will be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to subscribers as soon as practicable after the
corresponding Rights have been validly exercised and full payment for the Shares
has been received and cleared. Certificates representing Shares purchased
pursuant to the Over-Subscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date and after all allocations have
been effected. Participants in the Fund's Automatic Dividend Reinvestment and
Voluntary Cash Purchase Plan (the "Plan") will be issued Rights for the shares
held in their accounts in the
15
<PAGE> 16
Plan. Participants wishing to exercise these Rights must exercise the Rights in
accordance with the procedures set forth above in "Method of Exercise of Rights"
and "Payment for Shares." These Rights will not be exercised automatically by
the Plan. Plan participants exercising their Rights will receive their Primary
and Over-Subscription Shares via an uncertificated credit to their existing
account. To request a stock certificate, participants in the Plan should check
the appropriate box on the Subscription Certificate. These Shares will remain
subject to the same investment option as previously selected by the Plan
participant.
FOREIGN RESTRICTIONS
Subscription Certificates will only be mailed to Record Date Shareholders
whose addresses are within the United States and the Provinces of Quebec and
Ontario, Canada (other than an APO or FPO address). Record Date Shareholders
whose addresses are outside the United States and the Provinces of Quebec and
Ontario, Canada or who have an APO or FPO address and who wish to subscribe to
the Offer either partially or in full should contact the Subscription Agent,
EquiServe, by written instruction or recorded telephone conversation no later
than three Business Days prior to the Expiration Date. If the Subscription Agent
has received no instruction by such date, the Subscription Agent will attempt to
sell all Rights and remit the net proceeds, if any, to such shareholders. If the
Rights can be sold, sales of these Rights will be deemed to have been effected
at the weighted average price received by the Subscription Agent on the day the
Rights are sold, less any applicable brokerage commissions, taxes and other
expenses.
Under the securities laws of the Province of Quebec, investors residing in
Quebec may, subject to compliance with all applicable regulatory requirements,
transfer either the Rights or the Shares to be acquired upon the exercise of
these Rights to other subscribers of the Offer, to persons with whom they are
related or to persons residing outside of Quebec in a transaction effected on an
organized market.
Under the securities laws of the Province of Ontario, investors residing in
Ontario may, subject to compliance with all applicable regulatory requirements,
transfer either the Rights or the Shares to be acquired upon the exercise of
such Rights (i) through a dealer registered in Ontario that effects the
transaction through the facilities of the NYSE or (ii) through certain other
means as provided under and in compliance with Ontario securities laws.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the significant federal income tax
consequences of the receipt of Rights by a Record Date Shareholder and a
subsequent lapse, exercise or sale of such Rights. The discussion also addresses
the significant federal income tax consequences to a holder that purchases
Rights in a secondary-market transaction (e.g., on the NYSE). The discussion is
based upon applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury Regulations promulgated thereunder and other
authorities currently in effect, and does not address state or local tax
consequences. Moreover, the discussion assumes that the fair market value of the
Rights distributed to all of the Record Date Shareholders will, upon the date of
such distribution, be less than 15% of the total fair market value of all of the
Fund's Common Stock on such date.
RECORD DATE SHAREHOLDERS
For federal income tax purposes, neither the receipt nor the exercise of
Rights by a Record Date Shareholder will result in taxable income to such
shareholder, and no taxable loss will be realized by a Record Date Shareholder
who allows his Rights to expire without exercise. A taxable gain or loss
recognized by a Record Date Shareholder upon a sale of a Right will be a capital
gain or loss (assuming the Right is held as a capital asset at the time of sale)
and will be a short-term capital gain or loss. A Record Date Shareholder's
holding period for a share of Common Stock acquired upon exercise of a Right (a
"New Share") begins with the date of exercise of the Right. A taxable gain or
loss recognized by a Record Date Shareholder upon a sale of a New Share will be
a capital gain or loss (assuming the New Share is held as a capital asset at the
time of sale) and will be a long-term capital gain or loss if the New Share has
been held at the time of sale for more than one year.
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<PAGE> 17
Unless a Record Date Shareholder makes the election described in the
following paragraph, his basis for determining gain or loss upon the sale of a
Right will be zero and his basis for determining gain or loss upon the sale of a
New Share will be equal to the sum of the Subscription Price for the New Share
and any servicing fee charged to the shareholder by his broker, bank or trust
company. Moreover, unless a Record Date Shareholder makes the election described
in the following paragraph, the receipt of a Right and the lapse, sale or
exercise thereof will have no effect on the federal income tax basis of those
shares of Common Stock of the Fund that such shareholder originally owned
("Original Shares").
A Record Date Shareholder may make an election to allocate the federal
income tax basis of his Original Shares between such Original Shares and all of
the Rights that he receives pursuant to the Offer in proportion to their
respective fair market values as of the date of distribution of the Rights.
Thus, if such an election is made and the Record Date Shareholder sells or
exercises his Rights, the shareholder's basis in his Original Shares will be
reduced by an amount equal to the basis allocated to the Rights. This election
is irrevocable and must be made in a statement attached to the shareholder's
federal income tax return for the taxable year in which the Rights are
distributed. If an electing Record Date Shareholder exercises his Rights, the
basis of his New Shares will be equal to the sum of the Subscription Price for
such New Shares (as increased by any servicing fee charged to the shareholder by
his broker, bank or trust company) plus the basis allocated to such Rights as
described above. Accordingly, Record Date Shareholders should consider the
advisability of making the above-described election if they intend to exercise
their Rights. However, if an electing Record Date Shareholder does not sell or
exercise his Rights, no taxable loss will be realized as a result of the lapse
of such Rights and no portion of the shareholder's basis in his Original Shares
will be allocated to the unexercised Rights.
PURCHASERS OF RIGHTS
For federal income tax purposes, the exercise of Rights by a purchaser who
acquires such Rights on the NYSE or in another secondary-market transaction will
not result in taxable income to such purchaser, and a taxable loss will be
realized by a purchaser who allows his Rights to expire without exercise. Such
taxable loss will be a short-term capital loss if the purchaser holds the Rights
as capital assets at the time of their expiration. A taxable gain or loss
recognized by a purchaser upon a sale of a Right will be a capital gain or loss
(assuming the Right is held as a capital asset at the time of sale) and will be
a short-term capital gain or loss. A purchaser's basis for determining gain or
loss upon the sale of a New Share acquired through the exercise of a Right will
be equal to the sum of the Subscription Price for the New Share plus the
purchase price of the Right or Rights that were exercised in order to acquire
such New Share (with such Subscription Price and purchase price each being
increased by any applicable servicing fees charged to the purchaser by his
broker, bank or trust company). A purchaser's holding period for a New Share
acquired upon exercise of a Right begins with the date of exercise of the Right.
A taxable gain or loss recognized by a purchaser upon a sale of a New Share will
be a capital gain or loss (assuming the New Share is held as a capital asset at
the time of sale) and will be a long-term capital gain or loss if the New Share
has been held at the time of sale for more than one year.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), including
corporate savings and 401(k) plans, Keogh Plans of self-employed individuals and
Individual Retirement Accounts ("IRA") (each a "Benefit Plan" and collectively,
"Benefit Plans"), should be aware that additional contributions of cash in order
to exercise Rights would be treated as Benefit Plan contributions and, when
taken together with contributions previously made, may subject a Benefit Plan to
excise taxes for excess or nondeductible contributions. In the case of Benefit
Plans qualified under Section 401(a) of the Code, additional cash contributions
could cause the maximum contribution limitations of Section 415 of the Code or
other qualification rules to be violated. Benefit Plans contemplating making
additional cash contributions to exercise Rights should consult with their
counsel prior to making such contributions.
17
<PAGE> 18
Benefit Plans and other tax exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise of
Rights, they may become subject to the tax on unrelated business taxable income
("UBTI") under Section 511 of the Code. If any portion of an IRA is used as
security for a loan, the portion so used is also treated as distributed to the
IRA depositor.
ERISA contains prudence and diversification requirements and ERISA and the
Code contain prohibited transaction rules that may impact the exercise of
Rights. Among the prohibited transaction exemptions issued by the Department of
Labor that may exempt a Benefit Plan's exercise of Rights are Prohibited
Transaction Exemption 84-24 (governing purchases of shares in investment
companies) and Prohibited Transaction Exemption 75-1 (covering sales of
securities).
Due to the complexity of these rules and the penalties for noncompliance,
Benefit Plans should consult with their counsel regarding the consequences of
their exercise of Rights under ERISA and the Code.
RISK FACTORS AND SPECIAL CONSIDERATIONS
An immediate dilution of the aggregate net asset value of the shares owned
by shareholders who do not fully exercise their Rights is likely to be
experienced as a result of the Offer because the Subscription Price is likely to
be less than the then net asset value per share, and the number of shares
outstanding after the Offer is likely to increase in greater percentage than the
increase in the size of the Fund's assets. In addition, as a result of the terms
of the Offer, shareholders who do not fully exercise their Rights should expect
that they will, at the completion of the Offer, own a smaller proportional
interest in the Fund than would otherwise be the case. Although it is not
possible to state precisely the amount of such a decrease in value, because it
is not known at this time what the net asset value per share will be at the
Expiration Date, this dilution could be substantial. For example, assuming that
all Rights are exercised and that the Subscription Price of $7.00 is 36.3% below
the Fund's then net asset value per share, the Fund's net asset value per share
(before deduction of expenses incurred in connection with the Offer) would be
reduced by approximately $0.57 per share.
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."
The Fund's primary investment objective is long-term growth of capital. The
Fund seeks to achieve its objective by investing primarily in a portfolio of
equity securities which include the common stock, preferred stock, convertible
securities, options and warrants of foreign and domestic companies selected by
the Investment Adviser. Income is the secondary investment objective of the
Fund. Under normal market conditions, the Fund will invest at least 65% of its
total assets in equity securities.
USE OF PROCEEDS
The net proceeds of the Offer, assuming all Shares offered hereby are sold,
are estimated to be approximately $126.8 million, before deducting expenses
payable by the Fund estimated at approximately $500,000. The Investment Adviser
anticipates that investment of the proceeds, in accordance with the Fund's
investment objectives and policies, will be invested promptly as investment
opportunities are identified, depending on market conditions and the
availability of appropriate securities, and is anticipated to take approximately
six months. Pending investment in accordance with the Fund's investment
objectives and policies, the proceeds will be held in obligations of the United
States Government, its agencies or instrumentalities ("U.S. Government
Securities") and other short-term money market instruments.
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<PAGE> 19
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is long-term growth of
capital. Income is a secondary objective of the Fund. The Fund attempts to
achieve its objectives by investing primarily in a portfolio of equity
securities consisting of common stock, preferred stock, convertible or
exchangeable securities and warrants and rights to purchase such securities
selected by the Investment Adviser. The Investment Adviser selects investments
on the basis of fundamental value and, accordingly, the Fund typically invests
in the securities of companies that are believed by the Investment Adviser to be
priced lower than justified in relation to their underlying assets. Other
important factors in the selection of investments include favorable price/
earnings and debt/equity ratios and strong management.
The Fund's secondary investment objective is income, which the Fund seeks
to achieve, in part, by investing up to 10% of its total assets in a portfolio
consisting primarily of high-yielding, fixed-income securities, such as
corporate bonds, debentures, notes, convertible securities, preferred stocks and
domestic and foreign government obligations. Generally, debt securities
purchased by the Fund will be rated in the lower rating categories of recognized
statistical rating agencies, such as securities rated "CCC" or lower by Standard
& Poor's Ratings Services ("S&P") or "Caa" or lower by Moody's Investors
Service, Inc. ("Moody's"), or will be nonrated securities of comparable quality.
These debt securities are predominantly speculative and involve major risk
exposure to adverse conditions and are often referred to in the financial press
as "junk bonds."
The Fund's investment objectives of long-term growth of capital and income
are fundamental policies and may not be changed without 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 Investment Adviser normally will
consider the following factors, among others: (1) the Investment Adviser's own
evaluations of the private market value, cash flow, earnings per share and other
fundamental aspects of the underlying assets and business of the company, (2)
the potential for capital appreciation of the securities; (3) the interest or
dividend income generated by the securities; (4) the prices of the securities
relative to other comparable securities; (5) whether the securities are entitled
to the benefits of call protection or other protective covenants (e.g., events
of acceleration or events of default for failure to comply with certain
financial ratios or to satisfy other financial covenants or benchmarks; (6) the
existence of any anti-dilution protections or guarantees of the security; and
(7) the diversification of the portfolio of the Fund as to issuers. The
Investment Adviser's investment philosophy with respect to equity securities
seeks to identify securities of companies that are selling in the public market
at a discount to their private market value, which the Investment Adviser
defines as the value informed purchasers are willing to pay to acquire assets
with similar characteristics. The Investment Adviser also normally evaluates the
issuers' free cash flow and long-term earnings trends. Finally, the Investment
Adviser looks for a catalyst -- something in the company's industry or
indigenous to the company or country itself that will surface additional value.
OTHER INVESTMENT PRACTICES
Foreign Securities. The Fund may invest up to 35% of its total assets in
foreign securities. Among the foreign securities in which the Fund may invest
are those issued by companies located in developing countries, which are
countries in the initial stages of their industrialization cycles. Investing in
the equity and debt markets of developing countries involves exposure to
economic structures that are generally less diverse and less mature, and to
political systems that can be expected to have less stability, than those of
developed countries. The markets of developing countries historically have been
more volatile than the markets of the
19
<PAGE> 20
more mature economies of developed countries, but often have provided higher
rates of return to investors. The Fund may also invest in debt securities of
foreign governments.
Temporary Investments. Although under normal market conditions at least
65% of the Fund's total assets will consist of equity securities, when a
temporary defensive posture is believed by the Investment Adviser to be
warranted ("temporary defensive periods"), the Fund may without limitation hold
cash or invest its assets in money market instruments and repurchase agreements
in respect of those instruments. The Fund may also invest up to 10% of the
market value of its total assets during temporary defensive periods in shares of
money market mutual funds that invest primarily in U.S. Government Securities
and repurchase agreements in respect of those securities. For a further
description of such transactions, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
Lower Rated Securities. The Fund may invest up to 10% of its total assets
in fixed-income securities issued by U.S. and foreign corporations, governments
and agencies that are rated below investment grade by primary rating services
such as S&P and Moody's. These high-yield, higher-risk securities are commonly
known as "junk bonds." These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions involving money market instruments with banks, registered
broker-dealers and government securities dealers approved by the Investment
Adviser under the supervision of the Board of Directors. The Fund will not enter
into repurchase agreements with the Investment Adviser or any of its affiliates.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed price and time, thereby determining the
yield during its holding period. Thus, repurchase agreements may be seen to be
loans by the Fund collateralized by the underlying debt obligation. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the holding period. The value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including interest. The Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period in which it seeks to assert these
rights. The Investment Adviser, acting under the supervision of the Fund's Board
of Directors, reviews the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate these risks and monitors
on an ongoing basis the value of the securities subject to repurchase agreements
to ensure that the value is maintained at the required level.
Other Investments. The Fund is permitted to invest in special situations,
options and futures contracts, engage in forward currency transactions and enter
into forward commitments for the purchase or sale of securities, including on a
"when issued" or "delayed delivery" basis. See the SAI for a discussion of these
investments and techniques and the risks associated with them.
20
<PAGE> 21
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please consider the matters set forth below. You should read this entire
Prospectus and the SAI before you decide whether to exercise your Rights. In
addition, you should consider the matters set forth below.
PRINCIPAL RISKS ASSOCIATED WITH THE FUND
DILUTION
If you do not exercise all of your Rights, when the Offer is over you will
own a smaller proportional interest in the Fund. In addition, whether or not you
exercise your Rights, the per share net asset value of your shares will be
diluted (reduced) immediately as a result of the Offer because:
- the shares offered will be sold at less than their current net asset
value
- you will indirectly bear the expenses of the Offer
- the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net
assets
The Fund cannot state precisely the amount of any dilution because it is
not known at this time what the net asset value per share will be on the
Expiration Date or what proportion of the Rights will be exercised. The dilution
may be substantial and will increase if the net asset value increases as shown
by the following examples, assuming a $7.00 Subscription Price:
Scenario 1:(1)
<TABLE>
<S> <C>
NAV......................................................... $10.00
------
Subscription Price.......................................... $ 7.00
------
Reduction in NAV($)(2)...................................... $(0.43)
------
Reduction in NAV(%)......................................... (4.30)%
------
</TABLE>
Scenario 2:(1)
<TABLE>
<S> <C>
NAV......................................................... $11.00
------
Subscription Price.......................................... $ 7.00
------
Reduction in NAV($)(2)...................................... $(0.57)
------
Reduction in NAV(%)......................................... (5.18)%
------
</TABLE>
---------------
(1) Both examples assume full primary and over-subscription privilege exercised.
Actual amounts may vary due to rounding.
(2) Assumes $500,000 in estimated offering expenses.
You will incur a greater dilution in net asset value per share if you do
not exercise your Rights than if you do exercise your Rights.
If you do not wish to exercise your Rights, you should consider selling
these Rights as set forth in this Prospectus. Any cash you receive from selling
your Rights should serve as partial compensation for any possible dilution of
your interest in the Fund. The Fund cannot give assurance, however, that a
market for the Rights will develop or that the Rights will have any marketable
value.
21
<PAGE> 22
MARKET RISK
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy or the
market as a whole. Market risk is common to most investments, including stocks
and bonds and the investment funds that invest in them.
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. You should not consider an investment in shares of
the Fund as a complete investment program. You should take into account your
investment objectives as well as your other investments when considering whether
or not to participate in the Offer.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means the Fund is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer.
However, the Fund has in the past conducted and intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Code, which will relieve it of any liability for federal income tax to the
extent its earnings are distributed to shareholders. To qualify as a "regulated
investment company," among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable year:
- not more than 25% of the market value of its total assets will be
invested in the securities of a single issuer, and
- at least 50% of the market value of the Fund's assets is represented by
cash, securities of other regulated investment companies, U.S. Government
Securities and other securities that do not amount to more than 5% of a
single issuer and not more than 10% of a single issuer's voting
securities. The investments of the Fund in U.S. Government Securities are
not subject to these limitations.
As a non-diversified investment company, the Fund may invest in the
securities of individual issuers to a greater degree than a diversified
investment company. As a result, the Fund may be more vulnerable to events
affecting a single issuer and therefore subject to greater volatility than a
fund that is more broadly diversified. Accordingly, an investment in the Fund
may present greater risk to an investor than an investment in a diversified
company.
FOREIGN SECURITIES
The Fund may invest up to 35% of its total assets in foreign securities.
The risks which the Fund faces when it invests in securities of foreign
companies and foreign governments include:
- fluctuations in exchange rates between the U.S. dollar and foreign
currencies
- unavailable or deficient key information about an issuer, security or
market
- lack of uniform financial reporting standards and other regulatory
requirements
- expropriations, capital or currency controls, punitive taxes or
nationalizations
- economic policy changes, social and political instability, military
action and war
- changed circumstances in dealings between nations
- greater volatility and illiquidity of foreign securities
- costs incurred in connection with conversion between various currencies
22
<PAGE> 23
- higher foreign brokerage commissions
- possible extended settlement period
- revaluations of currencies
- transfer taxes or transaction charges
- greater difficulty in protecting and enforcing the Fund's rights
Each of the above risks is more pronounced with respect to the Fund's
investments in securities of companies and governments in the world's emerging
(less developed) markets. For a further description of the Fund's investments in
foreign securities, see "Investment Objectives and Policies -- Certain
Practices -- Foreign Securities."
MARKET VALUE AND NET ASSET VALUE
The shares of closed-end investment companies frequently trade at a
discount from net asset value. This characteristic of shares of a closed-end
fund is a risk separate and distinct from the risk that the Fund's net asset
value may decrease. Since the commencement of the Fund's operations, the Fund's
shares have generally traded in the market at a discount to net asset value. See
"Capital Stock." The risk of purchasing shares of a closed-end fund that might
trade at a discount is more pronounced if you wish to sell your shares in a
relatively short period of time. If you do so, realization of a gain or loss on
your investment is likely to be more dependent upon the existence of a premium
or discount than upon portfolio performance. The Fund's shares are not subject
to redemption. Investors desiring liquidity may, subject to applicable
securities laws, trade their shares in the Fund on any exchange where such
shares are then trading at current market value, which may differ from the then
current net asset value.
Additional Risks Associated with the Fund
LOWER RATED SECURITIES
High yield securities, also sometimes referred to as "junk bonds,"
generally pay a premium above the yields of U.S. Government Securities or mature
corporate issuers because they are subject to greater risks than these
securities. Hence, high yield securities usually carry a medium-grade or below
investment grade rating, which reflect their speculative character and the
following risks:
- greater volatility
- greater credit risk
- potentially greater sensitivity to general economic or industry
conditions
- potential lack of attractive resale opportunities (illiquidity)
- additional expenses to seek recovery from issuers who default
The market value of lower-rated securities may be more volatile than the
market value of higher-rated securities and generally tends to reflect the
market's perception of the creditworthiness of the issuer and short-term market
developments to a greater extent than more highly rated securities, which
reflect primarily fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Investment
Practices" in the SAI. For a description of the ratings categories of certain
recognized statistical ratings agencies, see Appendix A.
23
<PAGE> 24
TEMPORARY INVESTMENTS
During temporary defensive periods the Fund may invest in U.S. Government
Securities and in money market mutual funds not affiliated with the Investment
Adviser that invest in those securities. While certain U.S. Government
Securities are supported by the "full faith and credit" of the U.S. Government,
others are supported only by the credit of the issuing 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. For a further description of such investments, see "Investment
Objectives and Policies -- Investment Practices" in the SAI.
To the extent that the Fund holds temporary investments, it will not be
pursuing its investment objectives.
REPURCHASE AGREEMENTS
During temporary defensive periods or for cash management purposes, the
Fund may engage in repurchase agreement transactions with banks, registered
broker-dealers and government securities dealers approved by the Investment
Adviser under the supervision of the Board of Directors. 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 1 week) subject
to an obligation of the seller to repurchase such debt obligation from the Fund
at some agreed upon premium. The Fund bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the Fund
is delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period in which it seeks to assert these
rights. For a further description of these transactions, see "Investment
Objectives and Policies -- Certain Practices -- Repurchase Agreements."
HEDGING
If the expectations about the changes in the interest rates or evaluations
of the normal yield relationship between two securities proves to be incorrect,
the Fund's income, net asset value and potential capital gains may be decreased
or its potential capital losses may be increased. The Fund's use of hedging
strategies will result in the loss of principal under certain market conditions
and will involve certain other risks.
FUTURES TRANSACTIONS
Futures and options on futures entail certain risks, including:
- no assurance that futures contracts or options on futures can be offset
at favorable prices
- reduction of the yield of the Fund due to the use of hedging
- reduction in value of both the securities hedged and the hedging
instrument
- illiquidity 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 TRANSACTIONS
The use of forward currency contracts may involve certain risks, including:
- default of the counter-party under the contract,
- incomplete 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
24
<PAGE> 25
For a further description of such investments, see "Investment Objectives
and Policies -- Investment Practices" in the SAI.
DEPENDENCE ON KEY PERSONNEL
The Investment Adviser is dependent upon the expertise of Mr. Mario J.
Gabelli in providing advisory services with respect to the Fund's investments.
If the Investment Adviser were to lose the services of Mr. Gabelli, its ability
to service the Fund could be adversely affected. There can be no assurance that
a suitable replacement could be found for Mr. Gabelli in the event of his death,
resignation, retirement or inability to act on behalf of the Investment Adviser.
LEVERAGED CAPITAL STRUCTURE
The Fund has a leveraged capital structure which presents certain
additional risks. For a further description of these additional risks, see
"Capital Stock -- Effects of Leverage."
INTEREST-RATE RISK
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
25
<PAGE> 26
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors, and the day-to-day operations of the Fund are
conducted through or under the direction of the officers of the Fund. Although
the Fund is a Maryland corporation, Karl Otto Pohl, one of its Directors, is a
resident of Germany, and substantially all of his assets are located outside of
the United States. Mr. Pohl has not authorized an agent for service of process
in the United States. Consequently, it may be difficult for investors to effect
service of process upon him within the United States or to enforce, in United
States courts, judgments against him obtained in such courts predicated on the
civil liability provisions of the United States securities laws. In addition,
there is doubt as to the enforceability in German courts of liabilities
predicated solely upon the United States securities laws, whether or not such
liabilities are based upon judgments of courts in the United States. For certain
information regarding the Directors and officers of the Fund, see "Management of
the Fund" in the SAI.
INVESTMENT ADVISER
The Investment Adviser, whose principal business address is: One Corporate
Center, Rye, New York 10580, is a New York limited liability company which also
serves as Investment Adviser to other closed-end investment companies and
open-end investment companies with aggregate assets in excess of $10.9 billion
as of December 31, 2000. The Investment Adviser is a registered investment
adviser under the 1940 Act. Mr. Mario J. Gabelli may be deemed a "controlling
person" of the Investment Adviser on the basis of his controlling interest in
the parent company of the Investment Adviser. The Investment Adviser has several
affiliates that provide investment advisory services: GAMCO Investors, Inc.
("GAMCO"), a wholly-owned subsidiary of the Investment Adviser, acts as
investment adviser for individuals, pension trusts, profit-sharing trusts and
endowments, and had assets under management of approximately $10.1 billion under
its management as of December 31, 2000; Gabelli Advisers, Inc. acts as
investment adviser to the Gabelli Westwood Funds with assets under management of
approximately $446 million as of December 31, 2000; Gabelli Securities, Inc.
acts as general partner or investment manager to certain alternative investments
products, consisting primarily of risk arbitrage and merchant banking limited
partnerships and offshore companies, with assets under management of
approximately $437 million as of December 31, 2000; and Gabelli Fixed Income,
LLC acts as investment adviser for the three portfolios of The Treasurer's Fund
and separate accounts having assets under management of approximately $1.6
billion as of December 31, 2000.
The Investment Adviser has sole investment discretion for the Fund with
respect to the Fund's portfolio under the supervision of the Fund's Board of
Directors and in accordance with the Fund's stated policies. The Investment
Adviser will select investments for the Fund and will place purchase and sale
orders on behalf of the Fund. For its services, the Investment Adviser is paid a
fee computed daily and paid monthly at an annual rate of 1.00% of the average
weekly net assets of the Fund. For additional information regarding the
Investment Adviser, see "The Adviser" in the SAI.
Canadian shareholders should note, to the extent applicable, that there may
be difficulty enforcing any legal rights against the Investment Adviser because
it is resident outside Canada and all of it assets are situated outside Canada.
PORTFOLIO MANAGEMENT
Mario J. Gabelli, who is Chief Investment Officer of the Investment
Adviser, has managed the Fund's assets since its inception. In addition, over
the past five years, Mr. Gabelli has served as Chairman of the Board and Chief
Executive Officer of Gabelli Asset Management Inc.; Chief Investment Officer of
GAMCO Investors, Inc.; Chairman of the Board and Chief Executive Officer of
Lynch Corporation, a diversified manufacturing company, and Lynch Interactive
Corporation, a multimedia and communications services company; and Director of
Spinnaker Industries, Inc., a manufacturing company.
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<PAGE> 27
SUB-ADMINISTRATOR
The Investment Adviser has certain administrative responsibilities to the
Fund under its Advisory Agreement with the Fund. The Investment Adviser has
retained PFPC, Inc. as Sub-Administrator to provide certain administrative
services necessary for the Fund's operations other than those performed by the
Investment Adviser under its Advisory Agreement. These services include, but are
not limited to, supplying the Investment Adviser with office facilities,
statistical and research data, data processing services, clerical, accounting
and bookkeeping services, internal audit and regulatory administration services,
the preparation and distribution of materials for meeting of the Fund's Board of
Directors, compliance testing of the Fund's activities and the preparation of
stockholder reports, tax returns and other regulatory filings. For such services
by the Sub-Administrator, the Investment Adviser pays the Sub-Administrator a
monthly fee based upon the aggregate average daily net assets of certain funds
advised by the Investment Adviser, including the Fund, as follows: .0275% on
aggregate net assets under administration of $0-$10 billion, .0125% on aggregate
net assets under administration of $10-$15 billion and .0100% on aggregate net
assets under administration over $15 billion, which together with services
rendered, is subject to re-negotiation if net assets under administration exceed
$20 billion. The Investment Adviser also reimburses the Sub-Administrator for
certain out-of-pocket expenses incurred by the Sub-Administrator as a result of
its duties under the sub-administrative agreement. Either the Investment Adviser
or the Sub-Administrator may terminate the sub-administration agreement on 60
days' written notice. The Sub-Administrator has its principal office located at
101 Federal Street, Boston, Massachusetts 02110.
PAYMENT OF EXPENSES
For purposes of the calculation of the fees payable to the Investment
Adviser by the Fund, average weekly net assets of the Fund are determined at the
end of each month on the basis of its average net assets for each week during
the month. The assets for each weekly period are determined by averaging the net
assets at the end of a week with the net assets at the end of the prior week.
The Investment Adviser will be obligated to pay expenses associated with
providing the services contemplated by the Advisory Agreement including
compensation of and office space for its officers and employees connected with
investment and economic research, trading and investment management and
administration of the Fund, as well as the fees of all Directors of the Fund who
are affiliated with the Investment Adviser or any of its affiliates. The Fund
pays all other expenses incurred in its operation including, among other things,
expenses for legal and independent accountants' services, costs of printing
proxies, stock certificates and shareholder reports, charges of the custodian,
any subcustodian and transfer and dividend paying agent, expenses in connection
with the Plan, SEC fees, fees and expenses of unaffiliated Directors, accounting
and pricing costs, membership fees in trade associations, fidelity bond coverage
for its officers and employees, directors' and officers' errors and omission
insurance coverage, interest, brokerage costs, taxes, stock exchange listing
fees and expenses, expenses of qualifying its shares for sale in various states,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the Fund.
However, Gabelli & Company, Inc., an affiliate of the Investment Adviser, may
execute transactions in the over-the-counter markets on an agency basis and
receive a stated commission therefrom. For a more detailed discussion of the
Fund's brokerage allocation practice, see the SAI under "Portfolio
Transactions."
DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC DIVIDEND
REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
The Fund's policy is to make quarterly distributions of $0.27 per share at
the end of each of the first three calendar quarters of each year to holders of
its Common Stock. The Fund's distribution in December for each calendar year is
an adjusting distribution (equal to the sum of 2.5% of the net asset value of
the Fund as of the last day of the four preceding calendar quarters less the
aggregate distributions of $0.81 per share made for the
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<PAGE> 28
most recent three calendar quarters) in order to meet the Fund's 10% pay-out
goal as well as the Code's distribution requirements.
In furtherance of the Fund's dividend policy, on December 5, 2000, the
Board of Directors of the Fund declared a $0.50 per share cash distribution
which was paid on December 26, 2000 to common stock shareholders of record on
December 15, 2000.
The dividend policy of the Fund may be modified from time to time by the
Board of Directors. As a regulated investment company under the Code, the Fund
will not be subjected to U.S. federal income tax on its investment company
taxable income that it distributes to shareholders, provided that at least 90%
of its taxable income for the taxable year is distributed to its shareholders.
The Fund, along with other registered investment companies advised by the
Investment Adviser (the "Other Funds"), has obtained an exemption from Section
19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund to make
periodic distributions of long-term capital gains provided that the Fund
maintains distribution policies with respect to the Common Stock and Preferred
Stock calling for periodic (e.g., quarterly or semi-annually, but in no event
more frequently than quarterly, except that the Fund may elect to pay a dividend
pursuant to Section 855 of the Code in addition to the four quarterly payments)
distributions in an amount equal to a fixed percentage of the Fund's average net
asset value over a specified period of time or market price per share of Common
Stock or a fixed percentage of the Preferred Stock's liquidation preference at
or about the time of distribution or pay-out or a fixed dollar amount. If the
total distributions required by the proposed periodic pay-out policy exceed the
Fund's net investment income and net capital gains, the excess will be treated
as a return of capital. If the Fund's net investment income, net short-term
capital gains and net long-term capital gains for any year exceed the amount
required to be distributed under the proposed periodic pay-out policy, the Fund
generally intends to pay such excess once a year, but may, in its discretion,
retain and not distribute net long-term capital gains to the extent of such
excess.
As of December 31, 2000, the Fund has outstanding 5,368,900 shares of 7.25%
Cumulative Preferred Stock, liquidation preference $25 per share (the
"Cumulative Preferred Stock"), which are senior securities of the Fund.
Dividends on the Cumulative Preferred Stock accrue at an annual rate of 7.25% of
the liquidation preference per share, are cumulative from the date of original
issuance thereof and are payable quarterly on March 26, June 26, September 26
and December 26 in each year. The Fund is contemplating an additional issuance
of Preferred Stock after the completion of this Rights offering.
The Fund, along with the other Funds, has filed an application with the SEC
that seeks an exemptive order permitting the Fund to make periodic distributions
of long-term capital gains as often as monthly in any one taxable year in
respect of its Common Stock and Preferred Stock (to the extent allowed by the
terms thereof). The application is still pending.
Under the Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan
adopted by the Fund, a shareholder whose Common Stock is registered in his own
name will have all distributions reinvested automatically by State Street Bank,
which is the agent under the Plan, unless the shareholder elects to receive cash
and has so instructed State Street either in writing at the address set forth
below or by telephone at (617) 786-3000. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
name") will be reinvested by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. 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
such 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. 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, as agent for the participants, buy Fund shares in the open market,
on the NYSE or elsewhere, for the participants' accounts, except that State
Street will endeavor to terminate purchases in the open market
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<PAGE> 29
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, on or about the 1st and 15th of each month, for investment in
the shares as applicable. Such payments may be made in any amount from $250 to
$10,000.
There is no charge to participants for reinvesting dividends or capital
gains distributions payable in either stock or cash. State Street's fees for
handling the reinvestment of such dividends and capital gains distributions are
paid by the Fund. There are no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains distributions
payable in stock or in cash. However, each participant bears a pro rata share of
brokerage commissions incurred with respect to State Street's open market
purchases in connection with the reinvestment of dividends or capital gains
distributions.
With respect to purchases from voluntary cash payments, State Street will
charge $0.75 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. A fee of $2.50 per transaction is charged in
connection with the sale of shares that are held in book-entry form, such as
shares of Common Stock held by a shareholder through the Plan. Commissions may
also be charged on such transactions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends or
distributions.
Participants in the Plan may terminate their accounts under the Plan by
notifying State Street in writing. Upon termination, participants may request to
receive a certificate for the number of full shares then held in their Plan
account along with a check in payment for any fractional share interest they may
have. The payment for the fractional share interest will be valued at the
opening price of the Fund on the date their discontinuance is effective. In the
alternative, participants may liquidate their reinvestment shares. If a
participant wishes to liquidate his or her reinvestment shares, the cost is
$2.50 per transaction as well as the brokerage commission incurred. Brokerage
charges are expected to be less than the usual brokerage charge for such
transactions.
All correspondence concerning the Plan should be directed to State Street
at P.O. Box 8200, Boston, Massachusetts 02266-8200. For a further description of
the Plan, see "Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan"
in the SAI.
TAXATION
TAXATION
The Fund has qualified, and intends to continue to qualify, each year as a
"regulated investment company" under the Code. Accordingly, the Fund will not be
liable for federal income taxes to the extent its taxable net investment income
and net realized capital gain, if any, are distributed to shareholders, provided
that at least 90% of its investment company taxable income (i.e., 90% of the
Fund's taxable income minus the excess, if any, of its net realized long-term
capital gain over its net realized short-term capital loss (including any
capital loss carryovers) plus or minus certain other adjustments as specified in
section 852 of the Code) for the taxable year is distributed to shareholders.
The Fund will be subject to tax at regular corporate rates on any income or
gains that it does not distribute. Furthermore, the Fund is subject to a 4%
nondeductible federal excise tax on certain undistributed amounts of ordinary
income and capital gains. The Fund intends to make such distributions as are
necessary to avoid the application of this excise tax.
The Fund reserves the right, but does not currently intend, to retain for
reinvestment net long-term gains in excess of net short-term capital losses and
the Fund will be subject to a corporate tax (currently at a rate of 35%) on the
retained amount, if any. The Fund would designate such retained amounts as
undistributed capital gains. As a result, such amounts would be taxed to
shareholders as long-term capital gains and shareholders would be able to claim
their proportionate shares of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities, and would be
entitled to increase the adjusted tax basis of their shares of the Fund by 65%
of their undistributed capital gains. Qualified pension and profit sharing
funds, certain trusts and other organizations or persons not subject to federal
income tax on
29
<PAGE> 30
capital gains and certain non-resident alien individuals and foreign
corporations would be entitled to a refund of their pro rata share of such taxes
paid by the Fund upon filing appropriate returns or claims for refund with the
proper tax authorities. Failure by such entities and their sponsors or
responsible fiduciaries to properly account for such refund could result in
adverse federal income tax consequences.
The Fund sends its written statements and notices to its respective
shareholders regarding the tax status of all dividends and distributions made
during each calendar year.
Dividend and capital gain distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisors
regarding specific questions as to federal, state or local taxes. Non-U.S.
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax. For a more detailed
discussion of tax matters affecting the Fund and its shareholders, see
"Taxation" in the SAI.
CAPITAL STOCK
Common Stock. The Fund, which was incorporated under the laws of the State
of Maryland on May 20, 1986, is authorized to issue 192,000,000 shares of Common
Stock, par value $.001 per share. Each share of Common Stock has equal voting,
dividend, distribution and liquidation rights. The shares of Common Stock
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 of Common Stock are listed and traded on the NYSE under
the symbol "GAB." The average weekly trading volume of the Common Stock on the
NYSE for the 12 months ended December 31, 2000 was 108,917 shares. The following
table sets forth for the quarters indicated the high and low closing prices on
the NYSE per share of the Common Stock and the net asset value and the premium
or discount from net asset value at which the Common Stock was trading,
expressed as a percentage of net asset value, at each of the high and low
closing prices provided.
<TABLE>
<CAPTION>
PREMIUM OR DISCOUNT
MARKET PRICE(1) NET ASSET VALUE(2) AS % OF NAV
--------------------- --------------------- -------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
3/31/99.......................... $12.13 $11.50 $12.00 $11.31 1.04% 1.68%
6/30/99.......................... $12.63 $11.81 $12.39 $11.70 1.90% 0.96%
9/30/99.......................... $12.19 $11.13 $12.61 $11.06 -3.35% 0.59%
12/31/99......................... $12.56 $11.19 $12.75 $11.29 -1.47% -0.91%
3/31/00.......................... $12.63 $11.00 $12.89 $12.10 -2.06% -9.09%
6/30/00.......................... $12.19 $11.19 $12.07 $12.13 0.97% -7.77%
9/30/00.......................... $12.50 $11.31 $12.41 $11.52 0.73% -1.80%
12/31/00......................... $11.75 $10.63 $10.71 $10.44 9.71% 1.77%
</TABLE>
---------------
(1) As reported on the NYSE.
(2) Based on the Fund's computations.
Preferred Stock. The Fund's Board of Directors has authority to cause the
Fund to issue and sell up to 8,000,000 shares of Preferred Stock, par value
$.001 per share (the "Preferred Stock"). The terms of such Preferred Stock may
be fixed by the Board of Directors and would materially limit and/or qualify the
rights of the holders of the Fund's Common Stock. As of December 31, 2000, the
Fund has outstanding 5,368,900 shares of 7.25% Tax Advantaged Cumulative
Preferred Stock ("Cumulative Preferred Stock"), which are senior securities of
the Fund. Dividends on the Cumulative Preferred Stock accrue at an annual rate
of 7.25% of the liquidation preference of $25 per share and are cumulative from
the date of original issuance thereof and are payable quarterly on March 26,
June 26, September 26 and December 26 in each year.
It was a condition to the issuance of the Cumulative Preferred Stock that
it be rated "aaa" by Moody's. In connection with the receipt of such rating, the
composition of the Fund's portfolio must reflect guidelines established by
Moody's and the Fund is required to maintain a minimum discounted asset coverage
with respect to the Cumulative Preferred Stock. See "Moody's Discount Factors"
in the SAI.
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<PAGE> 31
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") if the Fund fails to maintain either of the minimum asset
coverages required by Moody's and the 1940 Act. Commencing June 9, 2003 and
thereafter, the Fund at its option may redeem the Cumulative Preferred Stock in
whole or in part for cash at a price equal to the Redemption Price. Prior to
June 9, 2003, the Cumulative Preferred Stock may be redeemed, at the option of
the Fund, for a cash 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.
All shares of Cumulative Preferred Stock are fully paid and nonassessable.
Set forth below is information with respect to the Fund's capital stock as
of December 31, 2000.
<TABLE>
<CAPTION>
AMOUNT HELD BY
FUND FOR ITS
CLASS OF STOCK AMOUNT AUTHORIZED OWN ACCOUNT AMOUNT OUTSTANDING
-------------- ------------------ -------------- ------------------
<S> <C> <C> <C>
Common Stock.......................... 192,000,000 shares N/A 108,688,408 shares
Preferred Stock....................... 8,000,000 shares N/A 5,368,900 shares
</TABLE>
EFFECTS OF LEVERAGE
The only obligation that the Fund has to the Preferred Shareholders is to
pay the stated dividend rate of 7.25%. Any return earned in excess of the stated
dividend rate, which is less than the Fund's average annual return, would
directly benefit Common Shareholders; however, any shortfall from the stated
rate would impact the Common Shareholders in the opposite fashion. The following
table is designed to assist you in understanding the effects of leverage on your
investment in the Fund. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed return on portfolio (net of expenses)... -10% -5% 0% 5% 10%
Corresponding return to common stockholder...... -12.57% -6.85% -1.13% 4.58% 10.30%
</TABLE>
The following factors associated with leveraging could increase the
investment risk and volatility of the price of the Fund's shares: (1) leveraging
exaggerates any increase or decrease in the value of the Fund's shares; (2) the
dividend requirements on preferred stock may exceed the income from the
portfolio securities purchased with the proceeds from the issuance of preferred
stock; (3) a decline in net asset value results if the investment performance of
the additional securities purchased fails to cover their cost to the Fund
(including any dividend requirements of preferred stock) to the Fund; (4) a
decline in net asset value could affect the ability of the Fund to make common
stock dividend payments; (5) a failure to pay dividends or make distributions
could result in the Fund's ceasing to qualify as a regulated investment company
under the Code; and (6) if the asset coverage for preferred stock or debt
securities declines to less than two hundred percent or three hundred percent,
respectively (as a result of market fluctuations or otherwise), the Fund may be
required to sell a portion of its investments when it may be disadvantageous to
do so.
Pursuant to Section 18 of the 1940 Act, it is unlawful for the Fund, as a
registered closed-end investment company, to issue any class of senior security,
or to sell any such security of which it is an issuer, unless it can satisfy
certain "asset coverage" ratios. The asset coverage ratio means the ratio of the
value of the total assets of such investment company (less all liabilities and
indebtedness not represented by senior securities) to the aggregate amount of
debt securities of such investment company (plus the involuntary liquidation
preference of the preferred stock of such company).
If the senior securities are stock, such as the Cumulative Preferred Stock
issued by the Fund, such stock must have an asset coverage of at least 200%
immediately after issuance or sale of such stock. If the senior securities
represent an indebtedness ("debt securities"), such debt securities must have an
asset coverage of at least 300% immediately after issuance or sale of such debt
securities.
Subject to certain exceptions, if the Fund fails to satisfy these asset
coverage ratios, it will, among other things, be prohibited from declaring any
dividend (except a dividend payable in stock issued by the Fund) or declaring
any other distribution. Notwithstanding the foregoing, a registered investment
company may, to the
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<PAGE> 32
extent permitted by the 1940 Act, segregate assets or "cover" transactions in
order to avoid the creation of a class of senior security.
The rating received by the Fund on its Cumulative Preferred Stock, or on
any other senior security which it may issue, is an assessment of the capacity
of the Fund to satisfy its obligations on the Cumulative Preferred Stock or such
other senior security. However, the rating on the Cumulative Preferred Stock
does not eliminate or mitigate the risks associated with investing in the Fund's
securities.
In addition, should the rating on the Cumulative Preferred Stock be lowered
or withdrawn by the relevant rating agency, there may be an adverse effect on
the market value of the Cumulative Preferred Stock. The Fund may also be
required to redeem all or part of the Cumulative Preferred Stock. If such
partial or whole redemption of the Cumulative Preferred Stock occurs, as a
result of the change in or withdrawal of the rating, the common stock of the
Fund will lose any potential benefits associated with a leveraged capital
structure.
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 shareholders and
will vote together with holders of shares of Common Stock and of any other
Preferred Stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders of shares
of 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 shareholders 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 Articles of Incorporation currently limits the maximum number of
directors of the Fund to twelve. 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 twelve, 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 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 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.
32
<PAGE> 33
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 Articles of Incorporation,
as amended and supplemented (including the Articles Supplementary) of the Fund
(the "Articles of Incorporation"), whether by merger, consolidation or
otherwise, so as to materially adversely affect any of the contract rights
expressly set forth in the Articles of Incorporation of holders of shares of the
Cumulative Preferred Stock or any other Preferred Stock. 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 Articles of Incorporation 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). Unless a
higher percentage is provided for under the Articles of Incorporation, the
affirmative vote of a majority (as defined in the 1940 Act) 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, open-ending the Fund and 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.
REPURCHASE OF SHARES
The Fund is a closed-end, management investment company and as such its
shareholders do not, and will not, have the right to redeem its shares. The
Fund, however, may repurchase its shares from time to time as and when it deems
such a repurchase advisable. Such repurchases may be made when the Fund's shares
are trading at a discount of 10% or more (or such other percentage as the Board
of Directors of the Fund may determine from time to time) from the net asset
value of the shares. Pursuant to the 1940 Act, the Fund may repurchase its
shares on a securities exchange (provided that the Fund has informed its
shareholders within the preceding six months of its intention to repurchase such
shares) or as otherwise permitted in accordance with Rule 23c-1 under the 1940
Act. Under that Rule, certain conditions must be met regarding, among other
things, distribution of net income for the preceding fiscal year, identity of
the sellers, price paid, brokerage commissions, prior notice to shareholders of
an intention to purchase shares and purchasing in a manner and on a basis which
does not discriminate unfairly against the other shareholders through their
interest in the Fund.
The Fund may incur debt, in an amount not exceeding 10% of its total
assets, to finance share repurchase transactions. See "Investment Restrictions"
in the SAI. Any gain in the value of the investments of the Fund during the term
of the borrowing that exceeds the interest paid on the amount borrowed would
cause the net asset value of its shares to increase more rapidly than in the
absence of borrowing. Conversely, any decline in the value of the investments of
the Fund would cause the net asset value of its shares to decrease more rapidly
than in the absence of borrowing. Borrowing money thus creates an opportunity
for greater capital gain but at the same time increases exposure to capital
risk.
When the Fund repurchases its shares for a price below their net asset
value, the net asset value of those shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of
33
<PAGE> 34
those outstanding shares will be affected, either positively or negatively.
Further, interest on borrowings to finance share repurchase transactions will
reduce the net income of the Fund.
For the twelve months ended December 31, 2000, no shares were repurchased
by the Fund in the open market.
The Fund does not currently have an established tender offer program or
established schedule for considering tender offers. No assurance can be given
that the Board of Directors of the Fund will decide to undertake any such tender
offers in the future, or, if undertaken, that they will reduce any market
discount.
From the commencement of the Fund's operations, the Fund's shares have
traded in the market for extended periods at both a premium to and a discount
from net asset value.
For the net asset value per share and the reported sales price of a share
of the Fund's Common Stock on the NYSE as of a recent date, see "The
Offer -- Subscription Price."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS
The Fund presently has provisions in its Articles of Incorporation 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 shareholders to
amend the Governing Documents or effectuate changes in the Fund's management.
These provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of Directors of the Fund is divided into
three classes, each having a term of no more than three years. Each year the
term of one class of Directors will expire. Accordingly, only those Directors in
one class may be changed in any one year, and it would require two years to
change a majority of the Board of Directors. Such system of electing Directors
may have the effect of maintaining the continuity of management and, thus, make
it more difficult for the shareholders of the Fund to change the majority of
Directors. See "Management of the Fund" in the SAI. A Director of the Fund may
be removed, but only with cause and by a vote of a majority of the votes
entitled to be cast for the election of Directors of the Fund. In addition, the
affirmative vote of the holders of 66 2/3% of its outstanding shares of each
class is required to authorize the conversion of the Fund from a closed-end to
an open-end investment company or generally to authorize any of the following
transactions:
(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
(v) 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 SEC; for the full text
of these provisions, see "Further 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
shareholder. The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interests of the shareholders
generally.
34
<PAGE> 35
CUSTODIAN AND TRANSFER, DIVIDEND DISBURSING AGENT AND REGISTRAR
Boston Safe Deposit and Trust Company (the "Custodian"), located at One
Boston Place, Boston, Massachusetts 02019, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement, the
Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon the average weekly
value of the total assets of the Fund, plus certain charges for securities
transactions.
State Street Bank and Trust Company located at Two Heritage Drive, Quincy,
Massachusetts 02171, serves as the Fund's dividend disbursing agent, as agent
under the Fund's Plan and as transfer agent and registrar for shares of the
Fund.
LEGAL MATTERS
With respect to matters of United States law, the validity of the shares
offered hereby will be passed on for the Fund by Willkie Farr & Gallagher, 787
Seventh Avenue New York, New York 10019. Counsel for the Fund will rely, as to
certain matters of Maryland law, on Venable, Baetjer and Howard, LLP 1800
Mercantile Bank and Trust Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
EXPERTS
The unaudited financial statements of the Fund as of June 30, 2000 have
been incorporated by reference into the SAI. The audited financial statements of
the Fund as of December 31, 1999 have also been incorporated by reference into
the SAI in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas,
New York, New York 10036.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information filed by the Fund can be inspected and copied at public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549; Seven World Trade Center, 13th Floor, New York, New York 10048; and 500
West Madison Street, Chicago, Illinois 60661. The Fund's Common Stock is listed
on the NYSE. Reports, proxy statements and other information concerning the Fund
can be inspected and copied at the Library of the NYSE at 20 Broad Street, New
York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form N-2
(together with the SAI and all the exhibits and the appendix thereto, the
"Registration Statement") filed by the Fund with the SEC under the Securities
Act and the 1940 Act. This Prospectus and the SAI do not contain all of the
information set forth in the Registration Statement. Reference is hereby made to
the Registration Statement and related exhibits for further information with
respect to the Fund and the Shares offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the SEC.
35
<PAGE> 36
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... 2
Investment Restrictions..................................... 10
Management of the Fund...................................... 12
The Investment Adviser...................................... 15
Portfolio Transactions...................................... 17
Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan...................................................... 18
Taxation.................................................... 19
Moody's Discount Factors.................................... 24
Net Asset Value............................................. 27
General Information......................................... 28
Beneficial Owners........................................... 28
Financial Statements........................................ 28
</TABLE>
36
<PAGE> 37
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
Aaa Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk
appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some
time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present. but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during
both good and bad times over the future Uncertainty of
position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract
over any long period of time may be small. Moody's applies
numerical modifiers (1, 2, and 3) with respect to the bonds
rated "Aa" through "B." The modifier 1 indicates that the
company ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the company ranks in the lower
end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
</TABLE>
A-1
<PAGE> 38
<TABLE>
<CAPTION>
STANDARD & POOR'S RATINGS SERVICES
<S> <C>
AAA This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
interest and repay principal.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small
degree.
A Principal and interest payments on bonds in this category
are regarded as safe. Debt rated A has a strong capacity to
pay interest and repay principal although they are somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher
rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher
rated categories.
</TABLE>
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation, and C the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions. Debt rated C 1 is
reserved for income bonds on which no interest is being paid and debt rated D is
in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is
attached to derivatives, hybrids and certain other obligations that S&P believes
may experience high variability in expected returns due to noncredit risks
created by the terms of the obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
A-2
<PAGE> 39
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR THE FUND'S INVESTMENT ADVISER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS AS SET FORTH IN THE
PROSPECTUS OR IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Fee Table............................. 7
Financial Highlights.................. 8
The Offer............................. 9
The Fund.............................. 18
Use of Proceeds....................... 18
Investment Objectives and Policies.... 19
Risk Factors and Special
Considerations...................... 21
Management of the Fund................ 26
Portfolio Transactions................ 27
Dividends and Distributions; Automatic
Dividend Reinvestment and Voluntary
Cash Purchase Plan.................. 27
Taxation.............................. 29
Capital Stock......................... 30
Custodian and Transfer, Dividend
Disbursing Agent and Registrar...... 35
Legal Matters......................... 35
Experts............................... 35
Further Information................... 35
Table of Contents of Statement of
Additional Information.............. 36
Appendix A............................ A-1
</TABLE>
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THE GABELLI EQUITY
TRUST INC.
18,114,735 SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE TO SUCH SHARES
[GABELLI GLOBAL LOGO]
------------------------
PROSPECTUS
------------------------
January 10, 2001
------------------------------------------------------
------------------------------------------------------
<PAGE> 40
The Gabelli Equity Trust Inc.
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
TELEPHONE 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 10, 2001
This Statement of Additional Information (the "SAI") relates to The Gabelli
Equity Trust Inc. (the "Fund"), and is not a prospectus. The Prospectus dated
January 10, 2001 ("Prospectus") sets forth concisely certain information about
the Fund that investors should know before investing and it should be read and
retained for future reference. This SAI contains additional and more detailed
information and should be read in conjunction with the balance of the Fund's
registration statement. Copies of the Prospectus and additional copies of the
SAI may be obtained without charge by writing or telephoning the Fund at the
address and telephone number set forth above.
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission
("SEC"), Washington, D.C. The registration statement may be obtained from the
SEC upon payment of the fee prescribed, or inspected at the SEC's office at no
charge.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THE
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICES........................... 2
INVESTMENT RESTRICTIONS..................................... 10
MANAGEMENT OF THE FUND...................................... 12
THE INVESTMENT ADVISER...................................... 15
PORTFOLIO TRANSACTIONS...................................... 17
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE
PLAN...................................................... 18
TAXATION.................................................... 19
MOODY'S DISCOUNT FACTORS.................................... 24
NET ASSET VALUE............................................. 27
GENERAL INFORMATION......................................... 28
BENEFICIAL OWNERS........................................... 28
FINANCIAL STATEMENTS........................................ 28
</TABLE>
<PAGE> 41
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 including common
stock, preferred stock, convertible securities, options and warrants. See
"Investment Objectives and Policies" in the Prospectus.
INVESTMENT PRACTICES
Special Situations. Subject to the Fund's policy of investing at least 65%
of its total assets in companies on the basis of fundamental value, the Fund
from time to time may, as a non-principal investment strategy, invest in
companies that are determined by Gabelli Funds, LLC (the "Investment Adviser")
to possess "special situation" characteristics. In general, a special situation
company is a company whose securities are expected to increase in value solely
by reason of a development particularly or uniquely applicable to the company.
Developments that may create special situations include, among others, a
liquidation, reorganization, recapitalization or merger, material litigation,
technological breakthrough or new management or management policies. The
principal risk associated with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investment therefore may not appreciate in value or may decline in
value.
Temporary Investments. Although under normal market conditions at least
65% of the Fund's assets will consist of equity securities, including common
stock, preferred stock, convertible securities, options and warrants, when a
temporary defensive posture is believed by the Investment Adviser to be
warranted ("temporary defensive periods"), the Fund may hold without limitation
cash or invest its assets in money market instruments and repurchase agreements
in respect of those instruments. The money market instruments in which the Fund
may invest are obligations of the United States government, its agencies or
instrumentalities ("U.S. Government Securities"); commercial paper rated A-1 or
higher by Standard & Poor's Ratings Services ("S&P") or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"); and certificates of deposit and bankers'
acceptances issued by domestic branches of U.S. banks that are members of the
Federal Deposit Insurance Corporation. For a description of such ratings, see
Appendix A to the Prospectus. The Fund may also invest up to 10% of the market
value of its total assets during temporary defensive periods in shares of money
market mutual funds that invest primarily in U.S. Government Securities and
repurchase agreements in respect of those securities. Money market mutual funds
are investment companies and the investments by the Fund in those companies are
subject to certain other limitations. See "Investment Restrictions." As a
shareholder in a mutual fund, the Fund will bear its ratable share of the fund's
expenses, including management fees, and will remain subject to payment of the
fees to the investment advisers with respect to assets so invested.
Lower Rated Securities. The Fund may invest up to 10% of its total assets
in fixed-income securities rated in the lower rating categories of recognized
statistical rating agencies, such as securities rated "CCC" or lower by S&P or
"Caa" or lower by Moody's, or non-rated securities of comparable quality. These
debt securities are predominantly speculative and involve major risk exposure to
adverse conditions and are often referred to in the financial press as "junk
bonds."
Generally, such lower rated securities and unrated securities of comparable
quality offer a higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than higher
quality bonds. In addition, such lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality
2
<PAGE> 42
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. In light of these risks, the Investment Adviser, in
evaluating the creditworthiness of an issue, whether rated or unrated, will take
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
such lower rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its portfolio and calculating its net asset value. Moreover,
the lack of a liquid trading market may restrict the availability of securities
for the Fund to purchase and may also have the effect of limiting the ability of
the Fund to sell securities at their fair market value to respond to changes in
the economy or the financial markets.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a typical
feature of fixed income securities), the Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
Also, as the principal value of bonds moves inversely with movements in interest
rates, in the event of rising interest rates the value of the securities held by
the Fund may decline proportionately more than a portfolio consisting of higher
rated securities. Investments in zero coupon bonds may be more speculative and
subject to greater fluctuations in value due to changes in interest rates than
bonds that pay interest currently.
The Fund may invest in securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Investment Adviser
believes that such issuers will honor their obligations or emerge from
bankruptcy protection and the value of these securities will appreciate. By
investing in securities of issuers in default, the Fund bears the risk that
these issuers will not continue to honor their obligations or emerge from
bankruptcy protection or that the value of the securities will not appreciate.
In addition to using recognized rating agencies and other sources, the
Investment Adviser also performs its own analysis in seeking investments that it
believes to be underrated (and thus higher-yielding) in light of the financial
condition of the issuer. Its analysis of issuers may include, among other
things, current and anticipated cash flow and borrowing requirements, value of
assets in relation to historical cost, strength of management, responsiveness to
business conditions, credit standing and current anticipated results of
operations. In selecting investments for the Fund, the Investment Adviser may
also consider general business conditions, anticipated changes in interest rates
and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced. In addition, it is possible that
statistical rating agencies might not change their ratings of a particular issue
or reflect subsequent events on a timely basis. Moreover, such ratings do not
assess the risk of a decline in market value. None of these events will require
the sale of the securities by the Fund, although the Investment Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
The market for certain lower rated and comparable unrated securities has in
the past experienced a major economic recession. The recession adversely
affected the value of such securities as well as the ability of certain issuers
of such securities to repay principal and pay interest thereon. The market for
those securities could react in a similar fashion in the event of any future
economic recession.
As a result of all these factors, the net asset value of the Fund, to the
extent it invests in high yield bonds, is expected to be more volatile than the
net asset value of funds which invest solely in higher rated debt securities.
Options. A call option is a contract that, in return for a premium, gives
the holder of the option the right to buy from the writer of the call option the
security or currency underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying security or
currency upon payment of the exercise price during the option period. A put
option is the reverse of a call option, giving the holder the right to sell the
security or
3
<PAGE> 43
currency to the writer and obligating the writer to purchase the underlying
security or currency from the holder.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other instrument held in its portfolio. A call option is also
covered if the Fund holds a call on the same instrument as the call written
where the exercise price of the call held is (1) equal to or less than the
exercise price of the call written or (2) greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, U.S.
Government Securities or other high grade short-term obligations in a segregated
account held with its custodian. A put option is "covered" if the Fund maintains
cash or other high grade short-term obligations with a value equal to the
exercise price in a segregated account held with its custodian, or else holds a
put on the same instrument as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once it has
been assigned an exercise notice, the Fund will be able 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 Investment Adviser to predict correctly
the effect of these factors. The use of options cannot serve as a complete hedge
since the price movement of securities underlying the options will not
necessarily follow the price movements of the portfolio securities subject to
the hedge.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event, it might not be
possible to effect closing transactions in particular options, so that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Fund, as a covered call option writer, is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and sell
call and put options on securities indices. A stock index reflects in a single
number the market value of many different stocks. Relative values are assigned
to the stocks included in an index and the index fluctuates with changes in the
market values of the stocks. The options give the holder the right to receive a
cash settlement during the term of the option based on the difference between
the exercise price and the value of the index. By writing a put or call option
on a securities index, the Fund is obligated, in return for the premium
received, to make delivery of this amount. The Fund may offset its position in
the stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
4
<PAGE> 44
The Fund also may buy or sell and call options on foreign currencies. A put
option on a foreign currency gives the purchaser of the option the right to sell
a foreign currency at the exercise price until the option expires. A call option
on a foreign currency gives the purchaser of the option the right to purchase
the currency at the exercise price until the option expires. Currency options
traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such
options. Over-the-counter options differ from exchange-traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller and generally do not have as much market liquidity as exchange-traded
options. Over-the-counter options are illiquid securities.
Use of options on securities indices entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Investment Adviser is satisfied with the development, depth and liquidity of the
market and the Investment Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of the Investment Adviser to predict correctly movements in the
direction of the stock market generally or of a particular industry. Because
options on securities indexes require settlement in cash, the Investment Adviser
may be forced to liquidate portfolio securities to meet settlement obligations.
Although the Investment Adviser will attempt to take appropriate measures
to minimize the risks relating to the Fund's writing of put and call options,
there can be no assurance that the Fund will succeed in any option writing
program it undertakes.
Futures Contracts and Options on Futures. The Fund will not enter into
futures contracts or options on futures contracts unless (i) the aggregate
initial margins and premiums do not exceed 5% of the fair market value of its
assets and (ii) the aggregate market value of its outstanding futures contracts
and the market value of the currencies and futures contracts subject to
outstanding options written by the Fund, as the case may be, do not exceed 50%
of the market value of its total assets. It is anticipated that these
investments, if any, will be made by the Fund solely for the purpose of bona
fide hedging against changes in the value of its portfolio securities and in the
value of securities it intends to purchase. Such investments will only be made
if they are economically appropriate to the reduction of risks involved in the
management of the Fund. In this regard, the Fund may enter into futures
contracts or options on futures for the purchase or sale of securities indices
or other financial instruments including but not limited to U.S. Government
Securities.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the assets underlying the
contract at a specified price at a specified future time. A "purchaser" of a
futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire the assets underlying the contract at a
specified future time. Certain futures contracts, including stock and bond index
futures, are settled on a net cash payment basis rather than by the sale and
delivery of the assets underlying the futures contracts.
No consideration will be paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required to deposit with
the broker an amount of cash or cash equivalents equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the exchange or
board of trade on which the contract is traded and brokers or members of such
board of trade may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract. Subsequent payments, known as "variation margin," to and from the
broker will be made daily as the price of the index or security underlying the
futures contract fluctuates. At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate its existing position in the contract.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract at a specified
exercise price at any time to the expiration of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account attributable
5
<PAGE> 45
to that contract, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option purchased is fixed at the point of sale, there are no daily cash payments
by the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the Investment Company Act of 1940,
as amended (the "1940 Act") an amount of cash or liquid securities equal to the
market value of the contract must be deposited and maintained in a segregated
account with the custodian of the Fund to collateralize the positions, thereby
ensuring that the use of the contract is unleveraged. For short positions in
futures contracts and sales of call options, the Fund may establish a segregated
account (not with a futures commission merchant or broker) with cash or liquid
securities that, when added to amounts deposited with a futures commission
merchant or a broker as margin, equal the market value of the instruments or
currency underlying the futures contract or call options, respectively (but are
not less than the stock price of the call option or the market price at which
the short positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may purchase
or sell interest rate futures contracts to take advantage of or to protect the
Fund against fluctuations in interest rates affecting the value of debt
securities which the Fund holds or intends to acquire. For example, if interest
rates are expected to increase, the Fund might sell futures contracts on debt
securities, the values of which historically have a high degree of positive
correlation to the values of the Fund's portfolio securities. Such a sale would
have an effect similar to selling an equivalent value of the Fund's portfolio
securities. If interest rates increase, the value of the Fund's portfolio
securities will decline, but the value of the futures contracts to the Fund will
increase at approximately an equivalent rate thereby keeping the net asset value
of the Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities with longer maturities and
investing in debt securities with shorter maturities when interest rates are
expected to increase. However, since the futures market may be more liquid than
the cash market, the use of futures contracts as a risk management technique
allows the Fund to maintain a defensive position without having to sell its
portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make its
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's custodian, assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with its custodian with respect to such
futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the
6
<PAGE> 46
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of futures
contracts, when the Fund is not fully invested it may purchase a call option on
a futures contract to hedge against a market advance due to declining interest
rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency futures
contracts and options thereon are similar to the interest rate futures contracts
and options thereon discussed previously. By entering into currency futures and
options thereon, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus, if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the Investment Adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the price of a foreign currency would move as against the U.S. dollar,
the Fund may exercise the option and thereby take a futures position to hedge
against the risk it had correctly anticipated or close out the option position
at a gain that will offset, to some extent, currency exchange losses otherwise
suffered by the Fund. If exchange rates move in a way the Fund did not
anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or sales
of securities index futures contracts are used for hedging purposes to attempt
to protect the Fund's current or intended investments from broad fluctuations in
stock or bond prices. For example, the Fund may sell securities index futures
contracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of the Fund's securities portfolio that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may be
offset, in whole or part, by gains on the futures position. When the Fund is not
fully invested in the securities market and anticipates a significant market
advance, it may purchase securities index futures contracts in order to gain
rapid market exposure that may, in part or entirely, offset increases in the
cost of
7
<PAGE> 47
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in securities index futures contracts will be closed
out. The Fund may write put and call options on securities index futures
contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts and Options on
Futures Contracts. Subject to the guidelines of the Board of Directors, the
Fund may engage in transactions in futures contracts and options hereon only for
bona fide hedging, yield enhancement and risk management purposes, in each case
in accordance with the rules and regulations of the CFTC, and not for
speculation.
Regulations of the CFTC applicable to the Fund permit the Fund's futures
and options on futures transactions to include (i) bona fide hedging
transactions without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) non-hedging transactions, provided that the
Fund not enter into such non-hedging transactions if, immediately thereafter,
the sum of the amount of initial margin deposits on the Fund's existing futures
positions and option premiums would exceed 5% of the market value of the Fund's
liquidating value, after taking into account unrealized profits and unrealized
losses on any such transactions.
Forward Currency Exchange Contracts. The Fund may engage in currency
transactions otherwise than on futures exchanges to protect against future
changes in the level of future currency exchange rates. The Fund will conduct
such currency exchange transactions either on a spot, i.e., cash, basis at the
rate then prevailing in the currency exchange market or on a forward basis, by
entering into forward contracts to purchase or sell currency. A forward contract
on foreign currency involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon by
the parties from the date of the contract, at a price set on the date of the
contract. The risk of shifting of a forward currency contract will be
substantially the same as a futures contract having similar terms. The Fund's
dealing in forward currency exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest receivable and Fund
expenses. Position hedging is the forward sale of currency with respect to
portfolio security positions denominated or quoted in that currency or in a
currency bearing a high degree of positive correlation to the value of that
currency.
The Fund may not position hedge with respect to a particular currency for
an amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If the
Fund enters into a position hedging transaction, the Fund's custodian or
subcustodian will place cash or other liquid securities in a segregated account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of the given forward contract. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will,
at all times, equal the amount of the Fund's commitment with respect to the
forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to
delivery. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of
the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to purchase is less than the price of the currency it has
agreed to sell. Should forward prices increase, the Fund will suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell. Closing out forward purchase contracts
involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward
8
<PAGE> 48
transactions in currency exchange are usually conducted on a principal basis, no
fees or commissions are involved. The use of foreign currency contracts does not
eliminate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result if the value of the currency increases.
If a decline in any currency is generally anticipated by the Investment
Adviser, the Fund may not be able to contract to sell the currency at a price
above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon. The
Fund's ability to establish and close out positions in futures contracts and
options thereon will be subject to the development and maintenance of liquid
markets. Although the Fund generally will purchase or sell only those futures
contracts and options thereon for which there appears to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option thereon at any particular time. In the
event no liquid market exists for a particular futures contract or option
thereon in which the Fund maintains a position, it will not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written option, wait to sell the underlying
securities until the option expires or is exercised or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option thereon which the Fund has written and which the Fund is unable to close,
the Fund would be required to maintain margin deposits on the futures contract
or option thereon and to make variation margin payments until the contract is
closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the Investment Adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the Investment Adviser's expectations are not met, the Fund will be in
a worse position than if a hedging strategy had not been pursued. For example,
if the Fund has hedged against the possibility of an increase in interest rates
which would adversely affect the price of securities in its portfolio and the
price of such securities increases instead, the Fund will lose part or all of
the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash to meet daily variation margin requirements, it
may have to sell securities to meet the requirements. These sales may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
Additional Risks of Foreign Options, Futures Contracts, Options on Futures
Contracts and Forward Contracts. Options, futures contracts and options thereon
and forward contracts on securities and currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also could be adversely affected by (i) other complex foreign political, legal
and economic factors, (ii) lesser availability than in the U.S. of data on which
to make trading decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in the foreign markets during non-business hours in
the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (v) lesser trading
volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
Risks of Currency Transactions. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental action
can result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has
entered into to be rendered useless, resulting in full currency exposure as well
as incurring transaction costs.
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<PAGE> 49
When Issued, Delayed Delivery Securities and Forward Commitments. The Fund
may enter into forward commitments for the purchase or sale of securities,
including on a "when issued" or "delayed delivery" basis, in excess of customary
settlement periods for the type of security involved. In some cases, a forward
commitment may be conditioned upon the occurrence of a subsequent event, such as
approval and consummation of a merger, corporate reorganization or debt
restructuring, i.e., a when, as and if issued security. When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment
and delivery taking place in the future, generally a month or more after the
date of the commitment. While it may only enter into a forward commitment with
the intention of actually acquiring the security, the Fund may sell the security
before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Fund prior to the
settlement date. The Fund will segregate with its custodian cash or liquid
securities in an aggregate amount at least equal to the amount of its
outstanding forward commitments.
Restricted and Illiquid Securities. The Fund may invest up to a total of
10% of its net assets in securities that are subject to restrictions on resale
and securities the markets for which are illiquid, including repurchase
agreements with more than seven days to maturity. Illiquid securities include
securities the disposition of which is subject to substantial legal or
contractual restrictions. The sale of illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Unseasoned issuers are companies (including
predecessors) that have operated less than three years. The continued liquidity
of such securities is not as well assured as that of publicly traded securities,
and accordingly the Board of Directors will monitor their liquidity. The Board
will review pertinent factors such as trading activity, reliability of price
information and trading patterns of comparable securities in determining whether
to treat any such security as liquid for purposes of the foregoing 15% test. To
the extent the Board treats such securities as liquid, temporary impairments to
trading patterns of such securities may adversely affect the Fund's liquidity.
To the extent it can do so consistent with the foregoing limitations, the
Fund may invest in non-publicly traded securities, including securities that are
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), but that can be offered and sold to qualified institutional buyers under
Rule 144A under the Securities Act. The Board of Directors has adopted
guidelines and delegated to the Adviser, subject to the supervision of the Board
of Directors, the daily function of determining and monitoring the liquidity of
Rule 144A securities. Rule 144A securities may become illiquid if qualified
institutional buyers are not interested in acquiring the securities.
INVESTMENT RESTRICTIONS
The Fund operates under the following restrictions that constitute
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act). All percentage limitations set forth below apply
immediately after a purchase or initial investment and any subsequent change in
any applicable percentage resulting from market fluctuations does not require
elimination of any security from the portfolio.
The Fund may not:
1. Invest 25% or more of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry. This restriction does not apply to investments in U.S. Government
Securities.
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, if
more than 10% of the market value of the total assets of the Fund would be
invested in securities of other investment companies, more than 5% of the
market value of the total assets of the Fund would be invested in the
securities of any one investment company or the Fund would own more than 3%
of any other investment company's securities; provided, however, this
10
<PAGE> 50
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a dividend to
its shareholders.
3. Purchase or sell commodities or commodity contracts except that the
Fund may purchase or sell futures contracts and related options thereon if
immediately thereafter (i) no more than 5% of its total assets are invested
in margins and premiums and (ii) the aggregate market value of its
outstanding futures contracts and market value of the currencies and
futures contracts subject to outstanding options written by the Fund do not
exceed 50% of the market value of its total assets. The Fund may not
purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase any securities on margin or make short sales, except that
the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
5. Make loans of money, except by the purchase of a portion of
publicly distributed debt obligations in which the Fund may invest, and
repurchase agreements with respect to those obligations, consistent with
its investment objectives and policies. The Fund reserves the authority to
make loans of its portfolio securities to financial intermediaries in an
aggregate amount not exceeding 20% of its total assets. Any such loans may
only be made upon approval of, and subject to any conditions imposed by,
the Board of Directors of the Fund. Because these loans would at all times
be fully collateralized, the risk of loss in the event of default of the
borrower should be slight.
6. Borrow money, except that the Fund may borrow from banks and other
financial institutions on an unsecured basis, in an amount not exceeding
10% of its total assets, to finance the repurchase of its shares. The Fund
also may borrow money on a secured basis from banks as a temporary measure
for extraordinary or emergency purposes. Temporary borrowings may not
exceed 5% of the value of the total assets of the Fund at the time the loan
is made. The Fund may pledge up to 10% of the lesser of the cost or value
of its total assets to secure temporary borrowings. The Fund will not
borrow for investment purposes. Immediately after any borrowing, the Fund
will maintain asset coverage of not less than 300% with respect to all
borrowings. While the borrowing of the Fund exceeds 5% of its respective
total assets, the Fund will make no further purchases of securities,
although this limitation will not apply to repurchase transactions as
described above.
7. Issue senior securities, except to the extent permitted by
applicable law.
8. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act in selling portfolio
securities; provided, however, this restriction shall not apply to
securities of any investment company organized by the Fund that are to be
distributed pro rata as a dividend to its shareholders.
9. Invest more than 10% of its total assets in illiquid securities,
such as repurchase agreements with maturities in excess of seven days, or
securities that at the time of purchase have legal or contractual
restrictions on resale.
11
<PAGE> 51
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund rests
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and the companies that furnish the Fund with
services, including agreements with the Investment Adviser, Boston Safe Deposit
and Trust Company, the Fund's custodian (the "Custodian") and the Fund's
transfer agent. The day-to-day operations of the Fund are delegated to the
Investment Adviser.
The names and business addresses of the Directors and Officers of the Fund
are set forth in the following table, together with their positions with the
Fund and their principal business occupations during the past five years and
their affiliations, if any, with the Investment Adviser or the Fund's
Administrator. Directors who are "interested persons" of the Fund, as defined by
the 1940 Act, are indicated by an asterisk. Cumulative Preferred Stock directors
are indicated by a "+".
As of December 31, 2000 the Directors and Officers of the Fund as a group
beneficially owned 1,315,482 shares of the Fund equaling 1.21% of the Fund's
outstanding shares.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME, BUSINESS ADDRESS AND AGE THE FUND PAST FIVE YEARS
------------------------------ ----------------------- ------------------------------------
<S> <C> <C>
Dr. Thomas E. Bratter................ Director Director, President and Founder, The
One Corporate Center John Dewey Academy (residential
Rye, New York 10580-1434 college preparatory therapeutic high
Age: 61 school).(7)(16)
Felix J. Christiana+................. Director Former Senior Vice President of
One Corporate Center Dollar Dry Dock Savings
Rye, New York 10580-1434 Bank.(l)(5)(6)(7)(8)
Age: 75 (10)(13)(16)(17)(19)
Anthony J. Colavita.................. Director President and Attorney at Law in the
One Corporate Center law firm of Anthony J. Colavita,
Rye, New York 10580-1434 P.C. since
Age: 64 1961.(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)
(11)(12)(13)(14)(15)(16)(17)(18)
(19)
James P. Conn+....................... Director Former Managing Director and Chief
One Corporate Center Investment Officer of Financial
Rye, New York 10580-1434 Security Assurance Holdings Ltd.
Age: 62 (1992-1998); Director of Meditrust
Corporation (real estate investment
trust) and First Republic
Bank.(1)(7)(10)(16)(18)
Frank J. Fahrenkopf, Jr.............. Director President and Chief Executive
One Corporate Center Officer of the American Gaming
Rye, New York 10580-1434 Association since June 1995; Partner
Age: 61 of Hogan and Hartson (law firm);
Chairman of International Trade
Practice Group; Co-Chairman of the
Commission on Presidential Debates;
Former Chairman of the Republican
National Committee.(7)(16)
</TABLE>
12
<PAGE> 52
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME, BUSINESS ADDRESS AND AGE THE FUND PAST FIVE YEARS
------------------------------ ----------------------- ------------------------------------
<S> <C> <C>
Mario J. Gabelli*.................... President, Director, Chairman of the Board and Chief
One Corporate Center and Chief Investment Investment Officer of Gabelli Asset
Rye, New York 10580-1434 Officer Management Inc. and Chief Investment
Age: 58 Officer of Gabelli Funds, LLC and
GAMCO Investors, Inc.; Chairman of
the Board and Chief Executive
Officer of Lynch Corporation
(diversified manufacturing company)
and Lynch Interactive Corporation (a
multimedia and services company);
Director of Spinnaker Industries,
Inc. (manufacturing
company).(1)(2)(3)(5)
(6)(7)(8)(9)(10)(11)(12)(13)(14)
(15)(16)(17)
Karl Otto Pohl*...................... Director Member of the Shareholder Committee
One Corporate Center of Sal Oppenheim Jr. & Cie (private
Rye, New York 10580-1434 investment bank); Director of
Age: 70 Gabelli Asset Management Inc.
(investment management), Zurich
Allied (insurance), and TrizecHahn
Corp. (real estate company); Former
President of the Deutsche Bundesbank
and Chairman of its Central Bank
Council (1980-1991).
(1)(2)(3)(5)(6)(7)(8)(9)(10)(11)
(12)(13)(14)(15)(16)(17)(18)(19)
Anthony R. Pustorino................. Director Certified Public Accountant;
One Corporate Center Professor of Accounting, Pace
Rye, New York 10580-1434 University since
Age: 75 1965.(1)(3)(4)(5)(6)(7)(10)(11)(16)
(17)(19)
Salvatore J. Zizza................... Director Chairman of The Bethlehem Corp.;
One Corporate Center Board Member of Hollis Eden
Rye, New York 10580-1434 Pharmaceuticals; Former Executive
Age: 54 Vice President of FMG Group (a
healthcare provider); Former
President and Chief Executive
Officer of the Lehigh Group Inc. (an
electrical supply wholesaler);
Former Chairman of the Executive
Committee and Director of Binnings
Buildings Products, Inc. until 1997;
Adviser to The Gabelli Growth
Fund.(1) (5)(7)(16)
Bruce N. Alpert...................... Vice President and Executive Vice President and Chief
One Corporate Center Treasurer Operating Officer of Gabelli Funds,
Rye, New York 10580-1434 LLC since 1988; Director and
Age: 49 President of Gabelli Advisers, Inc.,
and an officer of all mutual funds
managed by Gabelli Funds, LLC and
its affiliates.
James E. McKee....................... Secretary Vice President, General Counsel and
One Corporate Center Secretary of Gabelli Asset
Rye, New York 10580-1434 Management, Inc. since 1999 and
Age: 37 GAMCO Investors, Inc. since 1993;
Secretary of all mutual funds
managed by Gabelli Funds, LLC and
its affiliates.
</TABLE>
13
<PAGE> 53
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME, BUSINESS ADDRESS AND AGE THE FUND PAST FIVE YEARS
------------------------------ ----------------------- ------------------------------------
<S> <C> <C>
Carter W. Austin..................... Vice President Vice President of Gabelli Funds, LLC
One Corporate Center since 1996. Previously, Director of
Rye, New York 10580-1434 Business Development, for Links Club
Age: 33 International (an affiliate of the
PGA Tour).
</TABLE>
---------------
* "Interested person" of the Fund, as defined in the 1940 Act. Mr. Gabelli is
an "interested person" of the Fund as a result of his employment as an
officer of the Fund and the Adviser. Mr. Gabelli is also a registered
representative of an affiliated broker-dealer. Mr. Pohl is a Director of
the parent company of the Adviser.
(1) Trustee of The Gabelli Asset Fund
(2) Trustee of The Gabelli Blue Chip Value Fund
(3) Director of Gabelli Capital Series Fund, Inc.
(4) Director of Comstock Funds, Inc.
(5) Director of The Gabelli Convertible Securities Fund, Inc.
(6) Director of Gabelli Equity Series Funds, Inc.
(7) Director of The Gabelli Global Multimedia Trust Inc.
(8) Director of Gabelli Global Series Funds, Inc.
(9) Director of Gabelli Gold Fund, Inc.
(10) Trustee of The Gabelli Growth Fund
(11) Director of Gabelli International Growth Fund, Inc.
(12) Director of The Gabelli Investor Funds, Inc.
(13) Trustee of The Gabelli Mathers Fund
(14) Trustee of The Gabelli Money Market Funds
(15) Trustee of The Gabelli Utilities Fund
(16) Trustee of The Gabelli Utility Trust
(17) Director of The Gabelli Value Fund Inc.
(18) Trustee of The Gabelli Westwood Funds
(19) Director of The Treasurer's Fund, Inc.
The Board of Directors of the Fund is divided into three classes, with a
class having a term of no more than three years. Each year the term of office of
one class of directors expires. See "Certain Provisions of the Charter and
By-Laws" in the Prospectus.
The Fund and the Investment Adviser have adopted a code of ethics (the
"Code of Ethics") under Rule 17J-1 of the 1940 Act. The Code of Ethics permits
personnel, subject to the Code of Ethics and its restrictive provisions, to
invest in securities, including securities that may be purchased or held by the
Fund. The Code of Ethics can be reviewed and copied at the United States
Securities and Exchange Commission's Public Reference Room in Washington, D.C..
Information on the operations of the Reference Room may be obtained by calling
the Commission at (202) 742-8090. The Code of Ethics is also available on the
EDGAR database on the Commission's Internet Site at http://www.sec.gov. Copies
of the Code of Ethics may also be obtained, after paying a duplicating fee, by
electronic request at the following e-mail address: [email protected], or by
writing the Commission's Public Reference Room Section, Washington, D.C. 20549-
0102.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the Investment
Adviser or its affiliates a fee of $12,000 per year plus $1,500 per Directors'
meeting attended and $500 per meeting by telephone, together with each
Director's actual out-of-pocket expenses relating to attendance at such
meetings. The aggregate
14
<PAGE> 54
remuneration (exclusive of reimbursed personal expenses) accrued by the Fund
during the year ended December 31, 1999 amounted to $134,910.
The following table shows certain compensation information for the
Directors of the Fund for the year ended December 31, 1999. Officers and
Directors of the Fund who are employed by the Adviser received no compensation
or expense reimbursement from the Fund.
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION COMPENSATION FROM
FROM FUND FUND AND FUND
NAME OF DIRECTOR OR OFFICER (FISCAL YEAR) COMPLEX PAID*
--------------------------- ------------- -----------------
<S> <C> <C>
Mario J. Gabelli............................................ $ 0 $ 0(17)
Dr. Thomas E. Bratter....................................... $21,500 $ 33,750(3)
Felix J. Christiana......................................... $24,000 $ 99,250(11)
Anthony J. Colavita......................................... $ 2,000 $ 94,875(17)
James P. Conn............................................... $21,000 $ 53,625(6)
Frank J. Fahrenkopf, Jr..................................... $21,610 $ 26,577(3)
Karl Otto Pohl.............................................. $ 1,300 $ 7,042(19)
Anthony R. Pustorino........................................ $23,000 $107,250(11)
Salvatore J. Zizza.......................................... $20,500 $ 58,750(5)+
</TABLE>
---------------
* Represents the total compensation paid to such persons during the calendar
year ended December 31, 1999 by portfolios of investment companies (including
the Fund) from which such person receives compensation that are considered
part of the same fund complex as the Fund because they have common or
affiliated investment advisers. The parenthetical number represents the number
of such investment companies from which such person received compensation.
+ Includes compensation received from serving as an adviser of The Gabelli
Growth Fund during 1999.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
The By-Laws of the Fund provide that the Fund will indemnify its Directors
and officers and may indemnify its employees or agents against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with the Fund, to the fullest extent permitted by law.
In addition, the Articles of Incorporation of the Fund provide that the Fund's
Directors and officers will not be liable to shareholders 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.
THE INVESTMENT ADVISER
The Investment Adviser is a New York limited liability company that also
serves as Investment Adviser to other closed-end investment companies and
open-end investment companies with aggregate assets in excess of $10.9 billion
as of December 31, 2000. The Investment Adviser is a registered investment
adviser under the 1940 Act. Mr. Mario J. Gabelli may be deemed a "controlling
person" of the Adviser on the basis of his controlling interest in the parent
company of the Investment Adviser. The Investment Adviser has several affiliates
that provide investment advisory services: GAMCO Investors, Inc. ("GAMCO") a
wholly-owned subsidiary of the Investment Adviser acts as investment adviser for
individuals, pension trusts, profit-sharing trusts and endowments, and had
assets under management of approximately $10.1 billion under its
15
<PAGE> 55
management as of December 31, 2000; Gabelli Advisers, Inc. acts as to the
Gabelli Westwood Funds with assets under management of approximately $446
million as of December 31, 2000; Gabelli Securities, Inc. acts as general
partner or investment manager to certain alternative investments products,
consisting primarily of risk arbitrage and merchant banking limited partnerships
and offshore companies, with assets under management of approximately $437
million as of December 31, 2000; and Gabelli Fixed Income, LLC acts as
investment adviser for the three portfolios of The Treasurer's Fund and separate
accounts having assets under management of approximately $1.6 billion as of
December 31, 2000.
Affiliates of the Investment Adviser may, in the ordinary course of their
business, acquire for their own account or for the accounts of their advisory
clients, significant (and possibly controlling) positions in the securities of
companies that may also be suitable for investment by the Fund. The securities
in which the Fund might invest may thereby be limited to some extent. For
instance, many companies in the past several years have adopted so-called
"poison pill" or other defensive measures designed to discourage or prevent the
completion of non-negotiated offers for control of the company. Such defensive
measures may have the effect of limiting the shares of the company which might
otherwise be acquired by the Fund if the affiliates of the Investment Adviser or
their advisory accounts have or acquire a significant position in the same
securities However, the Investment Adviser does not believe that the investment
activities of its affiliates will have a material adverse effect upon the Fund
in seeking to achieve its investment objectives. Securities purchased or sold
pursuant to contemporaneous orders entered on behalf of the investment company
accounts of the Investment Adviser or the advisory accounts managed by its
affiliates for their unaffiliated clients are allocated pursuant to principles
believed to be fair over time and not disadvantageous to any such accounts. The
Investment Adviser may on occasion give advice or take action with respect to
other clients that differ from the actions taken with respect to the Fund. The
Fund may invest in the securities of companies which are investment management
clients of GAMCO. In addition, portfolio companies or their officers or
directors may be minority shareholders of the Adviser or its affiliates
Pursuant to an Advisory Agreement (the "Advisory Agreement"), the
Investment Adviser manages the portfolio of the Fund in accordance with its
stated investment objectives and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities on behalf of the Fund and
manages its other business and affairs, all subject to the supervision and
direction of the Fund's Board of Directors. In addition, under the Advisory
Agreement, the Investment Adviser oversees the administration of all aspects of
the Fund's business and affairs and provides, or arranges for others to provide,
at the Investment Adviser's expense, certain enumerated services, including
maintaining the Fund's books and records, preparing reports to the Fund's
shareholders and supervising the calculation of the net asset value of its
shares. All expenses of computing the net asset value of the Fund, including any
equipment or services obtained solely for the purpose of pricing shares or
valuing its investment portfolio, are considered to be an expense of the Fund
under its Advisory Agreement.
The Advisory Agreement combines investment advisory and administrative
responsibilities in one agreement. The Adviser has in turn retained PFPC, Inc.,
to act as sub-administrator to the Fund. See "Management of the
Fund -- Sub-Administrator" in the Prospectus.
For services rendered by the Investment Adviser on behalf of the Fund under
the Advisory Agreement, the Fund pays the Investment Adviser a fee computed
daily and paid monthly at the annual rate of 1.00% of the average weekly net
assets of the Fund. The fees payable under the Advisory Agreement are higher
than the fees payable by most registered investment companies. Notwithstanding
the foregoing, the Investment Adviser will waive the portion of its investment
advisory fee attributable to an amount of assets of the Fund equal to the
aggregate stated value of the 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 Investment Adviser is not liable for any error
16
<PAGE> 56
or judgment or mistake of law or for any loss suffered by the Fund. As part of
the Advisory Agreement, the Fund has agreed that the name "Gabelli" is the
Investment Adviser's property, and that in the event the Investment Adviser
ceases to act as an investment adviser to the Fund, the Fund will change its
name to one not including the word "Gabelli."
The Advisory Agreement was initially approved by the Board of Directors at
a meeting held on July 17, 1986 and was approved most recently by the Board of
Directors on May 17, 2000. The Advisory Agreement is terminable without penalty
by the Fund on not more than sixty days' written notice when authorized by the
Board of Directors of the Fund, by the holders of a majority of the outstanding
voting securities of the Fund, as defined in the 1940 Act, or by the Investment
Adviser. The Advisory Agreement will automatically terminate in the event of its
assignment, as defined in the 1940 Act. The Advisory Agreement provides that,
unless terminated, it will remain in effect so long as continuance of the
Advisory Agreement is approved annually by the Board of Directors of the Fund,
or the shareholders of the Fund and in either case, by a majority vote of the
Directors who are not parties to the Advisory Contract or "interested persons"
as defined in the 1940 Act of any such person cast in person at a meeting called
specifically for the purpose of voting on the continuance of the Advisory
Agreement.
For each of the years ended December 31, 1997, December 31, 1998 and
December 31, 1999, the Investment Adviser was paid $11,136,210, $12,272,654 and
$14,000,719, respectively, for advisory and administrative services rendered to
the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is responsible for placing purchase and sale orders and the
allocation of brokerage on behalf of the Fund. Transactions in equity securities
are in most cases effected on U.S. stock exchanges and involve the payment of
negotiated brokerage commissions. In general, there may be no stated commission
in the case of certain debt securities and securities traded in over-the-counter
markets, but the prices of those securities may include undisclosed commissions
or mark-ups. Principal transactions are not entered into with affiliates of the
Fund. However, Gabelli & Company, Inc. ("Gabelli & Company") may execute
transactions in the over-the counter markets on an agency basis and receive a
stated commission therefrom. To the extent consistent with applicable provisions
of the 1940 Act and the rules and exemptions adopted by the Commission
thereunder, as well as other regulatory requirements, the Fund's Board of
Directors has determined that portfolio transactions may be executed through
Gabelli & Company and its broker-dealer affiliates if, in the judgment of the
Investment Adviser, the use of those broker-dealers is likely to result in price
and execution at least as favorable as those of other qualified broker-dealers,
and if, in particular transactions, those broker-dealers charge the Fund a rate
consistent with that charged to comparable unaffiliated customers in similar
transactions. The Fund has no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. In executing
transactions, the Investment Adviser seeks to obtain the best price and
execution for the Fund, taking into account such factors as the price, size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the Fund does
not necessarily pay the lowest commission available
For the fiscal years ended December 31, 1997, December 31, 1998 and
December 31, 1999, the Fund paid a total of $845,429, $836,479, $1,137,510,
respectively, in brokerage commissions, of which Gabelli & Company, Inc. and its
affiliates received $178,336, $362,737 and $554,925, respectively. The amount
received by Gabelli & Company, Inc. and its affiliates from the Fund in respect
of brokerage commissions for the fiscal year ended December 31, 1999 represented
48.7% of the aggregate dollar amount of brokerage commissions paid by the Fund
for such period. In addition, for the fiscal year ended December 31, 1999, the
Fund paid brokerage commissions to Gabelli & Company, Inc. with respect to 57.7%
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 Investment
Adviser or its affiliates may receive orders for transactions by the
17
<PAGE> 57
Fund. The term "research, market and statistical information" includes advice as
to the value of securities, and advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, and furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. Information so received will be in addition to and not
in lieu of the services required to be performed by the Investment Adviser under
the Advisory Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Investment Adviser and its
affiliates in providing services to clients other than the Fund, and not all
such information is used by the Investment Adviser in connection with the Fund.
Conversely, such information provided to the Investment Adviser and its
affiliates by brokers and dealers through whom other clients of the Investment
Adviser and its affiliates effect securities transactions may be useful to the
Investment Adviser in providing services to the Fund.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made by those
other accounts. When the same securities are purchased for or sold by the Fund
and any of such other accounts, it is the policy of the Investment Adviser and
its affiliates to allocate such purchases and sales in the manner deemed fair
and equitable to all of the accounts, including the Fund.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal years ended December 31,
1998 and December 31, 1999 was 39.8% and 38.0%, 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. However, portfolio
turnover will not otherwise be a limiting factor in making investment decisions
for the Fund. 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 shareholders.
AUTOMATIC DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan (the "Plan"), a shareholder whose shares of the Fund's common
stock, par value $.001 per share (the "Common Stock") is registered in his own
name will have all distributions reinvested automatically by State Street, which
is agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common 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 Bank and Trust Company ("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 NYSE 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.
18
<PAGE> 58
The automatic reinvestment of dividends and capital gains distributions
will not relieve participants of any income tax which may be payable on such
distributions. A participant in the Plan will be treated for Federal income tax
purposes as having received, on a dividend payment date, a dividend or
distribution in an amount equal to the cash the participant could have received
instead of shares.
The Voluntary Cash Purchase Plan is another vehicle for shareholders of the
Fund to increase their investment in the Fund. In order to participate in the
Voluntary Cash Purchase Plan, shareholders must have their shares registered in
their own name and participate in the Dividend Reinvestment Plan.
Participants in the Voluntary Cash Purchase Plan have the option of making
additional cash payments to State Street for investments in the Fund's shares at
the then current market price. Shareholders may send an amount from $250 to
$10,000. State Street will use these funds to purchase shares in the open market
on or about the 1st and 15th of each month. State Street will charge each
shareholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that any
voluntary cash payments be sent to State Street such that State Street receives
such payments approximately 10 days before the investment date. Funds not
received at least 5 days before the investment date shall be held for investment
until the next purchase date. A payment may be withdrawn without charge if
notice is received by State Street at least 48 hours before such payment is to
be invested.
State Street maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by 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 shareholder account under the Plan.
In the case of shareholders such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, State Street will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate 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. All correspondence concerning the Plan should
be directed to State Street at P.O. Box 8200, Boston, Massachusetts 02266-8200.
TAXATION
The following discussion is a brief summary of certain United States
federal income tax considerations affecting the Fund and its shareholders. No
attempt is made to present a detailed explanation of all federal, state, local
and foreign tax concerns, and the discussions set forth here and in the
Prospectus do not constitute tax advice. Investors are urged to consult their
own tax advisers with any specific questions relating to federal, state, local
and foreign taxes. The discussion reflects applicable tax laws of the United
States as of the date of this SAI, which tax laws may be changed or subject to
new interpretations by the courts or the Internal Revenue Service retroactively
or prospectively.
GENERAL
The Fund intends to continue to qualify as a regulated investment company
(a "RIC") under Subchapter M of the Code. If it so qualifies, the Fund will not
be subject to federal income tax on the portion of its net investment income
(i.e., income other than its net realized long-term and short-term capital gains
and on its net realized long-term and short-term capital gains, if any, which it
distributes to its shareholders in each taxable year, provided that an amount
equal to at least 90% of the sum of its investment company taxable income (i.e.,
90% of its taxable income minus the excess, if any, of its net realized
long-term capital gains over
19
<PAGE> 59
its net realized short-term capital losses (including any capital loss
carryovers), plus or minus certain other adjustments as specified in the Code)
and any net tax-exempt income for the taxable year is distributed to its
shareholders, but will be subject to tax at regular corporate rates on any
taxable income or gains that it does not distribute.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies and
(b) diversify its holdings so that, at the end of each quarter of each of the
Fund's taxable years, (i) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. government securities, securities of
other RICs and other securities with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the value of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities (other
than U.S. government securities or the securities of other RICs) of any one
issuer or any two or more issuers that the Fund controls and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses.
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify as a RIC in any year, it would be taxed in the
same manner as an ordinary corporation and distributions to the Fund's
shareholders would not be deductible by the Fund in computing its taxable
income. To qualify again to be taxed as a RIC in a subsequent year, the Fund
would be required to distribute to Cumulative Preferred Shareholders and Common
Shareholders as a net investment income dividend, its earnings and profits
attributable to non-RIC years reduced by an interest charge payable by the Fund
to the Internal Revenue Service ("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 with respect to
certain of the Fund's assets (the excess of aggregate gains, including items of
income, over aggregate losses with respect to such assets 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 at least equal to the sum of (1) 98% of its ordinary income for the
calendar year, (2) 98% of its capital gain net income (both long-term and
short-term) for the one-year period ending on October 31 of such year (unless 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
shareholders 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 on December 31 of the year the
distributions are declared, rather than when the distributions are received.
While the Fund intends to distribute its ordinary income and capital gain net
income in the manner necessary to minimize imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Fund's ordinary income
and capital gain net income will be distributed to avoid entirely the imposition
of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be long-term
capital gain or loss if the securities have been held by the Fund for more than
one year. Gain or loss on the sale of securities held for one year or less will
be short-term capital gain or loss.
20
<PAGE> 60
Foreign currency gain or loss on non-U.S. dollar denominated bonds and
other similar debt instruments and on any non-U.S. dollar denominated futures
contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as net investment income and loss.
If the Fund invests in stock of a passive foreign investment company (a
"PFIC"), the Fund may be subject to federal income tax on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock even if such income is distributed as a taxable dividend by the Fund to
its shareholders. The tax would be determined by allocating such distribution or
gain ratably to each day of the Fund's holding period for the stock. The amount
so allocated to any taxable year of the Fund prior to the taxable year in which
the excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal federal corporate income tax rate in effect for the year to
which it was allocated, and the tax would be further increased by an interest
charge. The amount allocated to the taxable year of the distribution or
disposition would be included in the Fund's net investment income and,
accordingly, would not be taxable to the Fund to the extent distributed by the
Fund as taxable dividends to shareholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect to 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 of the PFIC, even if not distributed to
the Fund, and such amounts would be subject to the 90% and excise tax
distribution requirements described above. 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 or impossible to obtain. Alternatively, the Fund
may be able to elect to mark to market its PFIC stock, resulting in the stock
being treated as sold and repurchased at fair market value on the last business
day of each taxable year. Any resulting gain would be reported as ordinary
income, and any resulting loss would be an ordinary loss that could only be
deducted to the extent of previously recognized gains.
The Fund may invest in debt obligations purchased at a discount, with the
result that the Fund may be required to accrue income for federal income tax
purposes before amounts due under the obligation are paid. The Fund may also
invest in securities rated in the medium to lower rating categories of
nationally recognized rating organizations, and in unrated securities ("high
yield securities"). A portion of the interest payments on such high yield
securities may be treated as dividends for federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at a
discount or any other investment that produces income that is not matched by a
corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income would
be treated as income earned by the Fund and therefore would be subject to the
distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income, as is required in order to avoid
Fund-level federal income taxation, or might prevent the Fund from distributing
enough ordinary income and capital gain net income to avoid completely the
imposition of the excise tax. To avoid this result, the Fund may be required to
borrow money or dispose of other securities to be able to make distributions to
its shareholders.
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" Such a suspension of distributions might prevent
the Fund from distributing 90% of its net investment income, as is required in
order to avoid Fund-level federal income taxation, or might prevent the Fund
from distributing enough income and capital gain net income to avoid completely
imposition of the excise tax. Upon any failure to meet the asset coverage
requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in
certain circumstances will, be required to partially redeem the shares of
Cumulative Preferred Stock in order to restore the requisite asset coverage and
avoid the adverse consequences to the Fund and its shareholders 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 federal income taxation
on the Fund's undistributed income.
21
<PAGE> 61
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures contracts are
"section 1256 contracts." Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions may be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the elections
accelerate the recognition of gain or loss from the affected straddle positions.
Because application of the straddle rules may affect the character and
timing of the Fund's gains, losses and deductions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. It is anticipated that the Fund
will not invest more than 35% of its total assets in foreign securities.
Accordingly, the Fund will not be eligible to elect to "pass-through" to
stockholders of the Fund the ability to use the foreign tax deduction or foreign
tax credit for foreign taxes paid with respect to qualifying taxes. In order to
make such an election, at least 50% of the Fund's total assets would be required
to be invested in foreign securities.
TAXATION OF STOCKHOLDERS
The Fund will determine either to distribute or to retain for reinvestment
all or part of its net capital gain. If any such gains are retained, the Fund
will be subject to a tax of 35% of such amount. In that event, the Fund expects
to designate the retained amount as undistributed capital gains in a notice to
its shareholders, each of whom (1) will be required to include in income for tax
purposes as long-term capital gains its share of such undistributed amount, (2)
will be entitled to credit its proportionate share of the tax paid by the Fund
against its Federal income tax liability and to claim refunds to the extent that
the credit exceeds such liability, and (3) will increase its basis in its shares
of the Fund by an amount equal to 65% of the amount of undistributed capital
gains included in such shareholder's gross income.
Distributions of Ordinary Income Dividends are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Ordinary Income
Dividends paid by the Fund may qualify for the dividends received deduction
available to corporations, but only to the extent that the Fund's income
consists of qualified dividends received from U.S. corporations. The amount of
any dividend distribution eligible for the dividends received deduction will be
designated by the Fund in a written notice to shareholders within 60 days of the
close of the taxable year. Distributions of net capital gains designated as
capital gain dividends ("Capital Gain Dividends"), if any, are taxable as
long-term capital gains, whether paid in cash or in shares, regardless of how
long the shareholder has held the Fund's shares, and are not eligible for the
dividends received deduction.
Shareholders receiving distributions in the form of newly issued shares
will have a basis in such shares of the Fund equal to the fair market value of
such shares on the distribution date. If the net asset value of shares
22
<PAGE> 62
is reduced below a shareholder's cost as a result of a distribution by the Fund,
such distribution will be taxable even though it represents a return of invested
capital. The price of shares purchased at any time may reflect the amount of a
forthcoming distribution. Those purchasing shares just prior to a distribution
will receive a distribution which will be taxable to them, even though it
represents in part a return of invested capital.
Upon a sale or exchange of shares, a shareholder will realize a taxable
gain or loss depending upon his or her basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares have been held for more
than one year. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a 61-day period beginning 30
days before and ending 30 days after the day that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any Capital Gain Dividends received by
the shareholder with respect to such shares.
Ordinary Income Dividends and Capital Gains Dividends also may be subject
to state and local taxes. Shareholders are urged to consult their own tax
advisers regarding specific questions about the U.S. Federal, state, local or
foreign tax consequences to them of investing in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31% on
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder'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.
23
<PAGE> 63
MOODY'S DISCOUNT FACTORS
The following table identifies the Moody's Discount Factors used to
discount particular Moody's Eligible Assets, as defined in the Prospectus.
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Short Term Money Market Instruments (other than U.S.
Government Obligations set forth below) and other
commercial paper:
Demand or time deposits, certificates of deposit and
bankers' acceptances includible in Moody's Short Term
Money Market Instruments............................... 1.00
Commercial paper rated P-1 by Moody's maturing in 30 days
or less................................................ 1.00
Commercial paper rated P-1 by Moody's maturing in more
than 30 days but in 270 days or less................... 1.15
Commercial paper rated A-1+ by S&P maturing in 270 days or
less................................................... 1.25
Repurchase obligations includible in Moody's Short Term
Money Market Instruments if term is less than 30 days
and counterparty is rated at least A2.................. 1.00
Other repurchase obligations.............................. *
Common stocks............................................... 3.00
Convertible preferred stocks................................ 3.00
Preferred stocks:
Auction rate preferred stocks............................. 3.50
Other preferred stocks issued by issuers in the financial
and industrial industries.............................. 1.62
Other preferred stocks issued by issuers in the utilities
industry............................................... 1.40
U.S. Government Obligations (other than U.S. Treasury
Securities Strips set forth below) with remaining terms of
maturity of:
1 year or less......................................... 1.04
2 years or less........................................ 1.09
3 years or less........................................ 1.12
4 years or less........................................ 1.15
5 years or less........................................ 1.18
7 years or less........................................ 1.21
10 years or less....................................... 1.24
15 years or less....................................... 1.25
20 years or less....................................... 1.26
30 years or less....................................... 1.26
U.S. Treasury Securities Strips with remaining terms to
maturity of:
1 year or less......................................... 1.04
2 years or less........................................ 1.10
3 years or less........................................ 1.14
4 years or less........................................ 1.18
5 years or less........................................ 1.21
7 years or less........................................ 1.27
10 years or less....................................... 1.34
15 years or less....................................... 1.45
20 years or less....................................... 1.54
30 years or less....................................... 1.66
</TABLE>
24
<PAGE> 64
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Corporate evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 with
remaining terms to maturity of:
1 year or less......................................... 1.10
2 years or less........................................ 1.13
3 years or less........................................ 1.18
4 years or less........................................ 1.21
5 years or less........................................ 1.23
7 years or less........................................ 1.27
10 years or less....................................... 1.30
15 years or less....................................... 1.31
20 years or less....................................... 1.32
30 years or less....................................... 1.33
Corporate evidences of indebtedness rated Aa3 with
remaining terms to maturity of:
1 year or less......................................... 1.15
2 years or less........................................ 1.20
3 years or less........................................ 1.23
4 years or less........................................ 1.27
5 years or less........................................ 1.29
7 years or less........................................ 1.33
10 years or less....................................... 1.36
15 years or less....................................... 1.37
20 years or less....................................... 1.38
30 years or less....................................... 1.39
Corporate evidences of indebtedness rated A3 with
remaining terms to maturity of:
1 year or less......................................... 1.20
2 years or less........................................ 1.26
3 years or less........................................ 1.29
4 years or less........................................ 1.33
5 years or less........................................ 1.35
7 years or less........................................ 1.39
10 years or less....................................... 1.42
15 years or less....................................... 1.43
20 years or less....................................... 1.45
30 years or less....................................... 1.45
Corporate evidences of indebtedness rated at least Baa3
with remaining terms of maturity of:
1 year or less......................................... 1.25
2 years or less........................................ 1.31
3 years or less........................................ 1.35
4 years or less........................................ 1.38
5 years or less........................................ 1.41
7 years or less........................................ 1.45
10 years or less....................................... 1.48
15 years or less....................................... 1.50
20 years or less....................................... 1.51
30 years or less....................................... 1.52
</TABLE>
25
<PAGE> 65
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Corporate evidences of indebtedness rated at least Ba3
with remaining terms of
maturity of:
1 year or less......................................... 1.36
2 years or less........................................ 1.42
3 years or less........................................ 1.46
4 years or less........................................ 1.50
5 years or less........................................ 1.53
7 years or less........................................ 1.57
10 years or less....................................... 1.61
15 years or less....................................... 1.62
20 years or less....................................... 1.64
30 years or less....................................... 1.64
Corporate evidences of indebtedness rated at least B1 and
B2 with remaining terms of maturity of:
1 year or less......................................... 1.46
2 years or less........................................ 1.53
3 years or less........................................ 1.57
4 years or less........................................ 1.61
5 years or less........................................ 1.65
7 years or less........................................ 1.70
10 years or less....................................... 1.73
15 years or less....................................... 1.75
20 years or less....................................... 1.76
30 years or less....................................... 1.77
Convertible corporate evidences of indebtedness rated with
senior debt securities rated Aa3 issued by the
following type of issuers:
Utility................................................ 1.28
Industrial............................................. 1.75
Financial.............................................. 1.53
Transportation......................................... 2.13
Convertible corporate evidences of indebtedness rated with
senior debt securities rated A3 issued by the following
type of issuers:
Utility................................................ 1.33
Industrial............................................. 1.80
Financial.............................................. 1.58
Transportation......................................... 2.18
Convertible corporate evidences of indebtedness rated with
senior debt securities rated Baa3 issued by the
following type of issuers:
Utility................................................ 1.48
Industrial............................................. 1.95
Financial.............................................. 1.73
Transportation......................................... 2.33
Convertible corporate bonds with senior debt securities
rated Ba3 issued by the following type of issuers:
Utility................................................ 1.49
Industrial............................................. 1.96
Financial.............................................. 1.74
Transportation......................................... 2.34
</TABLE>
26
<PAGE> 66
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
------------------------------- ----------------
<S> <C>
Convertible corporate bonds with senior debt securities
rated B1 or B2 issued by the following type of issuers:
Utility................................................ 1.59
Industrial............................................. 2.06
Financial.............................................. 1.84
Transportation......................................... 2.44
</TABLE>
---------------
* Discount Factors applicable to underlying assets.
NET ASSET VALUE
The net asset value of the Fund's common shares is computed based on the
market value of the securities it holds and determined daily as of the close of
regular trading on the NYSE and reported in financial newspapers of general
circulation as of the last day of each week.
Portfolio securities which are traded only on stock exchanges are valued at
the last sale price as of the close of regular trading on the day the securities
are being valued, or lacking any sales, at the mean between closing bid and
asked prices. Securities traded in the over-the-counter market which are Nasdaq
National Market securities are valued at the last sale price as of the close of
regular trading on the day the securities are being valued. Other
over-the-counter securities are valued at the most recent bid prices as obtained
from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the counter market and on a stock
exchange are valued according to the broadest and most representative market, as
determined by the Investment Adviser. Securities traded primarily on foreign
exchanges are valued at the closing values of such securities on their
respective exchanges as of the day the securities are being valued. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund. Short-term investments that mature in 60 days or less are
valued at amortized cost, unless the Board of Directors of the Fund determines
that such valuation does not constitute fair value.
Net asset value per share is calculated by dividing the value of the
securities held plus any cash or other assets minus all liabilities, including
accrued expenses, and less the liquidation value of any preferred stock
outstanding by the total number of shares outstanding at such time.
27
<PAGE> 67
GENERAL INFORMATION
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019,
serves as the Fund's legal counsel.
PricewaterhouseCoopers LLP ("PWC"), 1177 Avenue of the Americas, New York,
New York 10036, has been selected as independent accountants for the Fund. As
the Fund's independent accountants PWC is responsible for auditing the Fund's
financial statements in accordance with Generally Accepted Accounting
Principles. PWC also prepares a report of its findings thereon and presents its
findings to the Fund's Board of Directors. PWC also reviews the Fund's state and
federal income tax returns prepared by the Fund's Administrator. For its
services, PWC charges fees which are paid by the Fund.
CUSTODIAN AND TRANSFER, DIVIDEND DISBURSING AGENT AND REGISTRAR
Boston Safe Deposit and Trust Company (the "Custodian"), located at One
Boston Place, Boston, Massachusetts 02019, serves as the custodian of the Fund's
assets pursuant to a custody agreement. Under the custody agreement, the
Custodian holds the Fund's assets in compliance with the 1940 Act. For its
services, the Custodian will receive a monthly fee based upon the average weekly
value of the total assets of the Fund, plus certain charges for securities
transactions.
State Street Bank and Trust Company located at Two Heritage Drive, Quincy,
Massachusetts 02171, serves as the Fund's dividend disbursing agent, as agent
under the Fund's Plan and as transfer agent and registrar for shares of the
Fund.
BENEFICIAL OWNERS
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. As of December 31, 2000, the Directors and Officers of the Fund as a
group beneficially owned approximately 1.21% of the outstanding shares of the
Fund's Common Stock.
FINANCIAL STATEMENTS
The unaudited financial statements included in the Semi-Annual Report to
the Fund's Shareholders for the six months ended June 30, 2000 are incorporated
herein by reference from the Fund's Semi-Annual Report to Shareholders filed
with the SEC on August 31, 2000. The audited financial statements included in
the Annual Report to the Fund's Shareholders for the fiscal year ended December
31, 1999, together with the report of PricewaterhouseCoopers LLP thereon, are
also incorporated herein by reference from the Fund's Annual Report to
Shareholders filed with the SEC on March 7, 2000. All other portions of the
Annual Report to Shareholders are not incorporated herein by reference and are
not part of the Registration Statement. A copy of the Annual Report to
Shareholders may be obtained without charge by writing to the Fund at its
address at One Corporate Center, Rye, New York 10580-1434 or by calling the Fund
toll-free at 800-GABELLI (422-3554).
28
