<PAGE> 1
PROSPECTUS
1,250,000 SHARES
THE GABELLI GLOBAL
MULTIMEDIA TRUST INC.
7.92% CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
[GABELLI GLOBAL LOGO]
------------------------
The 7.92% Cumulative Preferred Stock, liquidation preference $25 per share
(the "Cumulative Preferred Stock"), to be issued by The Gabelli Global
Multimedia Trust Inc. (the "Fund") will be senior securities of the Fund. Prior
to this offering, there has been no public market for the Cumulative Preferred
Stock. The Fund is a closed-end non-diversified management investment company.
The Fund's primary investment objective is long-term growth of capital,
primarily through investment in a portfolio of common stock and other securities
of foreign and domestic companies involved in the telecommunications, media,
publishing and entertainment industries. Income is a secondary objective of the
Fund. Gabelli Funds, Inc. is the Fund's investment adviser.
Dividends on the Cumulative Preferred Stock offered hereby, at the annual
rate of 7.92% of the liquidation preference of $25 per share, are cumulative
from the Date of Original Issue thereof and are payable semi-annually on June 26
and December 26 in each year, commencing on December 26, 1997.
During the Fund's last two fiscal years, distributions paid by the Fund on
its Common Stock have consisted of Ordinary Income Dividends (as defined below)
and Capital Gain Dividends (as defined below), and under current market
conditions it is expected that dividends paid on the Cumulative Preferred Stock
similarly will consist of Ordinary Income Dividends and Capital Gain Dividends.
No assurance can be given, however, as to what percentage, if any, of the
dividends paid on the Cumulative Preferred Stock will be Capital Gain Dividends.
It is a condition to its issuance that the Cumulative Preferred Stock be
rated 'aaa' by Moody's Investors Service, Inc. ("Moody's"). In connection with
the receipt of such rating, the composition of the Fund's portfolio must reflect
guidelines established by Moody's and the Fund will be required to maintain a
minimum discounted asset coverage with respect to the Cumulative Preferred
Stock. See "Description of Cumulative Preferred Stock -- Rating Agency
Guidelines."
The Cumulative Preferred Stock is subject to mandatory redemption in whole
or in part by the Fund for cash at a price equal to $25 per share plus
accumulated but unpaid dividends (whether or not earned or declared) (the
"Redemption Price") if the Fund fails to maintain either of the minimum asset
coverages required by Moody's and the Investment Company Act of 1940, as
amended. Commencing June 1, 2002 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 1, 2002, the Cumulative Preferred
Stock will be redeemable, at the option of the Fund, for cash at a price equal
to the Redemption Price, only to the extent necessary for the Fund to continue
to qualify for tax treatment as a regulated investment company. See "Description
of Cumulative Preferred Stock -- Redemption."
(Continued on next page)
APPLICATION HAS BEEN MADE TO LIST THE CUMULATIVE PREFERRED STOCK ON THE NEW YORK
STOCK EXCHANGE (THE "NYSE"). TRADING OF THE CUMULATIVE PREFERRED STOCK ON THE
NYSE IS EXPECTED TO COMMENCE WITHIN 30 DAYS OF THE DATE OF THIS PROSPECTUS. SEE
"UNDERWRITING."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS
PUBLIC(1) OR COMMISSIONS(2) TO FUND(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $25.00 $0.7875 $24.2125
- -------------------------------------------------------------------------------------------------------
Total(3) $31,250,000 $984,375 $30,265,625
=======================================================================================================
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
(3) Before deducting offering expenses payable by the Fund, estimated at
$429,625.
------------------------
The shares of Cumulative Preferred Stock are being offered by the
Underwriters named herein, subject to prior sale, when, as
and if accepted by them and subject to certain conditions. It is expected that
delivery of the shares of Cumulative Preferred Stock will be made in book-entry
form through the facilities of The Depository Trust Company on or about June 4,
1997.
------------------------
SMITH BARNEY INC. GABELLI & COMPANY, INC.
May 30, 1997
<PAGE> 2
This Prospectus sets forth certain information about the Fund an investor
should know before investing and should be retained for future reference.
A Statement of Additional Information dated May 30, 1997 (the "SAI") has
been filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus. The table of contents of the SAI appears on page
36 of this Prospectus. A copy of the SAI may be obtained without charge by
writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or calling the Fund toll-free at (800) 422-3554.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CUMULATIVE
PREFERRED STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the SAI.
Capitalized terms not defined in this Summary are defined in the Glossary that
appears at the end of this Prospectus.
The Fund................... The Fund has been engaged in business as a
closed-end non-diversified management investment
company since November 15, 1994.
Investment Objectives...... The Fund's primary investment objective is
long-term growth of capital, primarily through
investment in a portfolio of common stock and
other securities of foreign and domestic
companies involved in the telecommunications,
media, publishing and entertainment industries.
Income is a secondary objective of the Fund. No
assurance can be given that the Fund's investment
objectives will be achieved. See "Investment
Objectives and Policies." The Fund's outstanding
common stock, par value $.001 per share (the
"Common Stock"), is listed and traded on the
NYSE. As of March 31, 1997, the net assets of the
Fund were approximately $91 million.
Special Characteristics
and Risks................ The Fund invests a significant portion of its
assets in companies in the telecommunications,
media, publishing and entertainment industries
and, as a result, the value of the Fund's shares
will be more susceptible to factors affecting
those particular types of companies, including
government regulation, greater price volatility
for the overall market, rapid obsolescence of
products and services, intense competition and
strong market reactions to technological
developments. See "Risk Factors and Special
Considerations -- Industry Risks."
The Fund invests in smaller companies which may
benefit from the development of new products and
services. These smaller companies may present
greater opportunities for capital appreciation
and may also involve greater investment risk than
large, established issuers. See "Risk Factors and
Special Considerations -- Smaller Companies."
There is no limitation on the amount of foreign
securities in which the Fund may invest.
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."
The market price for the Cumulative Preferred Stock
will be influenced by changes in interest rates,
the perceived credit quality of the Cumulative
Preferred Stock and other factors. As indicated
above, the Cumulative Preferred Stock is subject
to redemption under specified circumstances.
Subject to such circumstances, the Cumulative
Preferred Stock is perpetual. The credit rating
on the Cumulative Preferred Stock could be
reduced or withdrawn while an investor holds
shares, and the credit rating does not eliminate
or mitigate the risks of investing in the
Cumulative Preferred Stock. A reduction or
withdrawal of the credit rating would likely have
an adverse effect on the market value of the
Cumulative Preferred Stock. The Cumulative
3
<PAGE> 4
Preferred Stock is not an obligation of the Fund.
Although unlikely, precipitous declines in the
value of the Fund's assets could result in the
Fund having insufficient assets to redeem all of
the Cumulative Preferred Stock for the full
Redemption Price.
The Fund may also purchase or sell options, engage
in transactions in financial futures and options
thereon, engage in short sales of securities it
owns or has the right to acquire, enter into
repurchase agreements and forward foreign
currency exchange contracts, lend its portfolio
securities to securities broker-dealers or
financial institutions and borrow money for
short-term credits from banks as may be necessary
for temporary or emergency purposes. These
techniques may involve special risks. See
"Special Investment Methods."
The Offering............... The Fund is offering 1,250,000 shares of 7.92%
Cumulative Preferred Stock, par value $.001 per
share, liquidation preference $25 per share (the
"Cumulative Preferred Stock"), at a purchase
price of $25 per share (the "Offering").
Dividends.................. Dividends on the Cumulative Preferred Stock, at the
annual rate of 7.92% of the liquidation
preference, are cumulative from the Date of
Original Issue and are payable, when, as and if
declared by the Board of Directors of the Fund,
out of funds legally available therefor, semi-
annually on June 26 and December 26 in each year,
commencing December 26, 1997. The Fund may from
time to time, at its option, pay dividends on the
Cumulative Preferred Stock on a quarterly basis
at the annual rate of 7.92%. See "Description of
Cumulative Preferred Stock -- Dividends."
Potential Tax Benefit to
Certain Investors........ The Fund intends to allocate net capital gain (the
excess of its net long-term capital gain over its
net short-term capital loss) income, as well as
other types of income, proportionately among
holders of shares of Common Stock and shares of
Cumulative Preferred Stock in accordance with the
current position of the Internal Revenue Service
(the "IRS"). During the Fund's last two fiscal
years, distributions paid by the Fund have
consisted of dividends paid out of the Fund's net
investment income which includes net short-term
capital gain ("Ordinary Income Dividends") and
dividends paid out of the Fund's net capital gain
("Capital Gain Dividends") and it is expected
that under current market conditions dividends
paid on the Cumulative Preferred Stock will
likewise consist of both Ordinary Income
Dividends and Capital Gain Dividends.
Accordingly, certain investors in the Cumulative
Preferred Stock may realize a tax benefit to the
extent that dividends paid by the Fund on those
shares are Capital Gain Dividends since such
dividends are taxed at long-term capital gain
rates. See "-- Ordinary Income Equivalent Yield
Tables." Subject to statutory limitations,
investors may also be entitled to offset the
portion of a Cumulative Preferred Stock dividend
which is a Capital Gain Dividend with capital
losses incurred by such investors. See
"Taxation." No assurance can be given, however,
as to what percentage, if any, of
4
<PAGE> 5
the dividends paid on the Cumulative Preferred
Stock will be Capital Gain Dividends. To the
extent that dividends on the shares of Cumulative
Preferred Stock are not Capital Gain Dividends,
they will be Ordinary Income Dividends and will
be taxed at ordinary rates or treated as a return
of capital.
Rating..................... It is a condition to issuance that the Cumulative
Preferred Stock be issued with a rating of 'aaa'
from Moody's. The Articles Supplementary creating
and fixing the rights and preferences of the
Cumulative Preferred Stock (the "Articles
Supplementary") contain certain provisions which
reflect guidelines established by Moody's (the
"Rating Agency Guidelines") in order to obtain
such rating on the Cumulative Preferred Stock on
the Date of Original Issue. See "Description of
Cumulative Preferred Stock -- Rating Agency
Guidelines."
Asset Coverage............. In order to maintain the 'aaa' rating on the
Cumulative Preferred Stock, the Fund will be
required to maintain Adjusted Assets greater than
or equal to the Basic Maintenance Amount in
accordance with discount factors and guidelines
established by Moody's. In addition, the Fund
will be required to maintain as of the last
Business Day of each March, June, September and
December of each year, an asset coverage of at
least 200% (or such higher or lower percentage as
may be required at the time under the 1940 Act)
with respect to all outstanding senior securities
of the Fund which are stock, including the
Cumulative Preferred Stock. See "Description of
Cumulative Preferred Stock -- Asset Maintenance."
Voting Rights.............. At all times, holders of shares of Cumulative
Preferred Stock or any other Preferred Stock,
voting as a single class, will be entitled to
elect two members of the Fund's Board of
Directors, and holders of Cumulative Preferred
Stock, any other Preferred Stock and Common
Stock, voting as a single class, will elect the
remaining directors. However, upon a failure by
the Fund to pay dividends on the Cumulative
Preferred Stock or any other Preferred Stock in
an amount equal to two full years' dividends,
holders of Cumulative Preferred Stock and any
other Preferred Stock of the Fund, voting as a
single class, will have the right to elect the
smallest number of directors that would
constitute a majority of the directors until all
cumulative dividends have been paid or provided
for. Holders of Cumulative Preferred Stock and
any other Preferred Stock will vote separately as
a class on certain other matters, as required
under the Articles Supplementary, the 1940 Act
and Maryland law. Except as otherwise indicated
in this Prospectus and as otherwise required by
applicable law, holders of Cumulative Preferred
Stock will be entitled to one vote per share on
each matter submitted to a vote of shareholders
and will vote together with holders of shares of
Common Stock and any other Preferred Stock as a
single class. See "Description of Cumulative
Preferred Stock -- Voting Rights."
Mandatory Redemption....... The Cumulative Preferred Stock is subject to
mandatory redemption in whole or in part by the
Fund in the event that the Fund fails to maintain
Adjusted Assets equal to or greater than the
Basic Maintenance Amount or fails to maintain
Asset Coverage and does not cure such failure by
the applicable cure date. Any such redemption
will be made for cash at a price equal to $25 per
share plus accumulated and
5
<PAGE> 6
unpaid dividends (whether or not earned or
declared) to the redemption date (the "Redemption
Price"). The Fund may, but is not required to,
redeem a sufficient number of shares of
Cumulative Preferred Stock so that Adjusted
Assets of the remaining outstanding shares of
Cumulative Preferred Stock and any other
Preferred Stock after redemption is as high as
110% of the Basic Maintenance Amount and the
asset coverage, as defined in the 1940 Act, of
the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock is
as high as 220%. See "Description of Cumulative
Preferred Stock -- Redemption -- Mandatory
Redemption."
Optional Redemption........ Commencing June 1, 2002 and thereafter, the Fund at
its option may redeem the Cumulative Preferred
Stock, in whole or in part, for cash at a price
per share equal to the Redemption Price. Prior to
June 1, 2002, the Cumulative Preferred Stock will
be redeemable at the option of the Fund at the
Redemption Price only to the extent necessary for
the Fund to continue to qualify for tax treatment
as a regulated investment company. See
"Description of Cumulative Preferred
Stock -- Redemption -- Optional Redemption."
Liquidation Preference..... The liquidation preference of each share of
Cumulative Preferred Stock is $25 plus an amount
equal to accumulated and unpaid dividends
(whether or not earned or declared) to the date
of distribution. See "Description of Cumulative
Preferred Stock -- Liquidation Rights."
Use of Proceeds............ The Fund will use the net proceeds from the
Offering to purchase additional portfolio
securities in accordance with its investment
objectives and policies. See "Use of Proceeds."
Listing.................... Prior to the Offering, there has been no public
market for the Cumulative Preferred Stock.
Application has been made to list the shares of
Cumulative Preferred Stock on the NYSE. However,
during an initial period which is not expected to
exceed 30 days after the date of this Prospectus,
the Cumulative Preferred Stock will not be listed
on any securities exchange. During such period,
the Underwriters intend to make a market in the
Cumulative Preferred Stock; however, they have no
obligation to do so. Consequently, an investment
in the Cumulative Preferred Stock may be illiquid
during such period.
Federal Income Tax
Considerations........... The Fund has qualified, and intends to remain
qualified, for Federal income tax purposes, as a
regulated investment company. Qualification
requires, among other things, compliance by the
Fund with certain distribution requirements.
Statutory limitations on distributions on the
Common Stock if the Fund fails to satisfy the
1940 Act's asset coverage requirements could
jeopardize the Fund's ability to meet the
distribution requirements. The Fund presently
intends, however, to purchase or redeem the
Cumulative Preferred Stock to the extent
necessary in order to maintain compliance with
such asset coverage requirements. See "Taxation"
for a more complete discussion of these and other
Federal income tax considerations.
Management and Fees........ Gabelli Funds, Inc. serves as the Fund's investment
adviser (the "Adviser") and is compensated for
its services and its related expenses at an
annual rate of 1.00% of the Fund's average daily
net assets. This fee is higher than that paid by
most mutual funds. The Adviser is
6
<PAGE> 7
responsible for administration of the Fund and
currently utilizes and pays the fees of a third
party administrator. Notwithstanding the
foregoing, the Adviser will waive the portion of
its investment advisory fee attributable to an
amount of assets of the Fund equal to the
aggregate stated value of the Cumulative
Preferred Stock for any calendar year in which
the total return of the Fund, including
distributions and the advisory fee subject to
potential waiver, allocable to the Common Stock
is less than the stated dividend rate of the
Cumulative Preferred Stock.
Repurchase of
Common Stock, and
Anti-takeover
Provisions............... The Fund is authorized, subject to maintaining
required asset coverage on the Cumulative
Preferred Stock, to repurchase its Common Stock
on the open market when the shares are trading at
a discount of 10% or more (or such other
percentage as its Board of Directors may
determine from time to time) from their net asset
value. In addition, certain provisions of the
Fund's Articles of Incorporation (the "Charter")
and By-Laws may be regarded as "anti-takeover"
provisions. Pursuant to these provisions, only
one of three classes of directors is elected each
year, and the affirmative vote of the holders of
66 2/3% of the outstanding shares of each class
of stock of the Fund is necessary to authorize
the conversion of the Fund from a closed-end to
an open-end investment company and an affirmative
vote of 66 2/3% of each class of the outstanding
voting shares of the Fund may be necessary to
authorize certain business transactions with any
beneficial owner of more than 5% of the
outstanding shares of the Fund. The overall
effect of these provisions is to render more
difficult the accomplishment of a merger with, or
the assumption of control by, a principal
shareholder. These provisions may have the effect
of depriving Fund shareholders of an opportunity
to sell their shares at a premium to the
prevailing market price. See "Certain Provisions
of the Charter and By-Laws."
Custodian, Transfer and
Dividend-Disbursing Agent
and Registrar............ State Street Bank and Trust Company serves as the
Fund's custodian and, with respect to the
Cumulative Preferred Stock, as transfer and
dividend-disbursing agent and registrar and as
agent to provide notice of redemption and certain
voting rights. See "Custodian, Transfer Agent and
Dividend-Disbursing Agent."
7
<PAGE> 8
ORDINARY INCOME EQUIVALENT YIELD TABLES
Over the Fund's last two fiscal years, distributions paid by the Fund on
its Common Stock have consisted, on average, of 42% Capital Gain Dividends which
are taxed at long-term capital gain rates, and 58% Ordinary Income Dividends
which are taxed at ordinary income rates.(1) Cumulative Preferred Stock
investors who are in a Federal marginal income tax bracket higher than the
current 28.0% maximum Federal tax rate on long-term capital gain would realize a
tax advantage on their investment to the extent that distributions by the Fund
to its shareholders continue to be partially composed of the more favorably
taxed Capital Gain Dividends.
The following table shows examples of the pure ordinary income equivalent
yield that would be generated by the indicated dividend rate on the Cumulative
Preferred Stock, assuming distributions consisting of four different proportions
of Capital Gain Dividends and Ordinary Income Dividends for an investor in the
39.6% Federal marginal tax bracket and assuming no change in the current maximum
Federal long-term capital gain tax rate of 28.0%.
<TABLE>
<CAPTION>
PERCENTAGE OF CUMULATIVE PREFERRED A CUMULATIVE PREFERRED STOCK
STOCK DIVIDENDS COMPOSED OF* DIVIDEND RATE OF
- ---------------------------------------- ----------------------------
7.92%
CAPITAL GAIN ORDINARY INCOME IS EQUIVALENT TO AN
DIVIDEND DIVIDEND ORDINARY INCOME YIELD OF
- ---------------- --------------- ----------------------------
<S> <C> <C>
25% 75% 8.30%
35% 65% 8.45%
45% 55% 8.60%
55% 45% 8.76%
65% 35% 8.91%
75% 25% 9.06%
</TABLE>
- ---------------
(1)
<TABLE>
<CAPTION>
PERCENTAGE COMPOSITION OF COMMON STOCK DISTRIBUTION
-----------------------------------------------------------
CAPITAL ORDINARY
YEAR GAIN DIVIDEND INCOME DIVIDEND
---------------------- ------------- ---------------
<S> <C> <C>
1995.................. 7% 93%
1996.................. 76% 24%
</TABLE>
* A number of factors could affect the composition of the Fund's distributions
to holders of the Cumulative Preferred Stock. Such factors include (i) active
management of the Fund's assets may result in varying proportions of Capital
Gain Dividends, Ordinary Income Dividends and/or return of capital in Fund
distributions; and (ii) the continued effectiveness of an IRS revenue ruling
requiring the proportionate allocation of Capital Gain Dividends among
distributions to holders of various classes of capital stock.
As illustrated in the table below, the yield advantage of the lower Federal
long-term capital gain tax rate would be diminished for investors in tax
brackets below the 39.6% rate assumed in the table above, and there would be no
effect on the yield for an investor in a Federal marginal income tax bracket of
28.0% or lower. Assuming Cumulative Preferred Stock dividends composed of 40%
Capital Gain Dividends and 60% Ordinary
8
<PAGE> 9
Income Dividends, the following table shows the ordinary income equivalent
yields that would be generated at the indicated dividend rate for taxpayers in
the indicated tax brackets.
<TABLE>
<CAPTION>
A CUMULATIVE PREFERRED STOCK
DIVIDEND RATE OF
----------------------------
7.92%
IS EQUIVALENT TO AN
1996 FEDERAL TAX BRACKET(1) ORDINARY INCOME YIELD OF
----------------------------------------------------- ----------------------------
<S> <C>
39.6%................................................ 8.53%
36.0%................................................ 8.32%
31.0%................................................ 8.06%
28.0%................................................ 7.92%
</TABLE>
- ---------------
(1) Annual taxable income levels corresponding to the 1996 Federal marginal tax
brackets are as follows:
<TABLE>
<S> <C>
39.6%...... over $263,750 for both single and joint returns
36.0%...... $121,301-$263,750 for single returns, $147,701-$263,750 for
joint returns
31.0%...... $58,151-$121,300 for single returns, $96,901-$147,700 for joint
returns
28.0%...... $24,001-$58,150 for single returns, $40,101-$96,900 for joint
returns
</TABLE>
An investor's marginal tax rate may exceed the rates shown in the above
table due to various factors. Income also may be subject to certain state, local
and foreign taxes. For investors who pay alternative minimum tax, equivalent
yields may be lower than those shown above. The tax rates shown above do not
apply to corporate taxpayers.
------------------------
The tax characteristics of the Fund are described more fully under
"Taxation." Consult your tax adviser for further details.
The charts above are for illustrative purposes only and cannot be taken as
an indication of the composition of future distributions by the Fund.
9
<PAGE> 10
FINANCIAL HIGHLIGHTS
The selected data set forth below is for shares of Common Stock outstanding
for the periods presented. The financial information was derived from and should
be read in conjunction with the Financial Statements of the Fund incorporated by
reference into this Prospectus and the SAI. The financial information for the
period ended December 31, 1994 and each of the two years ended December 31, 1996
has been audited by Price Waterhouse LLP, independent accountants, whose
unqualified report on such financial statements is incorporated by reference
into this Prospectus and the SAI.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994*
------- ------- -------
<S> <C> <C> <C>
OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period........................ $ 7.81 $ 7.51 $ 7.50
------- ------- -------
Net investment income....................................... 0.01 0.08 0.03
Net realized and unrealized gains on securities............. 0.63 0.98 0.03
------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS......................... 0.64 1.06 0.06
------- ------- -------
Increase/(decrease) in net asset value from Multimedia Trust
share transactions....................................... 0.02 (0.46) --
Offering expenses charged to capital surplus................ -- (0.05) --
------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income........................ (0.01) (0.08) (0.03)
Distributions from net realized gain on investments......... (0.36) (0.17) --
Distributions in excess of net investment income and/or
net realized gains....................................... (0.00)(a) (0.00)(a) (0.01)
Distributions from paid-in capital.......................... -- -- (0.01)
------- ------- -------
TOTAL DISTRIBUTIONS...................................... (0.37) (0.25) (0.05)
------- ------- -------
Net Asset Value, End of Period.............................. $ 8.100 $ 7.810 $ 7.510
======= ======= =======
Market Value, End of Period................................. $ 6.875 $ 6.750 $ 7.375
======= ======= =======
Total Net Asset Value Return**.............................. 9.40% 14.10% 0.80%
Total Investment Return***.................................. 7.40% 0.40% (7.90)%
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net Assets, end of period (in thousands).................... $91,462 $89,580 $64,606
Ratio of Operating Expenses to Average Net Assets........... 1.87% 2.04% 1.74%+
Ratio of Net Investment Income to Average Net Assets........ 0.13% 1.24% 3.15%+
Portfolio Turnover Rate..................................... 32.10% 86.00% 0.00%
Average Commission Rate Paid(b)............................. $0.0367 -- --
</TABLE>
- ---------------
* The Fund commenced operations on November 15, 1994.
** Based on net asset value per share, adjusted for reinvestment of all
distributions and 1995 rights offering.
*** Based on market value per share, adjusted for reinvestment of all
distributions and 1995 rights offering.
+ Annualized.
(a) Amount represents less than $0.005 per share.
(b) Average commission rate (per share of security) as required by amended SEC
disclosure requirements effective for fiscal years beginning after September
1, 1995.
10
<PAGE> 11
USE OF PROCEEDS
The net proceeds of the offering are estimated at $29,836,000, after
deduction of the underwriting discounts and estimated offering expenses payable
by the Fund. The Fund's investment adviser expects to invest such proceeds in
accordance with the Fund's investment objectives and policies within six months
after the completion of the offering, depending on market conditions for the
types of securities in which the Fund principally invests. Pending such
investment, the proceeds will be held in high quality short-term debt securities
and instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
December 31, 1996, and as adjusted to give effect to the Offering.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(a)
----------- --------------
<S> <C> <C>
Shareholders' equity:
Preferred Stock, $.001 par value:
Authorized 0 shares; as adjusted 2,000,000 shares
authorized; issued and outstanding 0 shares; as adjusted,
1,250,000 shares of 7.92% Cumulative Preferred Stock
issued and outstanding.................................... $ 0 $ 31,250,000
Common Stock, $.001 par value:
Authorized 200,000,000 shares; as adjusted 198,000,000
authorized; issued and outstanding 11,296,548 shares...... 11,297 11,297
Additional paid-in capital.................................. 81,230,031 79,816,031
Distributions in excess of net realized gain on
investments............................................... (53,535) (53,535)
Undistributed net investment income......................... 2,653 2,653
Net unrealized appreciation of investments.................. 10,271,498 10,271,498
----------- --------------
Net assets............................................. $91,461,944 $ 121,297,944
========== ===========
Net assets applicable to outstanding Common Stock...... $91,461,944 $ 90,047,944
========== ===========
</TABLE>
- ---------------
(a) After deducting underwriting discounts and estimated costs of the Offering
of $1,414,000.
11
<PAGE> 12
THE FUND
The Fund, incorporated in Maryland on March 31, 1994, 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 "GGT."
The Fund had no operations prior to November 15, 1994, other than the sale
of 10,000 shares of Common Stock for $100,000 to The Gabelli Equity Trust Inc.
On November 15, 1994, The Gabelli Equity Trust Inc. contributed $64,382,764 in
exchange for 8,587,702 shares of the Fund and immediately thereafter distributed
to its shareholders all the shares it held of the Fund. The Fund's investment
operations commenced on November 15, 1994.
The Fund's primary investment objective is long-term growth of capital. The
Fund seeks to achieve its objective by investing primarily in common stock and
other securities of foreign and domestic companies involved in the
telecommunications, media, publishing and entertaining industries. 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 common stock and other
securities of companies in the telecommunications, media, publishing and
entertainment industries.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Fund's primary investment objective is long-term growth of capital by
investing primarily in the common stock and other securities of foreign and
domestic companies involved in the telecommunications, media, publishing and
entertainment industries. Income is the secondary investment objective. The
investment objectives of long-term growth of capital and income are fundamental
policies of the Fund. The Fund's policy of concentration in companies in the
communications industries is also a fundamental policy of the Fund. These
fundamental policies and the investment limitations described in the SAI under
the caption "Investment Restrictions" cannot be changed without the approval of
the holders of a "majority of the Fund's outstanding voting securities". As used
herein, a "majority of the Fund's outstanding voting securities" means (i) 67%
of the shares of the Fund's voting securities represented at a meeting at which
more than 50% of the outstanding shares of the Fund's voting securities are
represented, whether in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund's voting securities. No assurance can be given
that the Fund's investment objectives will be achieved.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in common stock and other securities of companies in the
telecommunications, media, publishing and entertainment industries. Such
multimedia businesses are often involved in emerging technological advances in
interactive services and products that are accessible to individuals in their
homes or offices through consumer electronics devices such as telephone,
televisions, radios and personal computers.
The telecommunications companies in which the Fund may invest are engaged
in the development, manufacture or sale of communications services or equipment
throughout the world, including the following products or services: regular
telephone service; wireless communications services and equipment, including
cellular telephone, microwave and satellite communications, paging and other
emerging wireless technologies; equipment and services for both data and voice
transmission, including computer hardware and software; electronic components
and communications equipment; video conferencing; electronic mail; local and
wide area networking, and linkage of data and word processing systems;
publishing and information systems; video text and teletext; emerging
technologies combining television, telephone and computer systems; broadcasting,
including television and radio via VHF, UHF, satellite and microwave
transmission and cable television.
The entertainment, media and publishing companies in which the Fund may
invest are engaged in providing the following products or services: the
creation, packaging, distribution and ownership of entertainment programming
throughout the world including prerecorded music, feature-length motion
pictures, made-for-TV movies, television series, documentaries, animation, game
shows, sports programming and news
12
<PAGE> 13
programs; live events such as professional sporting events or concerts,
theatrical exhibitions, television and radio broadcasting via VHF, UHF,
satellite and microwave transmission, cable television systems and programming,
broadcast and cable networks, wireless cable television and other emerging
distribution technologies, home video, interactive and multimedia programming
including home shopping and multiplayer games; publishing, including newspapers,
magazines and books, advertising agencies and niche advertising mediums such as
in-store or direct mail, emerging technologies combining television, telephone
and computer systems, computer hardware and software, and equipment used in the
creation and distribution of entertainment programming such as that required in
the provision of broadcast, cable or telecommunications services.
Under normal circumstances, the Fund will invest in securities of issuers
located in at least three countries, which may include the United States.
Investing in securities of foreign issuers, 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 revaluations of currencies. For a further discussion of the risks
associated with investing in foreign securities and a description of other risks
inherent in the Fund's investment objectives and policies, see "Risk Factors and
Special Considerations."
The Adviser believes that at the present time investment by the Fund in the
securities of companies located throughout the world presents great potential
for accomplishing the Fund's investment objectives. While the Adviser expects
that a substantial portion of the Fund's portfolio may be invested in the
securities of domestic companies, a significant portion of the Fund's portfolio
may also be comprised of the securities of issuers headquartered outside the
United States.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Adviser normally will consider
the following factors, among others: (1) the Adviser's own evaluations of the
private market value, cash flow, earnings per share and other fundamental
aspects of the underlying assets and business of the company; (2) the potential
for capital appreciation of the securities; (3) the interest or dividend income
generated by the securities; (4) the prices of the securities relative to other
comparable securities; (5) whether the securities are entitled to the benefits
of call protection or other protective covenants; (6) the existence of any
anti-dilution protections or guarantees of the security; and (7) the
diversification of the portfolio of the Fund as to issuers. The Adviser's
investment philosophy with respect to equity securities seeks to identify assets
that are selling in the public market at a discount to their private market
value, which the Adviser defines as the value informed purchasers are willing to
pay to acquire assets with similar characteristics. The Adviser also normally
evaluates the issuers' free cash flow and long-term earnings trends. Finally,
the Adviser looks for a catalyst, something in the company's industry or
indigenous to the company or country itself that will surface additional value.
CERTAIN PRACTICES
Foreign Securities. There is no limitation on the amount of foreign
securities in which the Fund may invest. Among the foreign securities in which
the Fund may invest are those issued by companies located in developing
countries, which are countries in the initial stages of their industrialization
cycles. Investing in the equity and debt markets of developing countries
involves exposure to economic structures that are generally less diverse and
less mature, and to political systems that can be expected to have less
stability, than those of developed countries. The markets of developing
countries historically have been more volatile than the markets of the more
mature economies of developed countries, but often have provided higher rates of
return to investors. The Fund may also invest in debt securities of foreign
governments. See "Risk Factors and Special Considerations -- Foreign
Securities."
Corporate Reorganizations. Subject to the Fund's policy of investing at
least 65% of its total assets in companies involved in the telecommunications,
media, publishing and entertainment industries, the Fund may invest without
limit in securities of companies for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or similar reorganization proposal has been announced
if, in the judgment of the Adviser, there is a reasonable prospect of capital
13
<PAGE> 14
appreciation significantly greater than the added portfolio turnover expenses
inherent in the short term nature of such transactions. The principal risk is
that such offers or proposals may not be consummated within the time and under
the terms contemplated at the time of the investment, in which case the Fund may
sustain a loss. For further information on such investments, see "Other
Investments" in the SAI.
Temporary Investments. Although under normal market conditions at least
65% of the Fund's total assets will consist of common stock and other securities
of foreign and domestic companies involved in the telecommunications, media,
publishing and entertainment industries, when a temporary defensive posture is
believed by the Adviser to be warranted ("temporary defensive periods"), the
Fund may without limitation hold cash or invest its assets in money market
instruments and repurchase agreements in respect of those instruments. The Fund
may also invest up to 10% of the market value of its total assets during
temporary defensive periods in shares of money market mutual funds that invest
primarily in U.S. Government Securities and repurchase agreements in respect of
those securities. The yield on these securities will, as a general matter, tend
to be lower than the yield on other securities to be purchased by the Fund. For
a further description of such transactions, see "Investment Objectives and
Policies -- Investment Practices -- Temporary Investments" in the SAI.
SPECIAL INVESTMENT METHODS
OPTIONS
On behalf of the Fund, the Adviser may, subject to guidelines of the Board
of Directors, purchase or sell, i.e., write, options on securities, securities
indices and foreign currencies which are listed on a national securities
exchange or in the U.S. over-the-counter ("OTC") markets as a means of achieving
additional return or of hedging the value of the Fund's portfolio. The Fund may
write covered call options on common stocks that it owns or has an immediate
right to acquire through conversion or exchange of other securities in an amount
not to exceed 25% of total assets or invest up to 10% of its total assets in the
purchase of put options on common stocks that the Fund owns or may acquire
through the conversion or exchange of other securities that it owns.
A call option is a contract that gives the holder of the option the right
to buy from the writer (seller) of the call option, in return for a premium
paid, the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right to
sell to the writer (seller), in return for the premium, the underlying security
at a specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying security upon
exercise, at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. There can be no
assurance that a closing purchase transaction can be effected when the Fund so
desires.
An exchange traded option may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option.
FUTURES CONTRACTS AND OPTIONS THEREON
On behalf of the Fund, the Adviser may, subject to guidelines of the Board
of Directors, purchase and sell financial futures contracts and options thereon
which are traded on a commodities exchange or board of trade
14
<PAGE> 15
for certain hedging, yield enhancement and risk management purposes, in
accordance with regulations of the Commodity Futures Trading Commission
("CFTC"). These futures contracts and related options may be on debt securities,
financial indices, securities indices, U.S. Government securities and foreign
currencies. A financial futures contract is an agreement to purchase or sell an
agreed amount of securities or currencies at a set price for delivery in the
future.
Under CFTC regulations, the Adviser on behalf of the Fund may purchase and
sell futures contracts and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the Fund's
assets committed to margin and option premiums. The Fund will not enter into
futures contracts or options on futures contracts unless (i) the aggregate
initial margins and premiums do not exceed 5% of the fair market value of its
assets and (ii) the aggregate market value of its outstanding futures contracts
and the market value of the currencies and futures contracts subject to
outstanding options written by the Fund, as the case may be, do not exceed 50%
of the market value of its total assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
Subject to guidelines of the Board of Directors, the Fund may enter into
forward foreign currency exchange contracts to protect the value of its
portfolio against future changes in the level of currency exchange rates. The
Fund may enter into such contracts on a spot, i.e., cash, basis at the rate then
prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract. The
Fund's dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions, and the amount the Fund may invest
in forward currency contracts is limited to the amount of its aggregate
investments in foreign currencies. The Fund will only enter into forward
currency contracts with parties which it believes to be creditworthy.
SPECIAL RISKS OF DERIVATIVE TRANSACTIONS
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. If the Adviser's
prediction of movements in the direction of the securities, foreign currency and
interest rate markets are inaccurate, the consequences to the Fund may leave the
Fund in a worse position than if such strategies were not used. Risks inherent
in the use of options, foreign currency, futures contracts and options on
futures contracts, securities indices and foreign currencies include (1)
dependence on the Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; (6) the possible inability of the Fund to purchase or
sell a security at a time that otherwise would be favorable for it to do so, or
the possible need for the Fund to sell a security at a disadvantageous time due
to a need for the Fund to maintain "cover" or to segregate securities in
connection with the hedging techniques; and (7) the creditworthiness of
counterparties. For a further description, see "Risk Factors and Special
Considerations -- Futures Transactions" and "Risk Factors and Special
Considerations -- Forward Currency Exchange Contracts."
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities. The market
value of the securities sold short of any one issuer will not exceed 5% of the
Fund's total assets or 5% of such issuer's voting securities. The Fund may not
make short sales or maintain a short position if it would cause more than 25% of
the Fund's total assets, taken at market value, to be held as collateral for
such sales. The Fund may also make short sales
15
<PAGE> 16
"against the box" without respect to such limitations. A short sale is "against
the box" to the extent that the Fund contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Fund does not immediately deliver the securities sold or receive the
proceeds from the sale.
To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its custodian an equal amount
to the securities sold short or securities convertible into, or exchangeable for
such securities. The Fund may close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund may want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
The Fund may make a short sale in order to hedge against market risks when
it believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund or a security convertible into, or
exchangeable for, such security, or when the Fund does not want to sell the
security it owns, because, among other reasons, it wishes to defer recognition
of gain or loss for U.S. Federal income tax purposes. Additionally, the Fund may
use short sales in conjunction with the purchase of a Convertible Security when
it is determined that a Convertible Security can be bought at a small conversion
premium and has a yield advantage relative to the underlying common stock sold
short.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements involving money market
instruments with banks, registered broker-dealers and government securities
dealers approved by the Board of Directors which furnish collateral at least
equal in value or market price to the amount of their repurchase obligation. In
a repurchase agreement, the Fund purchases a debt security from a seller which
undertakes to repurchase the security at a specified resale price on an agreed
future date. Repurchase agreements are generally for one business day but may
have longer durations. The SEC has taken the position that, in economic reality,
a repurchase agreement is a loan by the Fund to the other party to the
transaction secured by securities transferred to the Fund. The resale price
generally exceeds the purchase price by an amount which reflects an agreed upon
market interest rate for the term of the repurchase agreement. The principal
risk is that, if the seller defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund are less than the repurchase price. In the event of
a default or bankruptcy by a seller, the Fund will promptly seek to liquidate
the collateral. The Adviser, acting under the supervision of the Fund's Board of
Directors, will monitor the creditworthiness of the counterparty to the
repurchase agreements.
If the financial institution which is a party to the repurchase agreement
petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. As a result, under
these circumstances, there may be a restriction on the Fund's ability to sell
the collateral and the Fund would suffer a loss.
LOANS OF PORTFOLIO SECURITIES
To increase income, the Fund may lend its portfolio securities to
securities broker-dealers or financial institutions if (1) the loan is
collateralized in accordance with applicable regulatory requirements and (2) no
loan will cause the value of all loaned securities to exceed 20% of the value of
the Fund's total assets.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over the value of the collateral. As with any extension of credit, there
are risks of delay in recovery and in some cases even loss of rights in
collateral should the borrower of the securities fail financially. While these
loans of portfolio securities will be made in accordance with guidelines
approved by the Board of Directors, there can be no assurance that borrowers
will not fail financially. On termination of the loan, the borrower is required
to return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund. If the contra party to the loan
petitions for bankruptcy or becomes subject to the United States Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. As a result, under
these
16
<PAGE> 17
circumstances, there may be a restriction on the Fund's ability to sell the
collateral and the Fund would suffer a loss. In addition, loans of portfolio
securities are limited to 5% of the Fund's total assets by the applicable Rating
Agency Guidelines. See "Description of Cumulative Preferred Stock -- Rating
Agency Guidelines."
LEVERAGING
As provided in the 1940 Act and subject to compliance with the Fund's
investment objectives, policies and restrictions, the Fund may issue debt or
preferred stock so long as the Fund's net assets exceed 300% of the amount of
the debt outstanding and exceed 200% of the amount of preferred stock
outstanding. Such debt or preferred stock may be convertible in accordance with
SEC staff guidelines which may permit the Fund to obtain leverage at attractive
rates. Leverage entails two primary risks. The first risk is that the use of
leverage magnifies the impact on the common shareholders of changes in net asset
value. For example, a fund that uses 33% leverage will show a 1.5% increase or
decline in net asset value for each 1% increase or decline in the value of its
total assets. The second risk is that the cost of leverage will exceed the
return on the securities acquired with the proceeds of leverage, thereby
diminishing rather than enhancing the return to common shareholders. These two
risks would generally make the Fund's total return to common shareholders more
volatile. In addition, the Fund may be required to sell investments in order to
meet dividend or interest payments on the debt or preferred stock when it may be
disadvantageous to do so.
A decline in net asset value could affect the ability of the Fund to make
common stock dividend payments and such a failure to pay dividends or make
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended ("the
Code"). See "Taxation". Finally, if the asset coverage for preferred stock or
debt securities declines to less than 200% or 300%, respectively (as a result of
market fluctuations or otherwise), the Fund may be required to sell a portion of
its investments to redeem the preferred stock or repay the debt when it may be
disadvantageous to do so.
Further information on the investment objectives and policies and
investment restrictions of the Fund are set forth in the SAI.
PORTFOLIO TURNOVER
The Fund buys and sells securities to accomplish its investment objective.
The investment policies of the Fund may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest or currency exchange
rates. The portfolio turnover may be higher than that of other investment
companies. While it is impossible to predict with certainty the portfolio
turnover, the Adviser expects that the annual turnover rate of the Fund will not
exceed 200%. During the years ended December 31, 1996 and 1995, the portfolio
turnover of the Fund was 32.1% and 86.0%, respectively.
Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. A high portfolio turnover
rate may make it more difficult to qualify as a regulated investment company,
since, in order for the Fund to so qualify each taxable year, less than 30% of
its gross income must be derived from the sale or other disposition of stocks or
securities held for less than three months. See "Taxation" in the SAI for a more
complete discussion of this requirement. The portfolio turnover rate is computed
by dividing the lesser of the amount of the long-term securities purchased or
securities sold by the average monthly value of securities owned during the year
(excluding securities whose maturities at acquisition were one year or less).
OTHER INVESTMENTS
The Fund is permitted to invest in illiquid securities, warrants and rights
and other investment companies and to enter into forward commitments for the
purchase or sale of securities, including on a "when issued" or "delayed
delivery" basis. See the SAI for a discussion of these investments and
techniques and the risks associated with them.
17
<PAGE> 18
INVESTMENT RESTRICTIONS
The Fund has adopted various investment restrictions as fundamental
policies requiring certification, limiting concentration in industries other
than the telecommunications, media, publishing and entertainment industries,
prohibiting investing for control purposes and limiting certain other policies
as described in greater detail in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations associated
with investing in the Fund.
PREFERRED STOCK
There are a number of risks associated with an investment in Cumulative
Preferred Stock. The market price for the Cumulative Preferred Stock will be
influenced by changes in interest rates, the perceived credit quality of the
Cumulative Preferred Stock and other factors. The Cumulative Preferred Stock is
subject to redemption under specified circumstances. Subject to such
circumstances, the Cumulative Preferred Stock is perpetual. The credit rating on
the Cumulative Preferred Stock could be reduced or withdrawn while an investor
holds shares, and the credit rating does not eliminate or mitigate the risks of
investing in the Cumulative Preferred Stock. A reduction or withdrawal of the
credit rating would likely have an adverse effect on the market value of the
Cumulative Preferred Stock. The Cumulative Preferred Stock is not an obligation
of the Fund. Although unlikely, precipitous declines in the value of the Fund's
assets could result in the Fund having insufficient assets to redeem all of the
Cumulative Preferred Stock for the full Redemption Price.
INDUSTRY RISKS
The Fund invests a significant portion of its assets in particular types of
companies, and, as a result, the value of the Fund's shares is more susceptible
to factors affecting those particular types of companies, including governmental
regulation, a greater price volatility than the overall market, rapid
obsolescence of products and services, intense competition and strong market
reactions to technological developments.
Various types of ownership restrictions are imposed by the Federal
Communications Commission ("FCC") on investments both in mass media companies,
such as broadcasters and cable operators, as well as in common carrier
companies, such as the providers of local telephone service and cellular radio.
For example, the FCC's broadcast multiple ownership rules, which apply to
the radio and television industries, provide that investment advisers are deemed
to have an "attributable" interest whenever the adviser has the right to
determine how more than five percent of the issued and outstanding voting stock
of a broadcast company may be voted. These same broadcast rules prohibit the
holding of an attributable interest in more than twenty AM and twenty FM radio
broadcast stations nationally or more than twelve television stations
nationally. Similar types of restrictions apply in the mass media and common
carrier industries.
The attributable interest that results from the role of the Adviser and its
principals in connection with other funds, managed accounts and companies may
limit the investments of the Fund in these industries.
SMALLER COMPANIES
While the Fund intends to focus on the securities of established suppliers
of accepted products and services, the Fund may invest in smaller companies
which may benefit from the development of new products and services. These
smaller companies may present greater opportunities for capital appreciation,
and may also involve greater investment risk than large, established issuers.
For example, smaller companies may have more limited product lines, market or
financial resources, and their securities may trade less frequently and in lower
volume than the securities of larger, more established companies. As a result,
the prices of the securities of such smaller companies may fluctuate to a
greater degree than the prices of securities of other issuers.
18
<PAGE> 19
LONG-TERM OBJECTIVE
The Fund is intended for investors seeking long-term capital growth. The
Fund is not meant to provide a vehicle for those who wish to play short-term
swings in the stock market. An investment in shares of the Fund should not be
considered a complete investment program. Each shareholder should take into
account the investment objectives of the Fund as well as such shareholder's
other investments when considering an investment in the Fund.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means the Fund is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities of a single issuer. Because
the Fund, as a non-diversified investment company, may invest in the securities
of individual issuers to a greater degree than a diversified investment company,
an investment in the Fund may, under certain circumstance, present greater risk
to an investor than an investment in a diversified investment company.
LOWER RATED SECURITIES
The Fund may invest up to 10% of its total assets in fixed-income
securities rated in the lower rating categories of recognized statistical rating
agencies, such as securities rated CCC or lower by Standard & Poor's Ratings
Services ("S&P") or Caa or lower by Moody's, or non-rated securities of
comparable quality. These debt securities are predominantly speculative and
involve major risk exposure to adverse conditions. These securities and
securities rated BB or lower by S&P and Ba or lower by Moody's are often
referred to in the financial press as "junk bonds" and may include securities of
issuers in default. "Junk bonds" are considered by the rating agencies to be
predominantly speculative and may involve major risk exposures such as: (i)
vulnerability to economic downturns and changes in interest rates; (ii)
sensitivity to adverse economic changes and corporate developments; (iii)
redemption or call provisions which may be exercised at inopportune times; (iv)
difficulty in accurately valuing or disposing of such securities; (v)
subordination to other debt of the issuer; and (vi) junk bonds are generally
unsecured.
The Fund may invest in securities of issuers in default. The Fund will
invest in securities of issuers in default only when the Adviser believes that
such issuers will honor their obligations or emerge from bankruptcy protection
and the value of these securities will appreciate. By investing in securities of
issuers in default, the Fund bears the risk that these issuers will not continue
to honor their obligations or emerge from bankruptcy protection or that the
value of these securities will not appreciate. Securities rated BBB by S&P or
Baa by Moody's, in the opinion of the rating agencies, also have speculative
characteristics.
For a further description of lower rated securities and the risks
associated therewith, see "Investment Objectives and Policies -- Investment
Practices -- Lower Rated Securities" in the SAI.
FOREIGN SECURITIES
There is no limitation on the amount of foreign securities in which the
Fund may invest. Investments in the securities of foreign issuers involve
certain considerations and risks not ordinarily associated with investments in
securities of domestic issuers. Foreign companies are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. companies. Foreign securities exchanges, brokers and
listed companies may be subject to less government supervision and regulation
than exists in the United States. Dividend and interest income may be subject to
withholding and other foreign taxes which may adversely affect the net return on
such investments. There may be difficulty in obtaining or enforcing a court
judgment abroad. In addition, it may be difficult to effect repatriation of
capital invested in certain countries. In addition, with respect to certain
countries, there are risks of expropriation, confiscatory taxation, political or
social instability or diplomatic developments which could affect assets of the
Fund held in foreign countries. Investments in debt securities of foreign
governments involve additional risks, including that payment by the issuer with
respect to such securities may depend on
19
<PAGE> 20
economic and political conditions, cash flow, availability of foreign exchange
and other relevant conditions in the country and there may be limited legal
recourse against the issuer in the event of a default.
There may be less publicly available information about a foreign company
than a U.S. company. Foreign securities markets may have substantially less
volume than U.S. securities markets and some foreign company securities are less
liquid than securities of otherwise comparable U.S. companies. A portfolio of
foreign securities may also be adversely affected by fluctuations in the rates
of exchange between the currencies of different nations and by exchange control
regulations. Foreign markets also have different clearance and settlement
procedures which could cause the Fund to encounter difficulties in purchasing
and selling securities on such markets and may result in the Fund missing
attractive investment opportunities or experiencing loss. In addition, a
portfolio which includes foreign securities can expect to have a higher expense
ratio because of the increased transaction costs on non-U.S. securities markets
and the increased costs of maintaining the custody of foreign securities.
The Fund may purchase sponsored American Depository Receipts ("ADRs") or
U.S. denominated securities of foreign issuers which shall not be included in
this foreign securities limitation. ADRs are receipts issued by United States
banks or trust companies in respect of securities of foreign issuers held on
deposit for use in the United States securities markets. While ADRs may not
necessarily be denominated in the same currency as the securities into which
they may be converted, many of the risks associated with foreign securities may
also apply to ADRs.
FUTURES TRANSACTIONS
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements for such
transactions. For a further description, see "Investment Objectives and
Policies -- Investment Practices" in the SAI.
FORWARD CURRENCY EXCHANGE CONTRACTS
The use of forward currency contracts may involve certain risks, including
the failure of the counter party to perform its obligations under the contract,
and that such use may not serve as a complete hedge because of an imperfect
correlation between movements in the prices of the contracts and the prices of
the currencies hedged or used for cover. For a further description of such
investments, see "Investment Objectives and Policies -- Investment Practices" in
the SAI.
DEPENDENCE ON KEY PERSONNEL
The Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in
providing advisory services with respect to the Fund's investments. There is no
contract of employment between the Adviser and Mr. Gabelli. If the Adviser were
to lose the services of Mr. Gabelli, its ability to service the Fund could be
adversely affected. There can be no assurance that a suitable replacement could
be found for Mr. Gabelli in the event of his death, resignation, retirement or
inability to act on behalf of the Adviser.
MANAGEMENT OF THE FUND
The Fund's Board of Directors (who, with its officers, are described in the
SAI) has overall responsibility for the management of the Fund. The Board of
Directors decides upon matters of general policy and reviews the actions of the
Adviser and the Administrator (as defined below). Pursuant to an Investment
Advisory Contract with the Fund, the Adviser, under the supervision of the
Fund's Board of Directors, provides a continuous investment program for the
Fund's portfolio; provides investment research and makes and executes
20
<PAGE> 21
recommendations for the purchase and sale of securities; and provides all
facilities and personnel, including officers required for its administrative
management and pays the compensation of all officers and directors of the Fund
who are its affiliates. As compensation for its services and the related
expenses borne by the Adviser, the Fund pays the Adviser a fee, computed daily
and payable monthly, equal, on an annual basis, to 1.00% of the Fund's average
daily net assets, which is higher than that paid by most mutual funds. For the
fiscal years ended December 31, 1994, 1995 and 1996 the Fund paid a management
fee of $83,054, $742,302 and $947,427, respectively. Notwithstanding the
foregoing, the Adviser will waive the portion of its investment advisory fee
attributable to an amount of assets of the Fund equal to the aggregate stated
value of the Cumulative Preferred Stock for any calendar year in which the total
return of the Fund, including distributions and the advisory fee subject to
potential waiver, allocable to common stock is less than the stated dividend
rate of the Cumulative Preferred Stock.
The Adviser was formed in 1980 and acts as investment adviser to other
closed-end and open-end investment companies with total net assets in excess of
$4.0 billion as of May 1, 1997. GAMCO Investors, Inc. ("GAMCO"), a subsidiary of
the Adviser, acts as investment adviser for individuals, pension trusts, profit
sharing trusts and endowments. As of May 1, 1997, GAMCO had aggregate assets in
excess of $5.1 billion under its management. Mr. Mario J. Gabelli may be deemed
a "controlling person" of the Adviser on the basis of his ownership of stock of
the Adviser.
In addition to the fees of the Adviser, the Fund is responsible for the
payment of all its other expenses incurred in the operation of the Fund, which
include, among other things, expenses for legal and independent accountant's
services, stock exchange listing fees, expenses relating to the Offering of
Cumulative Preferred Stock (including rating agency fees), costs of printing
proxies, stock certificates and shareholder reports, charges of State Street
Bank and Trust Company ("State Street", the "Custodian," "Transfer Agent" or
"Dividend - Disbursing Agent"), SEC fees, fees and expenses of unaffiliated
directors, accounting and printing costs, the Fund's pro rata portion of
membership fees in trade organizations, fidelity bond coverage for the Fund's
officers and employees, interest brokerage costs, taxes, expenses of qualifying
the Fund for sale in various states, expenses of personnel performing
shareholder servicing functions, litigation and other extraordinary or
non-recurring expenses and other expenses properly payable by the Fund.
The Investment Advisory Contract contains provisions relating to the
selection of securities brokers to effect the portfolio transactions of the
Fund. Under those provisions, the Adviser may (1) direct Fund portfolio
brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the
Adviser; and (2) pay commissions to brokers other than Gabelli & Company, Inc.
which are higher than might be charged by another qualified broker to obtain
brokerage and/or research services considered by the Adviser to be useful or
desirable for its investment management of the Fund and/or its other advisory
accounts or those of any investment adviser affiliated with it. The SAI contains
further information about the Investment Advisory Contract including a more
complete description of the advisory and expense arrangements, exculpatory and
brokerage provisions, as well as information on the brokerage practices of the
Fund.
PORTFOLIO MANAGER
Mario J. Gabelli serves as Portfolio Manager and is primarily responsible
for the day-to-day management of the Fund. Mr. Gabelli has served as the Fund's
Portfolio Manager since its inception and has served as Chairman, President and
Chief Investment Officer of the Adviser since 1980. Because of the diverse
nature of Mr. Gabelli's resonsibilities, he will devote less than all of his
time to the day-to-day management at the Fund.
NON-RESIDENT DIRECTORS
Karl Otto Pohl, a director of the Fund, resides outside the United States
and all or a significant portion of his assets are located outside the United
States. He has no authorized agent in the United States to receive service of
process. As a result, it may not be possible for investors to effect service of
process within the United States or to enforce against him in United States
courts judgments predicated upon civil liability provisions of United States
securities laws. It may also not be possible to enforce against him in foreign
courts judgments of
21
<PAGE> 22
United States courts or liabilities in original actions predicated upon civil
liability provisions of the United States securities laws.
ADMINISTRATOR
The Adviser has entered into an Administration Contract with First Data
Investor Services ("First Data" or the "Administrator") pursuant to which the
Administrator provides certain administrative services necessary for the Fund's
operations which do not include the investment advisory and portfolio management
services provided by the Adviser. For these services and the related expenses
borne by First Data, the Adviser pays a monthly fee at the annual rate of .10%
of the first $1.0 billion of the aggregate average net assets of the Fund and
other Funds advised by the Adviser and administered by First Data and .08% of
the aggregate average net assets exceeding $1.0 billion and .03% of the
aggregate average net assets in excess of $1.5 billion and .02% of the aggregate
net assets in excess of $3.0 billion (with a minimum annual fee of $30,000 per
portfolio), which, together with the services to be rendered, is subject to
negotiation between the parties. First Data has its principal office at 53 State
Street, Boston MA 02109-2873.
DIVIDEND AND DISTRIBUTION POLICY
The Fund intends to distribute its net capital gain each year but may
retain for reinvestment and pay Federal income taxes on its net capital gain, if
any. In the event the Fund's shares of Common Stock are trading at a discount to
their net asset value, the Board of Directors may consider quarterly
distributions and/or adopting a policy of distributing at least 10% per common
share of its average net asset value per year. Any such policy would be subject
to limitations on distribution and on repurchase of common stock of the Fund
while any preferred stock is outstanding. If, for any calendar year, the total
distributions by the Fund on its Common Stock and Preferred Stock exceed the sum
of its net investment income and its net capital gain, the excess will generally
be treated as a tax-free return of capital up to the amount of the shareholder's
tax basis in his shares. The amount treated as a tax-free return of capital will
reduce a shareholder's tax basis in his shares, thereby increasing his potential
gain or reducing his potential loss on the sale of his shares. Any amounts
distributed to a shareholder in excess of the basis in the shares will be
taxable to the shareholder as capital gain.
In the event the Fund distributes amounts in excess of the sum of its net
investment income and its net capital gain, such distributions will decrease the
Fund's total assets and, therefore, have the likely effect of increasing the
Fund's expense ratio. In addition, in order to make such distributions, the Fund
may have to sell a portion of its investment portfolio at a time when
independent investment judgment might not dictate such action. Such sales, if
they involve assets held for less than three months, could also adversely affect
the Fund's status as a regulated investment company (a "RIC") since, in order
for the Fund to so qualify, each taxable year, less than 30% of the Fund's gross
income must be derived from gains realized on the sale or other disposition of
stocks or securities held for less than three months.
At a special meeting of the Board of Directors on July 3, 1996, the Board
authorized the repurchase of up to 500,000 shares of the Fund's outstanding
common shares. At the February 26, 1997 meeting of the Board of Directors, the
Board voted to increase the authorized shares which may be repurchased to
750,000 shares. The Fund would typically repurchase its shares in the open
market when the shares are trading at a discount of 10% or more from the net
asset value of the shares. Through March 31, 1997, 400,000 shares were
repurchased in the open market.
See "Description of Cumulative Preferred Stock -- Dividends" for additional
information relating to dividends on the Cumulative Preferred Stock.
DESCRIPTION OF CUMULATIVE PREFERRED STOCK
The following is a brief description of the terms of the Cumulative
Preferred Stock. This description does not purport to be complete and is
qualified by reference to the Articles Supplementary, the form of which is filed
as an exhibit to the Fund's Registration Statement. Certain of the capitalized
terms used herein are defined in the Glossary that appears at the end of this
Prospectus.
22
<PAGE> 23
GENERAL
Under the Articles Supplementary, the Fund will be authorized to issue up
to 1,250,000 shares of Cumulative Preferred Stock. No fractional shares of
Cumulative Preferred Stock will be issued. As of the date of this Prospectus,
there were no shares of Cumulative Preferred Stock or any other Preferred Stock
of the Fund outstanding. The Board of Directors reserves the right to issue
additional shares of Preferred Stock, including Cumulative Preferred Stock, from
time to time, subject to the restrictions in the Articles Supplementary and the
1940 Act. The shares of Cumulative Preferred Stock will, upon issuance, be fully
paid and nonassessable and will have no preemptive, exchange or conversion
rights. Any shares of Cumulative Preferred Stock repurchased or redeemed by the
Fund will be classified as authorized but unissued Preferred Stock. The Board of
Directors may by resolution classify or reclassify any authorized but unissued
Preferred Stock from time to time by setting or changing the preferences,
rights, voting powers, restrictions, limitations or terms of redemption. The
Fund will not issue any class of stock senior to the shares of Cumulative
Preferred Stock.
RATING AGENCY GUIDELINES
Moody's has established guidelines in connection with the Fund's receipt of
a rating for the Cumulative Preferred Stock on the date of original issue of
'aaa' by Moody's. Moody's, a nationally-recognized securities rating
organization, issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines utilized for the Cumulative
Preferred Stock have been developed by Moody's in connection with issuances of
asset-backed and similar securities, including debt obligations and various
types of preferred stocks, generally on a case-by-case basis through discussions
with the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be sufficiently
varied and will be of sufficient quality and amount to justify investment-grade
ratings. The guidelines do not have the force of law but are being adopted by
the Fund in order to satisfy current requirements necessary for Moody's to issue
the above-described rating for the Cumulative Preferred Stock, which rating is
generally relied upon by investors in purchasing such securities. The guidelines
provide a set of tests for portfolio composition and discounted asset coverage
that supplement (and in some cases are more restrictive than) the applicable
requirements of Section 18 of the 1940 Act. Moody's guidelines are included in
the Articles Supplementary and are referred to in this Prospectus as the "Rating
Agency Guidelines."
The Rating Agency Guidelines require that the Fund maintain Adjusted Assets
greater than or equal to the Basic Maintenance Amount. If the Fund fails to meet
such requirement and such failure is not cured by the applicable cure date, the
Fund will be required to redeem some or all of the Cumulative Preferred Stock.
See "Description of Cumulative Preferred Stock -- Redemption -- Mandatory
Redemption." The Rating Agency Guidelines also exclude from the Moody's Eligible
Assets and, therefore, from Adjusted Assets, certain types of securities in
which the Fund may invest and also will limit the lending of portfolio
securities to 5% of the Fund's total assets. The Adviser does not believe that
compliance with the Rating Agency Guidelines will have an adverse effect on its
management of the Fund's portfolio or on the achievement of the Fund's
investment objectives. It is the Fund's present intention to continue to comply
with the Rating Agency Guidelines.
The Fund may, but is not required to, adopt any modifications to the Rating
Agency Guidelines that may hereafter be established by Moody's. Failure to adopt
such modifications, however, may result in a change in Moody's rating or a
withdrawal of a rating altogether. In addition, Moody's may, at any time, change
or withdraw such rating. However, failure to comply with the Rating Agency
Guidelines would require the Fund to redeem all or part of the Cumulative
Preferred Stock.
A preferred stock rating is an assessment of the capacity and willingness
of an issuer to pay preferred stock obligations. The rating on the Cumulative
Preferred Stock is not a recommendation to purchase, hold or sell such shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. Nor do Moody's requirements address the likelihood that a
holder of Cumulative Preferred Stock will be able to sell such shares. The
rating is based on current information furnished to Moody's by the Fund
23
<PAGE> 24
and the Adviser and information obtained from other sources. The rating may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information.
DIVIDENDS
Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Fund out of
funds legally available therefor, cumulative cash dividends, at the annual rate
of 7.92% of the liquidation preference of $25 per share, payable semi-annually
on June 26, and December 26 or if any such day is not a Business Day, the next
succeeding Business Day (the "Dividend Payment Date"), commencing on December
26, 1997, to the persons in whose names the shares of Cumulative Preferred Stock
are registered at the close of business on the fifth preceding Business Day. The
Fund may from time to time, at its option, pay dividends on the Cumulative
Preferred Stock on a quarterly basis at the annual rate of 7.92%.
Dividends on the shares of Cumulative Preferred Stock will accumulate from
the date on which such shares are originally issued (the "Date of Original
Issue").
No dividends will be declared or paid or set apart for payment on shares of
Cumulative Preferred Stock for any dividend period or part thereof unless full
cumulative dividends have been or contemporaneously are declared and paid on all
outstanding shares of Cumulative Preferred Stock through the most recent
Dividend Payment Date thereof. If full cumulative dividends are not paid on the
Cumulative Preferred Stock, all dividends on the shares of Cumulative Preferred
Stock will be paid pro rata to the holders of the shares of Cumulative Preferred
Stock. Holders of Cumulative Preferred Stock will not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment that may be in arrears.
For so long as any shares of Cumulative Preferred Stock are outstanding,
the Fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, shares of Common Stock
or other stock, if any, ranking junior to the Cumulative Preferred Stock as to
dividends or upon liquidation) in respect of the Common Stock or any other stock
of the Fund ranking junior to or on a parity with the Cumulative Preferred Stock
as to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of its Common Stock or any other
stock of the Fund ranking junior to or on a parity with the Cumulative Preferred
Stock as to dividends or upon liquidation (except by conversion into or exchange
for stock of the Fund ranking junior to or on a parity with the Cumulative
Preferred Stock as to dividends and upon liquidation), unless, in each case, (A)
immediately after such transaction, the Fund will have Adjusted Assets greater
than or equal to the Basic Maintenance Amount and will have the required Asset
Coverage (see "-- Asset Maintenance" and "-- Redemption" below), (B) full
cumulative dividends on shares of Cumulative Preferred Stock due on or prior to
the date of the transactions have been declared and paid (or sufficient Deposit
Assets to cover such payment have been deposited with the Dividend-Disbursing
Agent) and (C) the Fund has redeemed the full number of shares of Cumulative
Preferred Stock required to be redeemed by any provision for mandatory
redemption contained in the Articles Supplementary.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Asset Coverage. The Fund will be required under the Articles Supplementary
to maintain as of the last Business Day of each March, June, September and
December of each year, an "asset coverage" (as defined in the 1940 Act) of at
least 200% (or such higher or lower percentage as may be required at the time
under the 1940 Act) with respect to all outstanding senior securities of the
Fund which are stock, including the Cumulative Preferred Stock (the "Asset
Coverage"). If the Fund fails to maintain the Asset Coverage on such dates and
such failure is not cured within 60 days, the Fund will be required under
certain circumstances to redeem certain of the shares of Cumulative Preferred
Stock. See "-- Redemption" below.
24
<PAGE> 25
If the shares of Cumulative Preferred Stock offered hereby had been issued
and sold as of March 31, 1997, the asset coverage immediately following such
issuance and sale (after giving effect to the deduction of the underwriting
discounts and estimated offering expenses for such shares of $1,414,000), would
have been computed as follows:
<TABLE>
<S> <C> <C> <C>
Value of Fund assets less liabilities
not constituting senior securities $121,381,995
= 388%
------------ -------------
Senior securities representing indebtedness plus
liquidation preference of the Cumulative
Preferred Stock $31,250,000
</TABLE>
Basic Maintenance Amount. The Fund will be required under the Articles
Supplementary to maintain, as of each Valuation Date, Adjusted Assets greater
than or equal to the Basic Maintenance Amount, which is in general the sum of
the aggregate liquidation preference of the Cumulative Preferred Stock, any
indebtedness for borrowed money and current liabilities and dividends. If the
Fund fails to meet such requirement as to any Valuation Date and such failure is
not cured within 7 days after such Valuation Date, the Fund will be required to
redeem certain of the shares of Cumulative Preferred Stock. See "-- Redemption"
below.
Any security not meeting the Rating Agency Guidelines will be excluded from
the calculation of Adjusted Assets.
The Moody's Discount Factors and guidelines for determining the market
value of the Fund's portfolio holdings have been based on criteria established
in connection with the rating of the Cumulative Preferred Stock. These factors
include, but are not limited to, the sensitivity of the market value of the
relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the historical volatility of common stock prices
in general and within particular industry groups, the credit quality of the
relevant asset (for example, the lower the rating of a corporate debt
obligation, the higher the related discount factor), the frequency with which
the relevant asset is marked to market and the amount of time the Fund may take
to cure a failure to meet the Basic Maintenance Amount test. The Moody's
Discount Factor relating to any asset of the Fund, the assets eligible for
inclusion in the calculation of Adjusted Assets and the Basic Maintenance Amount
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Board of Directors, provided that, among other
things, such changes will not impair the rating then assigned to the Cumulative
Preferred Stock by Moody's. This feature will permit the Fund to respond to
changes required or permitted by Moody's from time to time without requiring a
vote of shareholders and should enhance the ability of the Fund to earn an
incremental return for the holders of its common stock without impairing the
rating of the Cumulative Preferred Stock.
On or before the fifth Business Day after each Quarterly Valuation Date,
the Fund is required to deliver to Moody's a report setting forth at least the
Fund's Adjusted Assets and the Basic Maintenance Amount as of the relevant
Valuation Date (the "Basic Maintenance Report"). Within ten Business Days after
delivery of such report to Moody's and on one other occasion chosen at random by
Fund's independent accountants, the Fund will deliver letters prepared by the
Fund's independent accountants regarding the accuracy of the calculations made
by the Fund in, and certain other matters relating to, its most recent Basic
Maintenance Report.
REDEMPTION
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price equal to $25 per share plus accumulated and unpaid dividends through the
date of redemption (whether or not earned or declared) (the "Redemption Price"),
certain of the shares of Cumulative Preferred Stock (to the extent permitted
under the 1940 Act and Maryland law) in the event that:
(i) the Fund fails to maintain the Asset Coverage and such failure is
not cured on or before 60 days following such failure (a "Cure Date"); or
(ii) the Fund fails to maintain Adjusted Assets greater than or equal
to the Basic Maintenance Amount as of any Valuation Date, and such failure
is not cured on or before the 7th day after such Valuation Date (also, a
"Cure Date").
25
<PAGE> 26
The amount of such mandatory redemption will equal the minimum number of
outstanding shares of Cumulative Preferred Stock the redemption of which, if
such redemption had occurred immediately prior to the opening of business on a
Cure Date, would have resulted in the Asset Coverage having been satisfied or
the Fund having Adjusted Assets equal to or greater than the Basic Maintenance
Amount on such Cure Date or, if the Asset Coverage or Adjusted Assets equal to
or greater than the Basic Maintenance Amount, as the case may be, cannot be so
restored, all of the shares of Cumulative Preferred Stock, at the Redemption
Price. In the event that shares of Cumulative Preferred Stock are redeemed due
to the occurrence of (i) above, the Fund may, but is not required to, redeem a
sufficient number of shares of Cumulative Preferred Stock so that the asset
coverage (as defined in the 1940 Act) of the remaining outstanding shares of
Cumulative Preferred Stock and any other Preferred Stock remaining after
redemption is up to 220%. In the event that shares of Cumulative Preferred Stock
are redeemed due to the occurrence of (ii) above, the Fund may, but is not
required to, redeem a sufficient number of shares of Cumulative Preferred Stock
so that the Adjusted Assets of the remaining outstanding shares of Cumulative
Preferred Stock and any other Preferred Stock remaining after redemption is up
to 110% of the Basic Maintenance Amount.
If the Fund does not have funds legally available for the redemption of, or
is otherwise unable to redeem, all the shares of Cumulative Preferred Stock to
be redeemed on any redemption date, the Fund will redeem on such redemption date
that number of shares for which it has legally available funds, or is otherwise
able, to redeem ratably from each holder whose shares are to be redeemed, and
the remainder of the shares required to be redeemed will be redeemed on the
earliest practicable date on which the Fund will have funds legally available
for the redemption of, or is otherwise able to redeem, such shares upon written
notice of redemption ("Notice of Redemption").
If fewer than all shares of Cumulative Preferred Stock are to be redeemed,
such redemption will be made pro rata from each holder of shares in accordance
with the respective number of shares held by each such holder on the record date
for such redemption. If fewer than all shares of Cumulative Preferred Stock held
by any holder are to be redeemed, the Notice of Redemption mailed to such holder
will specify the number of shares to be redeemed from such holder. Unless all
accumulated and unpaid dividends for all past dividend periods will have been or
are contemporaneously paid or declared and Deposit Assets for the payment
thereof deposited with the Dividend-Disbursing Agent, no redemptions of
Cumulative Preferred Stock may be made.
Optional Redemption. Prior to June 1, 2002, the shares of Cumulative
Preferred Stock are not subject to any optional redemption by the Fund unless
such redemption is necessary, in the judgment of the Fund, to maintain the
Fund's status as a regulated investment company ("RIC") under the Code.
Commencing June 1, 2002 and thereafter, the Fund may at any time redeem shares
of Cumulative Preferred Stock in whole or in part at the Redemption Price. Such
redemptions are subject to the limitations of the 1940 Act and Maryland law.
Redemption Procedures. A Notice of Redemption will be given to the holders
of record of Cumulative Preferred Stock selected for redemption not less than 30
or more than 45 days prior to the date fixed for the redemption. Each Notice of
Redemption will state (i) the redemption date, (ii) the number of shares of
Cumulative Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such
shares, (iv) the Redemption Price, (v) the place or places where such shares are
to be redeemed, (vi) that dividends on the shares to be redeemed will cease to
accrue on such redemption date and (vii) the provision of the Articles
Supplementary under which the redemption is being made. No defect in the Notice
of Redemption or in the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the affairs of the Fund
(whether voluntary or involuntary), holders of shares of Cumulative Preferred
Stock then outstanding will be entitled to receive out of the assets of the Fund
available for distribution to shareholders, after satisfying claims of creditors
but before any distribution or payment of assets is made to holders of the
Common Stock or any other class of stock of the Fund ranking junior to the
Cumulative Preferred Stock as to liquidation payments, a liquidation
distribution in the amount of $25 per share, plus an amount equal to all unpaid
dividends accrued to and including the date fixed for such distribution or
payment (whether or not earned or declared by the Fund but excluding interest
thereon) (the "Liquidation Payment"), and such holders will be entitled to no
further
26
<PAGE> 27
participation in any distribution or payment in connection with any such
liquidation, dissolution or winding up. If, upon any liquidation, dissolution or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
assets of the Fund available for distribution among the holders of all
outstanding shares of Cumulative Preferred Stock and any other outstanding class
or series of Preferred Stock of the Fund ranking on a parity with the Cumulative
Preferred Stock as to payment upon liquidation, will be insufficient to permit
the payment in full to such holders of Cumulative Preferred Stock of the
Liquidation Payment and the amounts due upon liquidation with respect to such
other Preferred Stock, then such available assets will be distributed among the
holders of Cumulative Preferred Stock and such other Preferred Stock ratably in
proportion to the respective preferential amounts to which they are entitled.
Unless and until the Liquidation Payment has been paid in full to the holders of
Cumulative Preferred Stock, no dividends or distributions will be made to
holders of the Common Stock or any other stock of the Fund ranking junior to the
Cumulative Preferred Stock as to liquidation.
VOTING RIGHTS
Except as otherwise stated in this Prospectus and as otherwise required by
applicable law, holders of shares of Cumulative Preferred Stock will be entitled
to one vote per share on each matter submitted to a vote of 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 Charter 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.
27
<PAGE> 28
So long as shares of the Cumulative Preferred Stock are outstanding, the
Fund will not, without the affirmative vote of the holders of a majority of the
shares of Preferred Stock outstanding at the time, voting separately as one
class, amend, alter or repeal the provisions of the Charter, whether by merger,
consolidation or otherwise, so as to materially adversely affect any of the
contract rights expressly set forth in the Charter of holders of shares of the
Cumulative Preferred Stock or any other Preferred Stock. To the extent permitted
under the 1940 Act, in the event shares of more than one series of Preferred
Stock are outstanding, the Fund will not approve any of the actions set forth in
the preceding sentence which materially adversely affects the contract rights
expressly set forth in the Charter of a holder of shares of a series of
Preferred Stock differently than those of a holder of shares of any other series
of Preferred Stock without the affirmative vote of at least a majority of votes
entitled to be cast by holders of the Preferred Stock of each series materially
adversely affected and outstanding at such time (each such materially adversely
affected series voting separately as a class). Unless a higher percentage is
provided for under the Charter, the affirmative vote of a majority of the votes
entitled to be cast by holders of outstanding shares of the Cumulative Preferred
Stock and any other Preferred Stock, voting as a separate class, will be
required to approve any plan of reorganization adversely affecting such shares
or any action requiring a vote of security holders under Section 13(a) of the
1940 Act, including, among other things, changes in the Fund's investment
objective or changes in the investment restrictions described as fundamental
policies under "Investment Objectives and Policies" and "Investment
Restrictions" in the Prospectus and the SAI. The class vote of holders of shares
of the Cumulative Preferred Stock and any other Preferred Stock described above
in each case will be in addition to a separate vote of the requisite percentage
of shares of Common Stock and Cumulative Preferred Stock and any other Preferred
Stock, voting together as a single class, necessary to authorize the action in
question.
The foregoing voting provisions will not apply to any shares of Cumulative
Preferred Stock if, at or prior to the time when the act with respect to which
such vote otherwise would be required will be effected, such shares will have
been (i) redeemed or (ii) called for redemption and sufficient Deposit Assets
provided to the Dividend-Disbursing Agent to effect such redemption. The holders
of Cumulative Preferred Stock will have no preemptive rights or rights to
cumulative voting.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND ISSUANCE OF ADDITIONAL
PREFERRED STOCK
So long as any shares of Cumulative Preferred Stock are outstanding and
subject to compliance with the Fund's investment objectives, policies and
restrictions, the Fund may issue and sell one or more series of a class of
senior securities of the Fund representing indebtedness under the 1940 Act
and/or otherwise create or incur indebtedness, provided that the Fund will,
immediately after giving effect to the incurrence of such indebtedness and to
its receipt and application of the proceeds thereof, have an "asset coverage"
for all senior securities of the Fund representing indebtedness, as defined in
the 1940 Act, of at least 300% of the amount of all indebtedness of the Fund
then outstanding and no such additional indebtedness will have any preference or
priority over any other indebtedness of the Fund upon the distribution of the
assets of the Fund or in respect of the payment of interest. Any possible
liability resulting from lending and/or borrowing portfolio securities, entering
into reverse repurchase agreements, entering into futures contracts and writing
options, to the extent such transactions are made in accordance with the
investment restrictions of the Fund then in effect, will not be considered to be
indebtedness limited by the Articles Supplementary.
So long as any shares of Cumulative Preferred Stock are outstanding and
subject to compliance with the Fund's investment objectives, policies and
restrictions, the Fund may issue and sell shares of one of more other series of
Preferred Stock in addition to the shares of Cumulative Preferred Stock,
provided that the Fund will, immediately after giving effect to the issuance of
such additional Preferred Stock and to its receipt and application of the
proceeds thereof, have an "asset coverage" for all senior securities of the Fund
which are stock, as defined in the 1940 Act, of at least 200% of the sum of the
liquidation preference of the shares of Cumulative Preferred Stock and all other
Preferred Stock of the Fund then outstanding and all indebtedness of the Fund
constituting senior securities and no such additional Preferred Stock will have
any preference or priority over any other Preferred Stock of the Fund upon the
distribution of the assets of the Fund or in respect of the payment of
dividends.
28
<PAGE> 29
REPURCHASE OF CUMULATIVE PREFERRED STOCK
The Fund is a closed-end investment company and, as such, holders of
Cumulative Preferred Stock do not, and will not, have the right to redeem their
shares of the Fund. The Fund, however, may repurchase shares of the Cumulative
Preferred Stock when it is deemed advisable by the Board of Directors in
compliance with the requirements of the 1940 Act and the rules and regulations
thereunder and other applicable requirements.
BOOK-ENTRY
Shares of Cumulative Preferred Stock will initially be held in the name of
Cede & Co ("Cede"), as nominee for The Depository Trust Company ("DTC"). The
Fund will treat Cede as the holder of record of the Cumulative Preferred Stock
for all purposes. In accordance with the procedures of DTC, however, purchasers
of Cumulative Preferred Stock will be deemed the beneficial owners of shares
purchased for purposes of dividends, voting and liquidation rights. Purchasers
of Cumulative Preferred Stock may obtain registered certificates by contacting
the Transfer Agent (as defined below).
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
Common Stock. The Fund, which was incorporated under the laws of the State
of Maryland on March 31, 1994, is authorized to issue 198,000,000 shares of
Common Stock, par value $.001 per share. Each share has equal voting, dividend,
distribution and liquidation rights. The shares issued and outstanding are fully
paid and non-assessable. Shares of the Common Stock are not redeemable and have
no preemptive, conversion or cumulative voting rights. The Fund's shares are
listed and traded on the NYSE under the symbol "GGT."
Preferred Stock. The Fund's Board of Directors has authority to cause the
Fund to issue and sell up to 2,000,000 shares of Preferred Stock, par value
$.001 per share. The terms of such Preferred Stock would be fixed by the Board
of Directors and would materially limit and/or qualify the rights of the holders
of the Fund's Common Stock. The Board of Directors has designated 1,250,000
shares of Preferred Stock as the Cumulative Preferred Stock offered hereby. All
shares of Cumulative Preferred Stock, when issued in accordance with the terms
of the Offering, will be fully paid and nonassessable. See "Description of
Cumulative Preferred Stock."
The following table shows the number of shares of (i) capital stock
authorized, (ii) capital stock held by the Fund for its own account and (iii)
capital stock outstanding for each class of authorized securities of the Fund as
of April 1, 1997 as if the Offering had been completed by such date.
<TABLE>
<CAPTION>
AMOUNT HELD
BY FUND FOR
AMOUNT ITS OWN AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Common Stock......................... 198,000,000 400,000 11,076,548
Preferred Stock...................... 2,000,000 0 1,250,000
</TABLE>
TAXATION
The following is a description of certain U.S. Federal income tax
consequences to a shareholder of acquiring, holding and disposing of Cumulative
Preferred and Common Shares of the Fund. The discussion reflects applicable tax
laws of the United States as of the date of this Prospectus, which tax laws may
be changed or subject to new interpretations by the courts or the Internal
Revenue Service retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S. Federal,
state, local and foreign tax concerns affecting the Fund and its shareholders,
and the discussions set forth here do not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the tax consequences to
them of investing in the Fund.
29
<PAGE> 30
TAXATION OF THE FUND
The Fund has qualified as and intends to continue to qualify as and elect
to be a RIC under Subchapter M of the Code. If it so qualifies, the Fund will
not be subject to U.S. Federal income tax on the portion of its net investment
income (i.e., its investment company taxable income as defined in the Code
without regard to the deduction for dividends paid) and its net capital gain
(i.e., the excess of its net realized long-term capital gain over its net
realized short-term capital loss) which it distributes to its shareholders in
each taxable year, provided that it distributes to its shareholders at least 90%
of its net investment income for such taxable year.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies; (b)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of any of the following held for less than three months:
stock, securities, options, futures, certain forward contracts, or foreign
currencies (or any options, futures or forward contracts on foreign currencies)
but only if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and (c)
diversify its holdings so that, at the end of each quarter of each taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of the Fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other RICs).
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. To qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to Cumulative
Preferred Shareholders and Common Shareholders as a dividend paid out of the
Fund's net investment income (an "Ordinary Income Dividend"), its earnings and
profits attributable to non-RIC years reduced by an interest charge on 50% of
such earnings and profits payable by the Fund to the IRS. In addition, if the
Fund failed to qualify as a RIC for a period greater than one taxable year, then
the Fund would be required to recognize and pay tax on any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if the Fund had been liquidated) in order to
qualify as a RIC in a subsequent year. To the extent possible, the Fund intends
to make sufficient distributions to avoid application of the corporate income
tax.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount equal to, at the minimum, the sum of (1) 98% of its ordinary
income for the calendar year, (2) 98% of its capital gain net income for the one
year period ending on October 31 of such year (unless an election is made by a
fund with a November or December year-end to use the fund's fiscal year), and
(3) all ordinary income and capital gain net income for previous years that were
not previously distributed. While the Fund intends to distribute its ordinary
income and capital gain net income in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's ordinary income and capital gain net income will be
distributed to avoid entirely the imposition of the tax. In such event, the Fund
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.
If the Fund does not meet the asset coverage requirements of the 1940 Act
and the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage is
restored. See "Description of Cumulative Preferred Stock -- Dividends" and
"Description of Capital Stock and Other Securities." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to avoid Fund-level taxation on the Fund's
distributions, or might prevent it from distributing enough income and capital
gain to avoid completely the imposition of the excise tax. Upon any failure to
meet the asset coverage requirements of the 1940 Act or
30
<PAGE> 31
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 taxation on the Fund's undistributed income.
TAXATION OF SHAREHOLDERS
Ordinary Income Dividends (which include the Fund's net short-term capital
gain) are taxable to shareholders as ordinary income. A portion of the Fund's
Ordinary Income Dividends may qualify for the dividends received deduction
available to corporations.
At the time of a shareholder's purchase, the market price of the Fund's
Common Stock or Cumulative Preferred Stock may reflect undistributed net
investment income or net capital gain. A subsequent distribution of these
amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's investment.
Investors should carefully consider the tax implications of acquiring shares
just prior to a distribution, as they will receive a distribution that would be
taxable to them.
Distributions made from net capital gain which are designated by the Fund
as Capital Gain Dividends are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares.
In general, the maximum Federal income tax rate imposed on individuals with
respect to capital gain dividends is 28%, whereas the maximum federal income tax
rate imposed on individuals with respect to ordinary income (and short-term
capital gains) is 39.6%. With respect to corporate taxpayers, long-term capital
gains currently are taxed at the same Federal income tax rates as ordinary
income and short-term capital gains.
In recent years, a number of legislative proposals concerning the tax
treatment of capital gains have been introduced in Congress. The proposals have
ranged from eliminating the preferential treatment of capital gains to
eliminating tax on capital gains. It cannot be predicted whether any of these
proposals may ultimately become law, nor can the effective date of any
legislation be anticipated. Any change in the tax treatment of capital gains,
however, would have an effect on the tax consequences of an investment in
Cumulative Preferred Stock. Shareholders may be entitled to offset their Capital
Gain Dividends with capital losses. There are a number of statutory provisions
affecting when capital losses may be offset against capital gains and limiting
the use of losses from certain investments and activities. Accordingly,
shareholders with capital losses are urged to consult their tax advisers.
Dividends are taxable to shareholders whether they are paid in cash or paid
in additional shares of stock under the Fund's plan for the automatic
reinvestment of dividends. Generally, shareholders will be taxed on dividends in
the year of receipt, however, if the Fund declares a dividend in October,
November or December to shareholders of record on a specified date in such a
month which is actually paid during the following January, the dividend will be
deemed to have been paid by the Fund (and received by the shareholders) on
December 31 of the year in which the dividend is declared. Not later than 60
days after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any Ordinary Income Dividends
or Capital Gain Dividends. Distributions in excess of the Fund's earnings and
profits will first reduce the adjusted tax basis of a holder's shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset).
The sale, redemption or other disposition of Fund shares is a taxable event
and may result in a gain or loss. Such gain or loss will generally be a capital
gain or loss if the shares are capital assets in the hands of the shareholder
and will be long-term capital gain or loss if the shares have been held for more
than one year. Any loss upon the sale or exchange of Fund shares held for six
months or less, however, will be treated as a long-term capital loss to the
extent of any Capital Gain Dividends received by the shareholder. A loss
realized on a sale or exchange of shares of the Fund will be disallowed if other
Fund shares of the same class are acquired within a 61-day period beginning 30
days before and ending 30 days after the date on which the shares are disposed.
In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
31
<PAGE> 32
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. If the Fund satisfies the
distribution requirements to be taxed as a RIC during a taxable year, and if 50%
of the Fund's total assets at the end of its taxable year consist of stock or
securities of foreign corporations, it may elect to "pass-through" to its
shareholders the ability to use the foreign tax deduction or credit for foreign
taxes paid with respect to qualifying taxes. If the Fund makes such an election,
a taxpayer would be required to include in income its proportionate share of the
qualifying foreign taxes paid by the Fund and would be allowed to either deduct
the amount of such taxes from its taxable income or to use such taxes as a
credit against its U.S. federal income tax liability. In general, it will be
more beneficial for a taxpayer to use its proportionate share of such taxes paid
by the Fund as a foreign tax credit. If the Fund elects to pass-through the
benefit of the deduction or credit allowed for qualifying foreign taxes it has
paid in a given year, it will send each Shareholder a written notice of the
portion of the Fund's dividends that represents income from sources within each
foreign country and the amount of such Shareholder's proportionate share of
foreign taxes paid to each foreign country.
Designation of Capital Gain Dividends to Cumulative Preferred Stock. The
IRS has taken the position in Revenue Ruling 89-81 that if a RIC has two classes
of shares, it may designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of particular types
of income, such as long-term capital gain and foreign taxes paid by the RIC (if
such taxes are subject to a "pass-through" election as described above). A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such year
that was paid to such class. Consequently, the Fund will designate distributions
made to the Common Stock and Cumulative Preferred Stock and any other Preferred
Stock series as consisting of particular types of income in accordance with the
classes' proportionate shares of such income. Because of this rule, the Fund is
required to allocate a portion of its net capital gains and foreign taxes paid
to holders of Common Stock, holders of Cumulative Preferred Stock and any other
Preferred Stock. The amount of net capital gains, other types of income and
foreign taxes paid allocable among holders of the Common Stock, the Cumulative
Preferred Stock and any other Preferred Stock will depend upon the amount of
such gains and other income realized by and taxes paid by the Fund and the total
dividends paid by the Fund on shares of Common Stock and Cumulative Preferred
Stock and any other Preferred Stock during a taxable year.
The Fund believes that under current law the manner in which the Fund
intends to allocate net capital gains, other types of income and foreign taxes
paid between shares of Common Stock and Cumulative Preferred Stock will be
respected for Federal income tax purposes. However, the Fund has not requested
and will not request direct guidance from the IRS specifically addressing
whether the Fund's method of allocation will be respected for Federal income tax
purposes, and it is possible that the IRS could disagree with the Fund and
attempt to reallocate the Fund's net capital gains, other taxable income and
foreign taxes paid.
WITHHOLDING AND OTHER TAXES
Ordinary Income Dividends (but not Capital Gain Dividends) paid to
shareholders who are nonresident aliens or foreign entities will be subject to a
30% United States withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax advisers concerning
the applicability of the United States withholding tax.
Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on Ordinary Income Dividends, Capital Gain Dividends and
redemption payments ("backup withholding"). A shareholder, however, may
generally avoid becoming subject to this requirement by filing an appropriate
form with the payor (i.e., the financial institution or brokerage firm where the
shareholder maintains his or her account), certifying under penalties of perjury
that such shareholder's taxpayer identification number is correct and that such
shareholder has never been notified by the IRS that he or she is subject to
backup withholding, has been notified by the IRS that he or she is no longer
subject to backup withholding, or is exempt from backup withholding. Corporate
shareholders and certain other shareholders are exempt from backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the
backup
32
<PAGE> 33
withholding rules from payments made to a shareholder may be credited against
such shareholder's Federal income tax liability.
Distributions may also be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Cumulative Preferred Stock.
THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARY OF THE APPLICABLE
PROVISIONS OF THE CODE AND TREASURY REGULATIONS PRESENTLY IN EFFECT. A MORE
COMPLETE DISCUSSION OF THE TAX RULES APPLICABLE TO THE FUND CAN BE FOUND IN THE
SAI WHICH IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. FOR THE COMPLETE
PROVISIONS APPLICABLE TO BOTH SHAREHOLDERS AND THE FUND, REFERENCE SHOULD BE
MADE TO THE PERTINENT CODE SECTIONS AND THE TREASURY REGULATIONS PROMULGATED
THEREUNDER. THE CODE AND THE TREASURY REGULATIONS ARE SUBJECT TO CHANGE BY
LEGISLATIVE, JUDICIAL OR ADMINISTRATIVE ACTION, EITHER PROSPECTIVELY OR
RETROACTIVELY.
CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter and By-Laws (together, in
each case, its "Governing Documents") which could have the effect of limiting,
in each case, (i) the ability of other entities or persons to acquire control of
the Fund, (ii) the Fund's freedom to engage in certain transactions, or (iii)
the ability of the Fund's Directors or 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 "antitakeover"
provisions. The Board of Directors of the Fund is divided into three classes,
each having a term of no more than three years. Each year the term of one class
of Directors will expire. Accordingly, only those Directors in one class may be
changed in any one year, and it would require two years to change a majority of
the Board of Directors. Such system of electing Directors may have the effect of
maintaining the continuity of management and, thus, make it more difficult for
the 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 with
or without cause by a vote of a majority of the votes entitled to be cast for
the election of Directors of the Fund. In addition, the affirmative vote of the
holders of 66 2/3% of each class of its outstanding voting shares is required to
authorize the conversion of the Fund from a closed-end to an open-end investment
company or generally to authorize any of the following transactions:
(i) merger or consolidation of the Fund with or into any other
corporation;
(ii) issuance of any securities of the Fund to any person or entity
for cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Fund, in exchange for securities
of the Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund. However, such vote would not be required when, under certain
conditions, the Board of Directors approves the transaction. Reference is made
to the Governing Documents of the Fund on file with the Commission; for the full
text of these provisions, see "Additional Information."
The provisions of the Governing Documents described above could have the
effect of depriving the owners of shares in the Fund of opportunities to sell
their shares at a premium over prevailing market prices, by discouraging a third
party from seeking to obtain control of the Fund in a tender offer or similar
transaction. The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a principal
shareholder. The Board of Directors has determined that the foregoing voting
requirements are in the best interests of the shareholders generally.
33
<PAGE> 34
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company serves as Custodian for the Fund's cash
and securities as well as the Transfer Agent and Dividend-Disbursing Agent for
its shares. Boston EquiServe LP, an affiliate of State Street, performs the
shareholder services on behalf of State Street and is located at 150 Royall
Street, Canton, MA 02021. State Street does not assist in and is not responsible
for investment decisions involving assets of the Fund.
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below for whom Smith
Barney Inc. and Gabelli & Company, Inc. are acting as the Representatives (the
"Representatives") has severally agreed to purchase, and the Fund has agreed to
sell to such Underwriter, the number of shares of Cumulative Preferred Stock set
forth opposite the name of such Underwriter:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
----------------------------------- ---------
<S> <C>
Smith Barney Inc. ................. 445,000
Gabelli & Company, Inc. ........... 445,000
Bear, Stearns & Co. Inc. .......... 20,000
J.C. Bradford & Co. ............... 10,000
Alex. Brown & Sons Incorporated.... 20,000
Cowen & Company.................... 10,000
Dain Bosworth Incorporated......... 20,000
Dillon, Read & Co. Inc. ........... 20,000
A.G. Edwards & Sons, Inc. ......... 20,000
EVEREN Securities, Inc. ........... 20,000
Fahnestock & Co. Inc. ............. 10,000
First of Michigan Corporation...... 10,000
Gruntal & Co., Incorporated........ 10,000
Janney Montgomery Scott Inc. ...... 10,000
Kennedy Cabot & Company Inc. ...... 10,000
Legg Mason Wood Walker,
Incorporated..................... 10,000
<CAPTION>
NUMBER OF
NAME SHARES
----------------------------------- ---------
<S> <C>
McDonald & Company Securities,
Inc. ............................ 10,000
McGinn, Smith & Co., Inc. ......... 10,000
Morgan Keegan & Company, Inc. ..... 10,000
Openheimer & Co., Inc. ............ 20,000
Piper Jaffray Inc. ................ 10,000
Principal Financial Securities,
Inc. ............................ 10,000
Prudential Securities
Incorporated..................... 20,000
Rauscher Pierce Refsnes, Inc. ..... 10,000
Raymond James & Associates,
Inc. ............................ 10,000
Robinson-Humphrey Company, Inc. ... 20,000
Stephens Inc. ..................... 10,000
Tucker Anthony Incorporated........ 10,000
U.S. Clearing Corp. ............... 10,000
=========
Total.............. 1,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Cumulative
Preferred Stock offered hereby are subject to the approval of certain legal
matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares of Cumulative Preferred Stock offered
hereby if any are taken.
The Underwriters propose to offer part of the shares of Cumulative
Preferred Stock offered hereby directly to the public at the public offering
price set forth on the cover page of this Prospectus and part of the shares to
certain dealers at a price which represents a concession not in excess of $0.50
per share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.30 per share to certain
other dealers. After the initial offering of the shares of Cumulative Preferred
Stock to the public, the public offering price and such concessions may be
changed by the Underwriters. The underwriting discount of $0.7875 per share is
equal to 3.15% of the initial offering price. Investors must pay for any shares
of Cumulative Preferred Stock purchased on or before June 4, 1997.
The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the 1933 Act.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the 1933 Act, certain persons participating in the Offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of stabilizing or
maintaining the
34
<PAGE> 35
market price of the Cumulative Preferred Stock at a level above that which might
otherwise prevail in the open market. A "stabilizing bid" is a bid for or the
purchase of the Cumulative Preferred Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Cumulative Preferred Stock. A
"syndicate covering transaction" is a bid for or purchase of the Cumulative
Preferred Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the Offering. A "penalty bid" is
an arrangement permitting the Underwriters to reclaim the selling concession
otherwise accruing to an Underwriter or selling group member in connection with
the Offering if any of the Cumulative Preferred Stock originally sold by such
Underwriter or selling group member is purchased in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter or
selling group member. The Underwriters have advised the Company that such
transactions may be effected on the NYSE otherwise and, if commenced, may be
discontinued at any time.
The Underwriters have acted in the past and may continue to act from time
to time during and subsequent to the completion of the offering of Cumulative
Preferred Stock hereunder as a broker or dealer in connection with the execution
of portfolio transactions for the Fund. See "Portfolio Transactions" in the SAI.
Prior to the Offering, there has been no public market for the Cumulative
Preferred Stock. Application has been made to list the Cumulative Preferred
Stock on the NYSE. However, during an initial period which is not expected to
exceed 30 days after the date of this Prospectus, the Cumulative Preferred Stock
will not be listed on any securities exchange. During such period, the
Underwriters intend to make a market in the Cumulative Preferred Stock; however,
they have no obligation to do so. Consequently, an investment in the Cumulative
Preferred Stock may be illiquid during such period.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli Securities,
Inc., which is a majority-owned subsidiary of the Adviser which is, in turn,
owned by Mario J. Gabelli. As a result of these relationships, Mr. Gabelli, the
Fund's President and Chief Investment Officer, may be deemed to be a
"controlling person" of Gabelli & Company, Inc. For additional Information
regarding these affiliations, see "Management of the Funds." The Underwriters
and the Fund have retained Financial Products Group, Inc. to provide certain
services in connection with the Offering.
Smith Barney Inc. and Gabelli & Company, Inc. have provided investment
banking and financial advisory services to the Fund.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the
Cumulative Preferred Stock will be passed on by Miles & Stockbridge, Baltimore,
Maryland. Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, special counsel to the Fund, and by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York, counsel to the Underwriters. Skadden, Arps,
Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett will each rely as to
matters of Maryland law on the opinion of Miles & Stockbridge.
EXPERTS
Price Waterhouse LLP, independent accountants, are the independent
accountants of the Fund. The audited financial statements of the Fund and the
information appearing under the caption "Financial Highlights" included in this
Prospectus have been audited by Price Waterhouse LLP for the periods indicated
in its report with respect thereto, and are included in reliance upon such
report and upon the authority of such firm as experts in accounting and
auditing. Price Waterhouse LLP has an office at 1177 Avenue of the Americas, New
York, New York 10036, and also performs tax and other professional services for
the Fund.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act and in accordance therewith
files reports and other information with the SEC. Reports, proxy statements and
other information filed by the Fund with the SEC pursuant to the informational
requirements of such Acts can be inspected and copied at the public reference
facilities maintained by the
35
<PAGE> 36
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the SEC: Northeast Regional
Office, Seven World Trade Center, Suite 1300, New York, New York 10048; Pacific
Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036-3648; and Midwest Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and copies of such
material can be obtained from the Public Reference Section of the SEC, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Fund, that file electronically with the SEC.
The Fund's Common Stock is listed on the NYSE, and reports, proxy
statements and other information concerning the Fund and filed with the SEC by
the Fund can be inspected at the offices of the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York 10005.
This Prospectus constitutes part of a Registration Statement filed by the
Fund with the SEC under the 1933 Act and the 1940 Act. This Prospectus omits
certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Fund and the Cumulative Preferred Stock
offered hereby. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the SEC. Each such statement is qualified in its
entirety by such reference. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its rules and regulations.
TABLE OF CONTENTS OF SAI
An SAI dated May 30, 1997 has been filed with the SEC and is incorporated
by reference in this Prospectus. An SAI may be obtained without charge by
writing to the Fund at its address at One Corporate Center, Rye, New York
10580-1434 or by calling the Fund toll-free at (800) GABELLI (422-3554). The
Table of Contents of the SAI is as follows:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................... B-2
INVESTMENT RESTRICTIONS.............................................................. B-11
MANAGEMENT OF THE FUND............................................................... B-12
THE ADVISER.......................................................................... B-17
PORTFOLIO TRANSACTIONS............................................................... B-18
TAXATION............................................................................. B-19
MOODY'S DISCOUNT FACTORS............................................................. B-23
NET ASSET VALUE...................................................................... B-27
GENERAL INFORMATION.................................................................. B-28
BENEFICIAL OWNER..................................................................... B-29
FINANCIAL STATEMENTS................................................................. B-29
</TABLE>
36
<PAGE> 37
GLOSSARY
"Adjusted Assets" means the aggregate Adjusted Value of all the Moody's
Eligible Assets.
"Adjusted Value" of each Moody's Eligible Asset shall be computed as
follows:
(i) Cash shall be valued at 100% of the face value thereof; and
(ii) all other Moody's Eligible Assets shall be valued at the
Discounted Value thereof; and
(iii) each asset that is not a Moody's Eligible Asset shall be valued
at zero.
"Articles Supplementary" means the Fund's Articles Supplementary creating
and fixing the rights of the Cumulative Preferred Stock.
"Asset Coverage" has the meaning set forth on page 24 of this Prospectus.
"Basic Maintenance Amount" means, as of any Valuation Date, the dollar
amount equal to (i) the sum of (A) the product, calculated separately for each
series of Cumulative Preferred Stock, of the number of shares of each series of
Cumulative Preferred Stock outstanding on such Valuation Date multiplied by the
liquidation preference per share; (B) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each
outstanding share of Cumulative Preferred Stock from the most recent Dividend
Payment Date to which dividends have been paid or duly provided for (or, in the
event the Basic Maintenance Amount is calculated on a date prior to the initial
Dividend Payment Date with respect to a series of the Cumulative Preferred
Stock, then from the Date of Original Issue) through the Valuation Date plus all
dividends to accumulate on the Preferred Stock then outstanding during the 70
days following such Valuation Date or, if less, during the number of days
following such Valuation Date that shares of Preferred Stock called for
redemption are scheduled to remain outstanding; (C) the Fund's other liabilities
due and payable as of such Valuation Date (except that dividends and other
distributions payable by the Fund by the issuance of Common Stock will not be
included as a liability) and such liabilities projected to become due and
payable by the Fund during the 90 days following such Valuation Date (excluding
liabilities for investments to be purchased and for dividends and other
distributions not declared as of such Valuation Date); (D) any current
liabilities of the Fund as of such Valuation Date to the extent not reflected in
any of (i)(A) through (i)(C) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund pursuant to reverse
repurchase agreements and any payables for assets purchased as of such Valuation
Date) less (ii) the Adjusted Value of any of the Fund's assets if such assets
are either cash or evidences of indebtedness which mature prior to or on the
date of redemption or repurchase of shares of Preferred Stock or payment of
another liability and are either U.S. Government Obligations or evidences of
indebtedness which have a rating assigned by Moody's of at least Aaa, P-1,
VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, and are irrevocably
held by the Fund's custodian bank in a segregated account or deposited by the
Fund with the Dividend - Disbursing Agent for the payment of the amounts needed
to redeem or repurchase Preferred Stock subject to redemption or repurchase or
any of (i)(B) through (i)(D) and provided that in the event the Fund has
repurchased Cumulative Preferred Stock at a price of less than the liquidation
preference thereof and irrevocably segregated or deposited assets as described
above with its custodian bank or the Dividend - Disbursing Agent for the payment
of the repurchase price the Fund may deduct 100% of the liquidation preference
of such Cumulative Preferred Stock to be repurchased from (i) above.
"Basic Maintenance Report" has the meaning set forth on page 25 of this
Prospectus.
"Business Day" means a day on which the NYSE is open for trading and that
is neither a Saturday, Sunday nor any other day on which banks in the City of
New York are authorized by law to close.
"Charter" means the Articles of Incorporation, as amended and supplemented
(including the Articles Supplementary), of the Fund on file in the State
Department of Assessments and Taxation of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the
Fund.
37
<PAGE> 38
"Cumulative Preferred Stock" means the 7.92% Cumulative Preferred Stock,
par value $.001 per share, of the Fund.
"Cure Date" has the meaning set forth on page 25 of this Prospectus.
"Date of Original Issue" has the meaning set forth on page 24 of this
Prospectus.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S.
Government Obligations. Except for determining whether the Fund has Adjusted
Assets equal to or greater than the Basic Maintenance Amount, each Deposit Asset
will be deemed to have a value equal to its principal or face amount payable at
maturity plus any interest payable thereon after delivery of such Deposit Asset
but only if payable on or prior to the applicable payment date in advance of
which the relevant deposit is made.
"Discounted Value" means, with respect to a Moody's Eligible Asset, the
quotient of (A) in the case of a non-convertible fixed income instrument, the
lower of the principal amount or liquidation preference and the market value
thereof or (B) in the case of any other Moody's Eligible Asset, the market value
thereof, divided by the applicable Moody's Discount Factor.
"Dividend-Disbursing Agent" means State Street Bank and Trust Company and
its successors or any other paying agent appointed by the Fund.
"Dividend Payment Date" has the meaning set forth on page 24 of this
Prospectus.
"Fund" means The Gabelli Global Multimedia Trust Inc., a Maryland
corporation.
"Liquidation Payment" has the meaning set forth on page 26 of this
Prospectus.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" means, with respect to a Moody's Eligible Asset
specified below, the numbers set forth in the SAI under the heading "Moody's
Discount Factors."
"Moody's Eligible Assets" means:
i. cash (including, for this purpose, receivables for investments sold to a
counterparty whose senior debt securities are rated at least Baa3 by Moody's or
a counterparty approved by Moody's and payable within five Business Days
following such Valuation Date and dividends and interest receivable within 70
days on investments);
ii. Short-Term Money Market Instruments;
iii. commercial paper that is not includible as a Short-Term Money Market
Instrument having on the Valuation Date a rating from Moody's of at least P-1
and maturing within 270 days;
iv. preferred stocks (A) which either (1) are issued by issuers whose
senior debt securities are rated at least Baa1 by Moody's or (2) are rated at
least "baa3" by Moody's (or in the event an issuer's senior debt securities or
preferred stock is not rated by Moody's, which either (1) are issued by an
issuer whose senior debt securities are rated at least A- by S&P or (2) are
rated at least A- by S&P and for this purpose have been assigned a Moody's
equivalent rating of at least "baa3"), (B) of issuers which have (or, in the
case of issuers which are special purpose corporations, whose parent companies
have) common stock listed on the NYSE, the American Stock Exchange or the NASDAQ
National Market System, (C) which have a minimum issue size (when taken together
with other of the issuer's issues of similar tenor) of $50,000,000, (D) which
have paid cash dividends consistently during the preceding three-year period
(or, in the case of new issues without a dividend history, are rated at least
"a1" by Moody's or, if not rated by Moody's, are rated at least AA- by S&P), (E)
which pay cumulative cash dividends in U.S. dollars, (F) which are not
convertible into any other class of stock and do not have warrants attached, (G)
which are not issued by issuers in the transportation industry and (H) in the
case of auction rate preferred stocks, which are rated at least "aa3" by
Moody's, or if not rated by Moody's, AAA by S&P or are otherwise approved in
writing by Moody's and have never had a failed auction; provided, however, that
for this purpose the aggregate market
38
<PAGE> 39
value of the Fund's holdings of any issue of preferred stock will not be less
than $500,000 nor more than $5,000,000;
v. common stocks (A) which are traded on the NYSE, the American Stock
Exchange or through the NASDAQ system in the over-the-counter market, (B) which,
if cash dividend paying, pay cash dividends in U.S. dollars, (C) which may be
sold without restriction by the Fund; provided, however, that (1) common stock
which, while a Moody's Eligible Asset owned by the Fund, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
after 71 days following the date of the announcement of such cessation, unless
the issuer of the common stock has senior debt securities rated at least A3 by
Moody's and (2) the aggregate market value of the Fund's holdings of the common
stock of any issuer in excess of 4% in the case of utility common stock and 6%
in the case of non-utility common stock of the number of outstanding shares
times the market value of such common stock shall not be a Moody's Eligible
Asset, and (D) which are securities denominated in any currency other than the
U.S. dollar and securities of issuers formed under the laws of jurisdictions
other than the United States, its states and the District of Columbia for which
there are dollar-denominated American Depository Receipts ("ADRs") which are
traded in the United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the District of
Columbia; provided, however, that the aggregate market value of the Fund's
holdings of securities denominated in currencies other than the U.S. dollar and
ADRs in excess of 6% of the aggregate market value of the outstanding shares of
common stock of such issuer or in excess of 10% of the market value of the
Moody's Eligible Assets with respect to issuers formed under the laws of any
single such non-U.S. jurisdiction shall not be a Moody's Eligible Asset;
vi. U.S. Government Obligations;
vii. corporate evidences of indebtedness (A) which may be sold without
restriction by the Fund and which are rated at least B3 (Caa subordinate) by
Moody's (or, in the event the security is not rated by Moody's, the security is
rated at least BB- by S&P and which for this purpose is assigned a Moody's
equivalent rating of one full rating category lower), with such rating confirmed
on each Valuation Date, (B) which have a minimum issue size of at least (x)
$100,000,000 if rated at least Baa3 or (y) $50,000,000 if rated B or Ba3, (C)
which are U.S. dollar denominated and pay interest in cash in U.S. dollars, (D)
which are not convertible or exchangeable into equity of the issuing corporation
and have a maturity of not more than 30 years and (E) for which, if rated below
Baa3, the aggregate market value of the Fund's holdings do not exceed 10% of the
aggregate market value of any individual issue of corporate evidences of
indebtedness calculated at the time of original issuance;
viii. convertible corporate evidences of indebtedness (A) which are issued
by issuers whose senior debt securities are rated at least B2 by Moody's (or, in
the event an issuer's senior debt securities are not rated by Moody's, which are
issued by issuers whose senior debt securities are rated at least BB by S&P and
which for this purpose is assigned a Moody's equivalent rating of one full
rating category lower), (B) which are convertible into common stocks which are
traded on the NYSE or the American Stock Exchange or are quoted on the NASDAQ
National Market System and (C) which, if cash dividend paying, pay cash
dividends in U.S. dollars; provided, however, that once convertible corporate
evidences of indebtedness have been converted into common stock, the common
stock issued upon conversion must satisfy the criteria set forth in clause (v)
above and other relevant criteria set forth in this definition in order to be a
Moody's Eligible Asset;
provided, however, that the Fund's investments in auction rate preferred stocks
described in clause (iv) above shall be included in Moody's Eligible Assets only
to the extent that the aggregate market value of such stocks does not exceed 10%
of the aggregate market value of all of the Fund's investments meeting the
criteria set forth in clauses (i) through (vii) above less the aggregate market
value of those investments excluded from Moody's Eligible Assets pursuant to the
proviso appearing after clause (ix) below; and
ix. no assets which are subject to any lien or irrevocably deposited by the
Fund for the payment of amounts needed to meet the obligations described in
clauses (i)(A) through (i)(D) of the definition of "Basic Maintenance Amount"
may be includible in Moody's Eligible Assets.
39
<PAGE> 40
Notwithstanding anything to the contrary in the preceding clauses (i)-(ix),
the Fund's investment in preferred stock, common stock, corporate evidences of
indebtedness and convertible corporate evidences of indebtedness shall not be
treated as Moody's Eligible Assets except to the extent they satisfy the
following diversification requirements (utilizing Moody's industry and
sub-industry categories):
ISSUER:
<TABLE>
<CAPTION>
NON-UTILITY UTILITY
MAXIMUM SINGLE MAXIMUM SINGLE
MOODY'S RATING(1)(2) ISSUER(3)(4) ISSUER(3)(4)
- ----------------------------------------------------------- --------------- ---------------
<S> <C> <C>
"aaa", Aaa................................................. 100% 100%
"aa", Aa................................................... 20% 20%
"a", A..................................................... 10% 10%
CS/CB, "Baa", Baa(5)....................................... 6% 4%
Ba......................................................... 4% 4%
B1/B2...................................................... 3% 3%
B3 (Caa subordinate)....................................... 2% 2%
</TABLE>
<TABLE>
<CAPTION>
UTILITY UTILITY
NON-UTILITY MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE SUB- SINGLE
MOODY'S RATING(1) INDUSTRY(3) INDUSTRY(3)(6) STATE(3)
- ------------------------------------------------------ -------------- ------------ -------
<S> <C> <C> <C>
"aaa", Aaa............................................ 100% 100% 100%
"aa", Aa.............................................. 60% 60% 20%
"a", A................................................ 40% 50% 10%(7)
CS/CB, "baa", Baa(5).................................. 20% 50% 7%(7)
Ba.................................................... 12% 12% 0%
B1/B2................................................. 8% 8% 0%
B3 (Caa subordinate).................................. 5% 5% 0%
</TABLE>
- ---------------
(1) The equivalent Moody's rating must be lowered one full rating category for
preferred stocks, corporate bonds and convertible corporate bonds rated by
S&P but not by Moody's.
(2) Corporate bonds from issues ranging $50,000,000 to $100,000,000 are limited
to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the
related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one
name.
(5) CS/CB refers to common stock and convertible corporate evidences of
indebtedness, which are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility,
evidences of indebtedness and utility convertible evidences of indebtedness,
the definition of industry refers to sub-industries (electric, water, hydro
power, gas, diversified). Investments in other sub-industries are eligible
only to the extent that the combined sum represents a percentage position of
Moody's Eligible Assets less than or equal to the percentage limits in the
diversification tables above.
(7) Such percentage will be 15% in the case of utilities regulated by
California, New York and Texas.
"1933 Act" means The Securities Act of 1933, as amended.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Notice of Redemption" has the meaning set forth on page 26 of this
Prospectus.
"Preferred Stock" means the preferred stock, par value $.001 per share, of
the Fund, and includes the Cumulative Preferred Stock.
40
<PAGE> 41
"Quarterly Valuation Date" means the last Valuation Date in March, June,
September and December of each year, commencing June, 1997.
"Redemption Price" has the meaning set forth on page 25 of this Prospectus.
"SEC" means the Securities and Exchange Commission.
"Short-Term Money Market Instruments" means the following types of
instruments if, on the date of purchase or other acquisition thereof by the Fund
(or, in the case of an instrument specified by clauses (i) and (ii) below, on
the Valuation Date), the remaining terms to maturity thereof are not in excess
of 90 days:
(i) U.S. Government Obligations;
(ii) commercial paper that is rated at the time of purchase or acquisition
and the Valuation Date at least P-1 by Moody's and is issued by an issuer (or
guaranteed or supported by a person or entity other than the issuer) whose
long-term unsecured debt obligations are rated at least Aa3 by Moody's;
(iii) demand or time deposits in or certificates of deposit of or banker's
acceptances issued by (A) a depository institution or trust company incorporated
under the laws of the United States of America or any state thereof or the
District of Columbia or (B) a United States branch office or agency of a foreign
depository institution (provided that such branch office or agency is subject to
banking regulation under the laws of the United States, any state thereof or the
District of Columbia) if, in each case, the commercial paper, if any, and the
long-term unsecured debt obligations (other than such obligations the ratings of
which are based on the credit of a person or entity other than such depository
institution or trust company) of such depository institution or trust company at
the time of purchase or acquisition and the Valuation Date, have (1) credit
ratings from Moody's of at least P-1 in the case of commercial paper and (2)
credit ratings from Moody's of at least Aa3 in the case of long-term unsecured
debt obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase or other
acquisition by the Fund, all of the foregoing requirements will be applicable
except that the required long-term unsecured debt credit rating of such
depository institution or trust company from Moody's will be at least A2; and
provided, further, however, that the foregoing credit rating requirements will
be deemed to be met with respect to a depository institution or trust company if
(1) such depository institution or trust company is the principal depository
institution in a holding company system, (2) the commercial paper, if any, of
such depository institution or trust company is not rated below P-1 by Moody's
and (3) the holding company will meet all of the foregoing credit rating
requirements (including the preceding proviso in the case of investments that
mature in no more than one Business Day from the date of purchase or other
acquisition by the Fund);
(iv) repurchase obligations with respect to any U.S. Government Obligation
entered into with a depository institution, trust company or securities dealer
(acting as principal) which is rated (A) at least Aa3 if the maturity is three
months or less, (B) at least A1 if the maturity is two months or less and (C) at
least A2 if the maturity is one month or less; and
(v) Eurodollar demand or time deposits in, or certificates of deposit of,
the head office or the London branch office of a depository institution or trust
company meeting the credit rating requirements of commercial paper and long-term
unsecured debt obligations specified in clause (iii) above, provided that the
interest receivable by the Fund will be payable in U.S. dollars and will not be
subject to any withholding or similar taxes.
"S&P" means Standard & Poor's Ratings Services or its successors.
"U.S. Government Obligations" means direct non-callable obligations of the
United States, provided that such direct obligations are entitled to the full
faith and credit of the United States and that any such obligations, other than
United States Treasury Bills and U.S. Treasury Securities Strips, provide for
the periodic payment of interest and the full payment of principal at maturity.
"Valuation Date" means the day of the week specified by the Board of
Directors for the weekly determination of net asset value of the Fund.
41
<PAGE> 42
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Financial Highlights.................. 10
Use of Proceeds....................... 11
Capitalization........................ 11
The Fund.............................. 12
Investment Objectives and Policies.... 12
Special Investment Methods............ 14
Risk Factors and Special
Considerations...................... 18
Management of the Fund................ 20
Dividend and Distribution Policy...... 22
Description of Cumulative Preferred
Stock............................... 22
Description of Capital Stock and Other
Securities.......................... 29
Taxation.............................. 29
Certain Provisions of the Charter and
By-laws............................. 33
Custodian, Transfer Agent and
Dividend-Disbursing Agent........... 34
Underwriting.......................... 34
Legal Matters......................... 35
Experts............................... 35
Additional Information................ 35
Table of Contents of SAI.............. 36
Glossary.............................. 37
</TABLE>
======================================================
======================================================
1,250,000 SHARES
(GLOBAL MULTIMEDIA TRUST INC. LOGO)
7.92% CUMULATIVE PREFERRED STOCK
------------
PROSPECTUS
MAY 30, 1997
---------------
SMITH BARNEY INC.
GABELLI & COMPANY, INC.
======================================================
<PAGE> 43
THE GABELLI GLOBAL
MULTIMEDIA TRUST INC.
ONE CORPORATE CENTER
RYE, NEW YORK 10580-1434
TELEPHONE 1-800-GABELLI (1-800-422-3554)
STATEMENT OF ADDITIONAL INFORMATION
MAY 30, 1997
This Statement of Additional Information (the "SAI") relates to The Gabelli
Global Multimedia Trust Inc. (the "Fund"), and is not a prospectus. This SAI
contains additional and more detailed information and should be read in
conjunction with the balance of the Fund's registration statement. 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.................................................... B-2
INVESTMENT RESTRICTIONS............................................................... B-11
MANAGEMENT OF THE FUND................................................................ B-12
THE ADVISER........................................................................... B-17
PORTFOLIO TRANSACTIONS................................................................ B-18
TAXATION.............................................................................. B-19
MOODY'S DISCOUNT FACTORS.............................................................. B-23
NET ASSET VALUE....................................................................... B-27
GENERAL INFORMATION................................................................... B-27
BENEFICIAL OWNER...................................................................... B-28
FINANCIAL STATEMENTS.................................................................. B-28
</TABLE>
<PAGE> 44
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 common stock and other securities of
companies in the telecommunications, media, publishing and entertainment
industries. See "Investment Objectives and Policies" in the Prospectus.
INVESTMENT PRACTICES
CORPORATE REORGANIZATIONS. Subject to the Fund's policy of investing at
least 65% of its total assets in companies involved in the telecommunications,
media, publishing and entertainment industries, the Fund may without limit
invest in securities of companies for which a tender or exchange offer has been
made or announced and in securities of companies for which a merger,
consolidation, liquidation or reorganization proposal has been announced if, in
the judgement of Gabelli Funds, Inc. (the "Adviser"), there is a reasonable
prospect of capital appreciation significantly greater than the brokerage and
other transaction expenses involved.
In general, securities which are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or may also discount what the stated or appraised
value of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when: the discount
significantly overstates the risk of the contingencies involved; the market
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or the market fails adequately to recognize the
possibility that the offer or proposal may be replaced or superseded by an offer
or proposal of greater value. The evaluation of such contingencies requires
unusually broad knowledge and experience on the part of the Adviser which must
appraise not only the value of the issuer and its component businesses as well
as the assets or securities to be received as a result of the contemplated
transaction but also the financial resources and business motivation of the
offeror and the dynamics and business climate when the offer or proposal is in
process.
TEMPORARY INVESTMENTS. Although under normal market conditions at least
65% of the Fund's assets will consist of common stock and other securities of
foreign and domestic companies involved in the telecommunications, media,
publishing and entertainment industries, when a temporary defensive posture is
believed by the Adviser to be warranted ("temporary defensive periods"), the
Fund may hold without limitation cash or invest its assets in money market
instruments and repurchase agreements in respect of those instruments. The money
market instruments in which the Fund may invest are obligations of the United
States government, its agencies or instrumentalities ("U.S. Government
Securities"); commercial paper rated A-1 or higher by Standard & Poor's Rating's
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. 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 Adviser
with respect to assets so invested.
LOWER RATED SECURITIES. The Fund may invest up to 10% of its total assets
in fixed-income securities rated in the lower rating categories of recognized
statistical rating agencies, such as securities rated CCC or lower by S&P or Caa
or lower by Moody's, or non-rated securities of comparable quality. These debt
securities are predominantly speculative and involve major risk exposure to
adverse conditions and are often referred to in the financial press as "junk
bonds."
B-2
<PAGE> 45
Generally, such lower rated securities and unrated securities of comparable
quality offer a higher current yield than is offered by higher rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than higher
quality bonds. In addition, such lower rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because such lower
rated securities and unrated securities of comparable quality generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. In light of these risks, the Adviser, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by the
issue, the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is
more volatile than that of higher quality securities, and the markets in which
such lower rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its portfolio and calculating its net asset value. Moreover,
the lack of a liquid trading market may restrict the availability of securities
for the Fund to purchase and may also have the effect of limiting the ability of
the Fund to sell securities at their fair 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 Adviser believes that
such issuers will honor their obligations or emerge from bankruptcy protection
and the value of these securities will appreciate. By investing in securities of
issuers in default, the Fund bears the risk that these issuers will not continue
to honor their obligations or emerge from bankruptcy protection or that the
value of the securities will not appreciate.
In addition to using recognized rating agencies and other sources, the
Adviser also performs its own analysis in seeking investments that it believes
to be underrated (and thus higher-yielding) in light of the financial condition
of the issuer. Its analysis of issuers may include, among other things, current
and anticipated cash flow and borrowing requirements, value of assets in
relation to historical cost, strength of management, responsiveness to business
conditions, credit standing and current anticipated results of operations. In
selecting investments for the Fund, the Adviser may also consider general
business conditions, anticipated changes in interest rates and the outlook for
specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to
be rated or its rating may be reduced. In addition, it is possible that
statistical rating agencies might not change their ratings of a particular issue
or reflect subsequent events on a timely basis. 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 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.
B-3
<PAGE> 46
As a result of all these factors, the net asset value of the Fund to the
extent it invests in high yield bonds, is expected to be more volatile than the
net asset value of funds which invest solely in higher rated debt securities.
OPTIONS. A call option is a contract that, in return for a premium, gives
the holder of the option the right to buy from the writer of the call option the
security or currency underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option has the
obligation, upon exercise of the option, to deliver the underlying security or
currency upon payment of the exercise price during the option period. A put
option is the reverse of a call option, giving the holder the right to sell the
security or currency to the writer and obligating the writer to purchase the
underlying security or currency from the holder.
A call option is "covered" if the Fund owns the underlying instrument
covered by the call or has an absolute and immediate right to acquire that
instrument without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other instrument held in its portfolio. A call option is also
covered if the Fund holds a call on the same instrument as the call written
where the exercise price of the call held is (1) equal to or less than the
exercise price of the call written or (2) greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, U.S.
Government Securities or other high grade short-term obligations in a segregated
account held with its custodian. A put option is "covered" if the Fund maintains
cash or other high grade short-term obligations with a value equal to the
exercise price in a segregated account held with its custodian, or else holds a
put on the same instrument as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written.
If the Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once it has
been assigned an exercise notice, the Fund will 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.
B-4
<PAGE> 47
In addition to options on securities, the Fund may also purchase and sell
call and put options on securities indices. A stock index reflects in a single
number the market value of many different stocks. Relative values are assigned
to the stocks included in an index and the index fluctuates with changes in the
market values of the stocks. The options give the holder the right to receive a
cash settlement during the term of the option based on the difference between
the exercise price and the value of the index. By writing a put or call option
on a securities index, the Fund is obligated, in return for the premium
received, to make delivery of this amount. The Fund may offset its position in
the stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The Fund also may buy or sell and call options on foreign currencies. A put
option on a foreign currency gives the purchaser of the option the right to sell
a foreign currency at the exercise price until the option expires. A call option
on a foreign currency gives the purchaser of the option the right to purchase
the currency at the exercise price until the option expires. Currency options
traded on U.S. or other exchanges may be subject to position limits which may
limit the ability of the Fund to reduce foreign currency risk using such
options. Over-the-counter options differ from exchange-traded options in that
they are two-party contracts with price and other terms negotiated between buyer
and seller and generally do not have as much market liquidity as exchange-traded
options. Over-the-counter options are illiquid securities.
Use of options on securities indices entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase these options unless the
Adviser is satisfied with the development, depth and liquidity of the market and
the Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indexes cannot serve as a complete hedge and will depend, in part, on the
ability of the Adviser to predict correctly movements in the direction of the
stock market generally or of a particular industry. Because options on
securities indexes require settlement in cash, the Adviser may be forced to
liquidate portfolio securities to meet settlement obligations.
The Fund has qualified, and intends to continue to qualify, as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). One requirement for such qualification is that the Fund must derive
less than 30% of its gross income from gains from the sale or other disposition
of securities held for less than three months. Therefore, the Fund may be
limited in its ability to engage in options transactions.
Although the Adviser will attempt to take appropriate measures to minimize
the risks relating to the Fund's writing of put and call options, there can be
no assurance that the Fund will succeed in any option writing program it
undertakes.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund will not enter into
futures contracts or options on futures contracts unless (i) the aggregate
initial margins and premiums do not exceed 5% of the fair market value of its
assets and (ii) the aggregate market value of its outstanding futures contracts
and the market value of the currencies and futures contracts subject to
outstanding options written by the Fund, as the case may be, do not exceed 50%
of the market value of its total assets. It is anticipated that these
investments, if any, will be made by the Fund solely for the purpose of 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.
B-5
<PAGE> 48
No consideration will be paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required to deposit with
the broker an amount of cash or cash equivalents equal to approximately 1% to
10% of the contract amount (this amount is subject to change by the exchange or
board of trade on which the contract is traded and brokers or members of such
board of trade may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract. Subsequent payments, known as "variation margin," to and from the
broker will be made daily as the price of the index or security underlying the
futures contract fluctuates. At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate its existing position in the contract.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract at a specified
exercise price at any time to the expiration of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account attributable to that contract, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option purchased
is fixed at the point of sale, there are no daily cash payments by the purchaser
to reflect changes in the value of the underlying contract; however, the value
of the option does change daily and that change would be reflected in the net
assets of the Fund.
Futures and options on futures entail certain risks, including but not
limited to the following: no assurance that futures contracts or options on
futures can be offset at favorable prices, possible reduction of the yield of
the Fund due to the use of hedging, possible reduction in value of both the
securities hedged and the hedging instrument, possible lack of liquidity due to
daily limits on price fluctuations, imperfect correlation between the contracts
and the securities being hedged, losses from investing in futures transactions
that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures
contracts, under current interpretations of the Investment Company Act of 1940,
as amended (the "1940 Act") an amount of cash, U.S. Government Securities or
other high grade debt securities equal to the market value of the contract must
be deposited and maintained in a segregated account with the custodian of the
Fund to collateralize the positions, thereby ensuring that the use of the
contract is unleveraged. For short positions in futures contracts and sales of
call options, the Fund may establish a segregated account (not with a futures
commission merchant or broker) with cash, U.S. Government Securities or other
high grade debt securities that, when added to amounts deposited with a futures
commission merchant or a broker as margin, equal the market value of the
instruments or currency underlying the futures 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.
B-6
<PAGE> 49
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make its
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain in a segregated asset account with
the Fund's custodian, assets sufficient to cover the Fund's obligations with
respect to such futures contracts, which will consist of cash or other liquid
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with its custodian with respect to such
futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency futures
contracts and options thereon are similar to the interest rate futures contracts
and options thereon discussed previously. By entering into currency futures and
options thereon, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus, if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the 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
B-7
<PAGE> 50
exercise the option and thereby take a futures position to hedge against the
risk it had correctly anticipated or close out the option position at a gain
that will offset, to some extent, currency exchange losses otherwise suffered by
the Fund. If exchange rates move in a way the Fund did not anticipate, however,
the Fund will have incurred the expense of the option without obtaining the
expected benefit; any such movement in exchange rates may also thereby reduce
rather than enhance the Fund's profits on its underlying securities
transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or sales
of securities index futures contracts are used for hedging purposes to attempt
to protect the Fund's current or intended investments from broad fluctuations in
stock or bond prices. For example, the Fund may sell securities index futures
contracts in anticipation of or during a market decline to attempt to offset the
decrease in market value of the Fund's securities portfolio that might otherwise
result. If such decline occurs, the loss in value of portfolio securities may be
offset, in whole or part, by gains on the futures position. When the Fund is not
fully invested in the securities market and anticipates a significant market
advance, it may purchase securities index futures contracts in order to gain
rapid market exposure that may, in part or entirely, offset increases in the
cost of securities that the Fund intends to purchase. As such purchases are
made, the corresponding positions in securities index futures contracts will be
closed out. The Fund may write put and call options on securities index futures
contracts for hedging purposes.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. Subject to the guidelines of the Board of Directors, the Fund
may engage in transactions in futures contracts and options hereon only for bona
fide hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC, and not for speculation.
Regulations of the CFTC applicable to the Fund permit the Fund's futures
and options on futures transactions to include (i) bona fide hedging
transactions without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) non-hedging transactions, provided that the
Fund not enter into such non-hedging transactions if, immediately thereafter,
the sum of the amount of initial margin deposits on the Fund's existing futures
positions and option premiums would exceed 5% of the market value of the Fund's
liquidating value, after taking into account unrealized profits and unrealized
losses on any such transactions.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Fund may engage in currency
transactions otherwise than on futures exchanges to protect against future
changes in the level of future currency exchange rates. The Fund will conduct
such currency exchange transactions either on a spot, i.e., cash, basis at the
rate then prevailing in the currency exchange market or on a forward basis, by
entering into forward contracts to purchase or sell currency. A forward contract
on foreign currency involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon by
the parties from the date of the contract, at a price set on the date of the
contract. The risk of shifting of a forward currency contract will be
substantially the same as a futures contract having similar terms. The Fund's
dealing in forward currency exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest receivable and Fund
expenses. Position hedging is the forward sale of currency with respect to
portfolio security positions denominated or quoted in that currency or in a
currency bearing a high degree of positive correlation to the value of that
currency.
The Fund may not position hedge with respect to a particular currency for
an amount greater than the aggregate market value (determined at the time of
making any sale of forward currency) of the securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If the
Fund enters into a position hedging transaction, the Fund's custodian or
subcustodian will place cash or other liquid securities in a segregated account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of the given forward contract. If the value of the
securities placed in the segregated account
B-8
<PAGE> 51
declines, additional cash or securities will be placed in the account so that
the value of the account will, at all times, equal the amount of the Fund's
commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to
delivery. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of
the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to purchase is less than the price of the currency it has
agreed to sell. Should forward prices increase, the Fund will suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell. Closing out forward purchase contracts
involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of foreign currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result if the
value of the currency increases.
If a decline in any currency is generally anticipated by the 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 Adviser to predict
correctly movements in the direction of interest and foreign currency rates. If
the 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.
B-9
<PAGE> 52
ADDITIONAL RISKS OF FOREIGN OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS AND FORWARD CONTRACTS. Options, futures contracts and options thereon
and forward contracts on securities and currencies may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also could be adversely affected by (i) other complex foreign political, legal
and economic factors, (ii) lesser availability than in the U.S. of data on which
to make trading decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in the foreign markets during non-business hours in
the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (v) lesser trading
volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulation, or
exchange restrictions imposed by governments. These forms of governmental action
can result in losses to the Fund if it is unable to deliver or receive currency
or monies in settlement of obligations and could also cause hedges it has
entered into to be rendered useless, resulting in full currency exposure as well
as incurring transaction costs.
WHEN ISSUED, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. The Fund
may enter into forward commitments for the purchase or sale of securities,
including on a "when issued" or "delayed delivery" basis, in excess of customary
settlement periods for the type of security involved. In some cases, a forward
commitment may be conditioned upon the occurrence of a subsequent event, such as
approval and consummation of a merger, corporate reorganization or debt
restructuring, i.e., a when, as and if issued security. When such transactions
are negotiated, the price is fixed at the time of the commitment, with payment
and delivery taking place in the future, generally a month or more after the
date of the commitment. While it will 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
high-grade debt securities in an aggregate amount at least equal to the amount
of its outstanding forward commitments.
SHORT SALES. The Fund may make short sales of securities. A short sale is
a transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The market value of the
securities sold short of any one issuer will not exceed either 5% of the Fund's
total assets or 5% of such issuer's voting securities. The Fund will not make a
short sale, if, after giving effect to such sale, the market value of all
securities sold short exceeds 25% of the value of its assets or the Fund's
aggregate short sales of a particular class of securities exceeds 25% of the
outstanding securities of that class. The Fund may also make short sales
"against the box" without respect to such limitations. In this type of short
sale, at the time of the sale, the Fund owns, or has the immediate and
unconditional right to acquire at no additional cost, the identical security.
The Fund expects to make short sales both to obtain capital gains from
anticipated declines in securities and as a form of hedging to offset potential
declines in long positions in the same or similar securities. The short sale of
a security is considered a speculative investment technique.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale in
order to satisfy its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
B-10
<PAGE> 53
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
Securities or other highly liquid debt securities. The Fund will also be
required to deposit similar collateral with its custodian to the extent, if any,
necessary so that the value of both collateral deposits in the aggregate is at
all times equal to the greater of the price at which the security is sold short
or 100% of the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Fund on such security,
the Fund may not receive any payments (including interest) on its collateral
deposited with such broker-dealer. If the price of the security sold short
increases between the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a capital gain. Any gain will be decreased, any
loss increased, by the transaction costs described above. Although the Fund's
gain is limited to the price at which it sold the security short, its potential
loss is theoretically unlimited.
To secure its obligations to deliver the securities sold short, the Fund
will deposit in escrow in a separate account with its custodian, State Street
Bank and Trust Company ("State Street"), an amount at least equal to the
securities sold short or securities convertible into, or exchangeable for, the
securities. The Fund may close out a short position by purchasing and delivering
an equal amount of securities sold short, rather than by delivering securities
already held by the Fund, because the Fund may want to continue to receive
interest and dividend payments on securities in its portfolio that are
convertible into the securities sold short.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to a total of
15% 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, but that can be
offered and sold to qualified institutional buyers under Rule 144A under that
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 other than the telecommunications, media, publishing and
entertainment industries. This restriction does not apply to investments in
U.S. Government Securities.
B-11
<PAGE> 54
2. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, if
more than 10% of the market value of the total assets of the Fund would be
invested in securities of other investment companies, more than 5% of the
market value of the total assets of the Fund would be invested in the
securities of any one investment company or the Fund would own more than 3%
of any other investment company's securities; provided, however, this
restriction shall not apply to securities of any investment company
organized by the Fund that are to be distributed pro rata as a dividend to
its shareholders.
3. Purchase or sell commodities or commodity contracts except that the
Fund may purchase or sell futures contracts and related options thereon if
immediately thereafter (i) no more than 5% of its total assets are invested
in margins and premiums and (ii) the aggregate market value of its
outstanding futures contracts and market value of the currencies and
futures contracts subject to outstanding options written by the Fund do not
exceed 50% of the market value of its total assets. The Fund may not
purchase or sell real estate, provided that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
4. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
5. Make loans of money, except by the purchase of a portion of
publicly distributed debt obligations in which the Fund may invest, and
repurchase agreements with respect to those obligations, consistent with
its investment objectives and policies. The Fund reserves the authority to
make loans of its portfolio securities to financial intermediaries in an
aggregate amount not exceeding 20% of its total assets. Any such loans will
only be made upon approval of, and subject to any conditions imposed by,
the Board of Directors of the Fund. Because these loans would at all times
be fully collateralized, the risk of loss in the event of default of the
borrower should be slight.
6. Borrow money, except that the Fund may borrow from banks and other
financial institutions on an unsecured basis, in an amount not exceeding
10% of its total assets, to finance the repurchase of its shares. 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 of 1933, as amended,
in selling portfolio securities; provided, however, this restriction shall
not apply to securities of any investment company organized by the Fund
that are to be distributed pro rata as a dividend to its shareholders.
9. Invest more than 15% of its total assets in illiquid securities,
such as repurchase agreements with maturities in excess of seven days, or
securities that at the time of purchase have legal or contractual
restrictions on resale.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund rests
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and the companies that furnish the Fund with
services, including agreements with the Adviser, the Fund's custodian and the
Fund's transfer agent. The day-to-day operations of the Fund are delegated to
the Adviser.
B-12
<PAGE> 55
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 Adviser or the 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 April 30, 1997 the Directors and Officers of the Fund as a group
beneficially owned 200,773 shares of the Fund equaling 1.78% of the Fund's
outstanding shares.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS THE FUND PAST FIVE YEARS; AGE
- ---------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Dr. Thomas E. Bratter............. Director Director, President and Founder,
One Corporate Center The John Dewey Academy (residential
Rye, New York 10580-1434 college preparatory therapeutic
high school). Director of one other
registered investment company
advised by the Adviser. Dr. Bratter
is 56 years old. (10)
Bill Callaghan.................... Director President of Bill Callaghan
One Corporate Center Associates Ltd., an executive
Rye, New York 10580-1434 search company. Director of two
other registered investment
companies advised by the Adviser.
Mr. Callaghan is 53 years old.
(3)(10)
Felix J. Christiana+.............. Director Retired; formerly Senior Vice
One Corporate Center President of Dollar Dry Dock
Rye, New York 10580-1434 Savings Bank. Director/ Trustee of
eight other registered investment
companies advised by the Adviser or
its affiliates. Mr. Christiana is
71 years old.(1)(2)
(3)(4)(5)(8)(10)(13)
James P. Conn+.................... Director Managing Director of Financial
One Corporate Center Security Assurance since 1992;
Rye, New York 10580-1434 Director of Santa Anita Realty
Enterprises, Inc. since 1995;
Director of Santa Anita Operating
Company since 1995; President and
Chief Executive Officer of Bay
Meadows Operating Company from 1988
through 1992. Director/ Trustee of
four other registered investment
companies advised by the Adviser.
Mr. Conn is 59 years old.
(1)(2)(10)(14)
</TABLE>
B-13
<PAGE> 56
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS THE FUND PAST FIVE YEARS; AGE
- ---------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Mario J. Gabelli*................. Chairman of the Board, Chairman of the Board; President
One Corporate Center President and Chief In- and Chief Investment Officer of the
Rye, New York 10580-1434 vestment Officer Adviser; Chairman of the Board and
Chief Executive Officer of GAMCO
Investors, Inc.; Chairman of the
Board and Chief Executive Officer
of Lynch Corporation; Director and
Adviser of Gabelli International
Ltd.; Director/Trustee of twelve
other registered investment
companies advised by the Adviser or
its affiliates. Mr. Gabelli is 54
years old. (1)(2)(3)(4)(5)(6)(7)
(8)(9)(10)(11)(12)
Karl Otto Pohl*................... Director Partner of Sal Oppenheim Jr. & Cie
One Corporate Center (private investment bank);
Rye, New York 10580-1434 President of the Deutsche
Bundesbank and Chairman of its
Central Bank Council from 1980
through 1991; Currently Board
Member of Zurich Versicherungs-
Gesellschaft (Insurance); the
International Council for JP Morgan
& Co.; Supervisory Board Member of
Royal Dutch; ROBECo/o Group; and
Advisory Director of Unilever N.V.
and Unilever Deutschland; German
Governor of The International
Monetary Fund (1980-1991); Board
Member, Bank for International
Settlements (1980-1991); and
Chairman of the European Economic
Community Central Bank Governors
(1990-1991); Director/Trustee of
twelve other registered investment
companies advised by the Adviser.
Mr. Pohl is 67 years old.(1)
(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
(12)
Anthony R. Pustorino.............. Director Certified Public Accountant.
One Corporate Center Professor of Accounting, Pace
Rye, New York 10580-1434 University since 1965; Director,
President and shareholder of
Pustorino, Puglisi & Co., P.C.,
certified public accountants, from
1961 to 1990; Director/Trustee of
eight other registered investment
companies advised by the Adviser.
Mr. Pustorino is 71 years
old.(1)(2)(3)(4)(5)(10) (11)(12)
</TABLE>
B-14
<PAGE> 57
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION DURING
NAME AND BUSINESS ADDRESS THE FUND PAST FIVE YEARS; AGE
- ---------------------------------- ------------------------- -----------------------------------
<S> <C> <C>
Salvatore J. Zizza*............... Director President and Chief Executive
The Lehigh Group, Inc. Officer of The Lehigh Group, Inc.
810 Seventh Avenue, 27th Floor (an electrical supply wholesaler);
New York, New York 10019 Chairman of the Executive Committee
and Director of Binnings Buildings
Products, Inc.; Director/Trustee of
three other registered investment
companies advised by the Adviser.
Mr. Zizza is 49 years old.
(1)(4)(10)
Bruce N. Alpert................... Vice President and Vice President and Chief Financial
One Corporate Center Treasurer and Administrative Officer of the
Rye, New York 10580-1434 investment advisory division of the
Adviser since June 1988; Chief
Operating Officer, Vice President
and Treasurer of The Gabelli Value
Fund Inc. since September 1989;
President and Treasurer of The
Gabelli Asset Fund and The Gabelli
Growth Fund; Vice President and
Treasurer of all other registered
investment companies advised by the
Adviser. Mr. Alpert is 45 years
old.
James E. McKee.................... Secretary Vice President and General Counsel
One Corporate Center of the Adviser; General Counsel of
Rye, New York 10580-1434 Gamco Investors, Inc.; Secretary of
all Funds advised by the Adviser
and Teton Advisers LLC; Branch
Chief U.S. Securities and Exchange
Commission - Northeast Regional
Office, 1992-1993; Staff Attorney,
U.S. Securities and Exchange
Commission -- Northeast Regional
Office, 1989-1992. Mr. McKee is 34
years old.
</TABLE>
- ---------------
* "Interested person" of the Fund, as defined in the 1940 Act. Mr. Gabelli is
an "interested person" of the Fund as a result of his employment as an
officer of the Fund and the Adviser. Mr. Gabelli is also a registered
representative of an affiliated broker-dealer. Mr. Pohl receives fees from
the Adviser but has no obligation to provide any services to it. Although
this relationship does not appear to require designation of Mr. Pohl as an
"interested person," the Fund is currently making such designation in order
to avoid the possibility that Mr. Pohl's independence would be questioned.
Mr. Zizza may be an "interested person" as a result of his association with
Binnings Building Products, Inc., an entity controlled by GLI, Inc., an
affiliate of the Adviser.
(1) Trustee of The Gabelli Asset Fund
(2) Trustee of The Gabelli Growth Fund
(3) Director of The Gabelli Value Fund Inc.
(4) Director of The Gabelli Convertible Securities Fund, Inc.
(5) Director of Gabelli Equity Series Funds, Inc.
(6) Trustee of The Gabelli Money Market Funds
(7) Director of Gabelli Investor Funds, Inc.
(8) Director of Gabelli Global Series Funds, Inc.
(9) Director of Gabelli Gold Fund, Inc.
(10) Director of The Gabelli Equity Trust Inc.
(11) Director of Gabelli Capital Series Funds
B-15
<PAGE> 58
(12) Director of Gabelli International Growth Fund, Inc.
(13) Trustee of The Treasurer's Fund, Inc.
(14) Trustee of the Westwood Funds
The Board of Directors of the fund are 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.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the Investment
Adviser or its affiliates a fee of $3,000 per year plus $500 per Directors'
meeting attended, together with each Director's actual out-of-pocket expenses
relating to attendance at such meetings. In addition, if net assets of the Fund
equal or exceed $500 million, each such non-interested Director will receive a
fee of $500 per committee meeting attended and a fee of $500 per annum if the
Director serves as chair of a committee of the Fund's Board of Directors. The
aggregate remuneration accrued by the Fund during the year ended December 31,
1996 amounted to $37,354 (includes a prorated payment to Paul R. Ades, who
served as a director from January 1996 to May 1996).
The following table shows certain compensation information for the
Directors of the Fund for the year ended December 31, 1996. None of the Fund's
executive officers and Directors who are also officers or directors of the
Adviser received any compensation from the Fund for such period. No executive
officer or person affiliated with the Fund received compensation from the Fund
in excess of $60,000.
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION COMPENSATION FROM
FROM FUND FUND AND FUND
(FISCAL COMPLEX PAID TO
NAME OF DIRECTOR YEAR) DIRECTORS*
- -------------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Mario J. Gabelli.............................................. $ 0 $ 0
Dr. Thomas E. Bratter......................................... $5,000 $20,500(2)
Bill Callaghan................................................ $5,000 $34,500(3)
Felix J. Christiana........................................... $5,000 $74,000(11)
James P. Conn................................................. $5,000 $36,500(5)
Karl Otto Pohl................................................ $4,500 $77,750(16)
Anthony R. Pustorino.......................................... $5,000 $84,500(9)
Salvatore J. Zizza............................................ $5,000 $42,500(5)+
</TABLE>
- ---------------
* Represents the total compensation paid to such persons during the calendar
year ended December 31, 1996 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 a director of The Gabelli
Growth Fund during 1996.
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
B-16
<PAGE> 59
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 ADVISER
The Adviser is a New York corporation with principal offices located at One
Corporate Center, Rye, New York 10580-1434. The Adviser also serves as adviser
to other closed-end and open-end investment companies with net assets in excess
of $4.0 billion as of May 1, 1997.
Pursuant to an Advisory Agreement (the "Advisory Agreement"), the Adviser
manages the portfolio of the Fund in accordance with its stated investment
objectives and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and manages its other
business and affairs, all subject to the supervision and direction of the Fund's
Board of Directors. In addition, under the Advisory Agreement, the 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 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, will be
an expense of the Fund under its Advisory Agreement. The expenses of computing
the net asset value of the Fund are anticipated to be approximately $50,000 per
year.
The Advisory Agreement combines investment advisory and administrative
responsibilities in one agreement. The Adviser has in turn retained First Data
Investor Services, 53 State Street, Boston, MA 02109-2873, to act as
sub-administrator to the Fund. See "Management of the Fund -- Administrator" in
the Prospectus.
For services rendered by the Adviser on behalf of the Fund under the
Advisory Agreement, the Fund pays the Adviser a fee computed daily and paid
monthly at the annual rate of 1.00% of the average weekly net assets of the
Fund. The fees payable under the Advisory Agreement are higher than the fees
payable by most registered investment companies. Notwithstanding the foregoing,
the Adviser will waive the portion of its investment advisory fee attributable
to an amount of assets of the Fund equal to the aggregate stated value of the
Cumulative Preferred Stock for any calendar year in which the total return of
the Fund, including distributions and the advisory fee subject to potential
waiver, allocable to common stock is less than the stated dividend rate of the
Cumulative Preferred Stock.
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard for its obligations and duties
thereunder, the Adviser is not liable for any error or judgment or mistake of
law or for any loss suffered by the Fund. As part of the Advisory Agreement, the
Fund has agreed that the name "Gabelli" is the Adviser's property, and that in
the event the Adviser ceases to act as an investment adviser to the Fund, the
Fund will change its name to one not including the word "Gabelli."
The Advisory Agreement was approved by the Board of Directors on at a
meeting held on April 6, 1994 and was approved most recently by the Board of
Directors on May 14, 1997. 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 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, 1994, December 31, 1995 and
December 31, 1996, the Adviser was paid $83,054, $742,302 and $947,427,
respectively, for advisory and administrative services rendered to the Fund.
B-17
<PAGE> 60
FOREIGN CUSTODIAL ARRANGEMENTS
Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities in the custody of certain eligible foreign banks and securities
depositories. Pursuant to those rules, any foreign securities in the portfolio
of the Fund may be held by subcustodians approved by the Directors of the Fund
in accordance with the regulations of the Commission.
Selection of any such subcustodians will be made by the Directors of the
Fund following a consideration of a number of factors, including but not limited
to the reliability and financial stability of the institution, the ability of
the institution to perform capably custodial services for the Fund, the
reputation of the institution in its national market, the political and economic
stability of the country or countries in which the subcustodians are located,
and risks of potential nationalization or expropriation of assets of the Fund.
In addition, the 1940 Act requires that certain foreign subcustodians, among
other things, have shareholders' equity in excess of $200 million, have no lien
on the Fund's assets and maintain adequate and accessible records.
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 have 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, 1994, December 31, 1995 and
December 31, 1996, the Fund paid a total of $17,027, $109,262, $64,107,
respectively, in brokerage commissions, of which Gabelli & Company received
$2,595, $13,690 and $17,578, respectively, and of which Keeley Investment Corp.,
an affiliate of Gabelli & Company, received $0, $0 and $75, respectively. The
amount received by Gabelli & Company, Inc. and Keeley Investment Corp. from the
Fund in respect of brokerage commissions for the fiscal year ended December 31,
1996 represented 27.4% and 0.12%, respectively, of the aggregate dollar amount
of brokerage commissions paid by the Fund for such period. In addition, for the
fiscal year ended December 31, 1996, the Fund paid brokerage commissions to
Gabelli & Company, Inc. and Keeley Investment Corp. with respect to 28.3% and
0.12%, respectively, of the aggregate dollar amount of transactions by the Fund.
Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information to the Investment
Adviser or its affiliates may receive orders for transactions by the Fund. The
term "research, market and statistical information" includes advice as to the
value of securities, and advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under the
Advisory Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
B-18
<PAGE> 61
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,
1995 and December 31, 1996 was 86.0% and 32.1%, 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. The ability of the Fund
to enter into certain short-term transactions will be limited by the requirement
that certain gains on securities may not exceed 30% of its annual gross income
for federal income tax purposes. 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.
TAXATION
The following discussion is a brief summary of certain additional tax
considerations affecting the Fund and its shareholders. No attempt is made to
present a detailed explanation of all U.S. Federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with any specific questions relating to federal, state, local and foreign taxes.
The discussion reflects applicable tax laws of the United States as of the date
of this SAI, which tax laws may be changed or subject to new interpretations by
the courts or the Internal Revenue Service retroactively or prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as and elect
to be a regulated investment company (a "RIC") under Subchapter M of the Code.
If it so qualifies, the Fund will not be subject to U.S. Federal income tax on
the portion of its net investment income (i.e., its investment company taxable
income as defined in the Code) and its net capital gain (i.e., the excess of its
net realized long-term capital gains over its net realized short-term capital
losses) which it distributes to its shareholders in each taxable year., provided
that it distributes to its shareholders at least 90% of its net investment
income for such taxable year.
Qualification as a RIC requires, among other things, that the Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stock, securities or currencies; (b)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition of any of the following held for less than three months:
stock, securities, options, futures, certain forward contracts, or foreign
currencies (or any options, futures or forward contracts on foreign currencies)
but only if such currencies are not directly related to the Fund's principal
business of investing in stock or securities (the "30% limitation"); and (c)
diversify its holdings so that, at the end of each quarter of each taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other RICs and other
securities with such other securities limited, in respect of any one
B-19
<PAGE> 62
issuer, to an amount not greater than 5% of the value of the Fund's assets and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other RICs).
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution requirement or
otherwise were to fail to qualify to be taxed as a RIC in any year, it would be
subject to tax in such year on all of its taxable income, whether or not the
Fund made any distributions. To qualify again to be taxed as a RIC in a
subsequent year, the Fund would be required to distribute to Cumulative
Preferred Shareholders and Common Shareholders as an net investment income
dividend, its earnings and profits attributable to non-RIC years reduced by an
interest charge on 50% of such earnings and profits payable by the Fund to the
IRS. In addition, if the Fund failed to qualify as a RIC for a period greater
than one taxable year, then the Fund would be required to recognize and pay tax
on any net built-in gains (the excess of aggregate gains, including items of
income, over aggregate losses that would have been realized if the Fund had been
liquidated) in order to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar
year, an amount equal to, at the minimum, the sum of (1) 98% of its net
investment income for the calendar year, (2) 98% of its capital gain net income
for the one year period ending on October 31 of such year (unless 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
twelve months. Gain or loss on the sale of securities held for twelve months or
less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar denominated bonds and
other similar debt instruments and on any non-U.S. dollar denominated futures
contracts, options and forward contracts that are not section 1256 contracts (as
defined below) generally will be treated as net investment income and loss.
If the Fund invests in stock of a passive foreign investment company
("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. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The amount so
allocated to any taxable year of the Fund prior to the taxable year in which the
excess distribution or disposition occurs would be taxed to the Fund at the
highest marginal income tax rate in effect for the year to which it was
allocated, and the tax would be further increased by an interest charge. The
amount allocated to the taxable year of the distribution or disposition would be
included in the Fund's net investment income and, accordingly, would not be
taxable to the Fund to the extent distributed by the Fund as Ordinary Income
Dividend to 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 (whether or not distributed) of the PFIC.
In order to make this election, the Fund would be required to obtain annual
information from the PFICs in which it invests, which may be difficult to
obtain. Alternatively, under proposed regulations not currently in effect, the
B-20
<PAGE> 63
Fund may be able to elect to mark to market its PFIC stock, resulting in the
stock being treated as sold at fair market value on the last business day of
each taxable year. Any resulting gain would be reported as net investment
income, and any resulting loss would not be recognized.
The Fund may invest in securities purchased at a discount and may therefore
cause the Fund to accrue income before amounts due under the obligation are
paid. The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield securities"). A portion of the interest payments on such
high yield securities may be treated as dividends for Federal income tax
purposes.
As a result of investing in stock of PFICs or securities purchased at a
discount or any other investment that produces income that is not matched by a
corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income would
be treated as income earned by the Fund and therefore would be subject to the
distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its net investment income, as is required in order to avoid
Fund-level taxation on the Fund's distributions, or might prevent it from
distributing enough ordinary income and capital gain net income to avoid
completely the imposition of the excise tax. To avoid this result, the Fund may
be required to borrow money or dispose of other securities to be able to make
distributions to its investors. The extent to which the Fund may liquidate
securities at a gain may be limited by the 30% limitation (discussed above).
If the Fund does not meet the asset coverage requirements of the 1940 Act
and the Articles Supplementary, the Fund will be required to suspend
distributions to the holders of the common stock until the asset coverage is
restored. See "Description of Cumulative Preferred Stock -- Dividends" and
"Description of Capital Stock and Other Securities." Such a suspension of
distributions might prevent the Fund from distributing 90% of its net investment
income, as is required in order to avoid Fund-level taxation on the Fund's
distributions, or might prevent it from distributing enough income and capital
gain to avoid completely imposition of the excise tax. Upon any failure to meet
the asset coverage requirements of the 1940 Act or the Articles Supplementary,
the Fund may, and in certain circumstances will, be required to partially redeem
the shares of Cumulative Preferred Stock in order to restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its 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 taxation on
the Fund's undistributed income.
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures contracts are
"section 1256 contracts". Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40"). Also, section 1256 contracts held by the Fund at the end of each
taxable year are "marked-to-the-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for
U.S. Federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Further, the Fund may be
required to capitalize, rather than deduct currently, any interest expense on
indebtedness incurred or continued to purchase or carry any positions that are
part of a straddle.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
accelerate the recognition of gain or loss from the affected straddle positions.
B-21
<PAGE> 64
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.
The 30% limitation (discussed above) may limit the Fund's ability to engage
in transactions in options, spreads, straddles, hedging transactions, forward or
futures contracts and options on any of these positions because these
transactions (1) are often consummated in less than three months, (2) may
require the sale of portfolio securities held less than three months, and (3)
may reduce the holding periods of certain securities within the Fund.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from such
securities may be subject to non-U.S. taxes. If the Fund satisfies the
distribution requirements to be taxed as a RIC during a taxable year, and if 50%
of the Fund's total assets at the end of its taxable year consist of stock or
securities of foreign corporations, it may elect to "pass-through" to its
shareholders the ability to use the foreign tax deduction or credit for foreign
taxes paid with respect to qualifying taxes. If the Fund makes such an election,
a taxpayer would be required to include in income its proportionate share of the
qualifying foreign taxes paid by the Fund and would be allowed to either deduct
the amount of such taxes from its taxable income or to use such taxes as a
credit against its U.S. federal income tax liability. In general, it will be
more beneficial for a taxpayer to use its proportionate share of such taxes paid
by the Fund as a foreign tax credit. If the Fund elects to pass-through the
benefit of the deduction or credit allowed for qualifying foreign taxes it has
paid in a given year, it will send each Shareholder a written notice of the
portion of the Fund's dividends that represents income from sources within each
foreign country and the amount of such Shareholder's proportionate share of
foreign taxes paid to each foreign country.
TAXATION OF SHAREHOLDERS
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 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
B-22
<PAGE> 65
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 Internal Revenue Service 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.
MOODY'S DISCOUNT FACTORS
The following table identifies the Moody's Discount Factors used to
discount particular Moody's Eligible Assets, as defined in the Prospectus, for a
two-week exposure period.
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Short Term Money Market Instruments (other than U.S. Government Obligations
set forth below) and other commercial paper:
Demand or time deposits, certificates of deposit and bankers' acceptances
includible in 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.............................................. *
-----------------
* Discount Factors applicable to underlying assets.
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
</TABLE>
B-23
<PAGE> 66
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ---------------------------------------------------------------------------- ----------------
<S> <C>
U.S. Government Obligations (other than U.S. Treasury Securities Strips set
forth below) with remaining terms to maturity of:
1 year or less......................................................... 1.04
2 years or less........................................................ 1.09
3 years or less........................................................ 1.12
4 years or less........................................................ 1.15
5 years or less........................................................ 1.18
7 years of less........................................................ 1.21
10 years or less....................................................... 1.24
15 years or less....................................................... 1.25
20 years or less....................................................... 1.26
30 years or less....................................................... 1.26
U.S. Treasury Securities Strips with remaining terms to maturity of:
1 year or less......................................................... 1.04
2 years or less........................................................ 1.10
3 years or less........................................................ 1.14
4 years or less........................................................ 1.18
5 years or less........................................................ 1.21
7 years or less........................................................ 1.27
10 years or less....................................................... 1.34
15 years or less....................................................... 1.45
20 years or less....................................................... 1.54
30 years or less....................................................... 1.66
Corporate evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 with remaining terms to
maturity of:
1 year or less......................................................... 1.10
2 years or less........................................................ 1.13
3 years or less........................................................ 1.18
4 years or less........................................................ 1.21
5 years or less........................................................ 1.23
7 years or less........................................................ 1.27
10 years or less....................................................... 1.30
15 years or less....................................................... 1.31
20 years or less....................................................... 1.32
30 years or less....................................................... 1.33
Corporate evidences of indebtedness rated Aa3 with remaining terms to
maturity of:
1 year or less......................................................... 1.15
2 years of less........................................................ 1.20
3 years or less........................................................ 1.23
4 years or less........................................................ 1.27
5 years or less........................................................ 1.29
7 years or less........................................................ 1.33
10 years or less....................................................... 1.36
15 years or less....................................................... 1.37
20 years or less....................................................... 1.38
</TABLE>
B-24
<PAGE> 67
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ---------------------------------------------------------------------------- ----------------
<S> <C>
30 years or less....................................................... 1.39
Corporate evidences of indebtedness rated A3 with remaining terms to
maturity of:
1 year or less......................................................... 1.20
2 years or less........................................................ 1.26
3 years or less........................................................ 1.29
4 years or less........................................................ 1.33
5 years or less........................................................ 1.35
7 years or less........................................................ 1.39
10 years or less....................................................... 1.42
15 years or less....................................................... 1.43
20 years or less....................................................... 1.45
30 years or less....................................................... 1.45
Corporate evidences of indebtedness rated at least Baa3 with remaining
terms of maturity of:
1 year or less......................................................... 1.25
2 years or less........................................................ 1.31
3 years or less........................................................ 1.35
4 years or less........................................................ 1.38
5 years or less........................................................ 1.41
7 years or less........................................................ 1.45
10 years or less....................................................... 1.48
15 years or less....................................................... 1.50
20 years or less....................................................... 1.51
30 years or less....................................................... 1.52
Corporate evidences of indebtedness rated at least Ba3 with remaining
terms of maturity of:
1 year or less......................................................... 1.36
2 years or less........................................................ 1.42
3 years or less........................................................ 1.46
4 years or less........................................................ 1.50
5 years or less........................................................ 1.53
7 years or less........................................................ 1.57
10 years or less....................................................... 1.61
15 years or less....................................................... 1.62
20 years or less....................................................... 1.64
30 years or less....................................................... 1.64
Corporate evidences of indebtedness rated at least B1 and B2 with
remaining terms of maturity of:
1 year or less......................................................... 1.46
2 years or less........................................................ 1.53
3 years or less........................................................ 1.57
</TABLE>
B-25
<PAGE> 68
<TABLE>
<CAPTION>
MOODY'S
TYPE OF MOODY'S ELIGIBLE ASSET: DISCOUNT FACTOR:
- ---------------------------------------------------------------------------- ----------------
<S> <C>
4 years or less........................................................ 1.61
5 years or less........................................................ 1.65
7 years or less........................................................ 1.70
10 years or less....................................................... 1.73
15 years or less....................................................... 1.75
20 years or less....................................................... 1.76
30 years or less....................................................... 1.77
Convertible corporate evidences of indebtedness with senior debt
securities rated Aa3 issued by the following type of issuers:
Utility................................................................ 1.28
Industrial............................................................. 1.75
Financial.............................................................. 1.53
Transportation......................................................... 2.13
Convertible corporate evidences of indebtedness with senior debt
securities rated A3 issued by the following type of issuers:
Utility................................................................ 1.33
Industrial............................................................. 1.80
Financial.............................................................. 1.58
Transportation......................................................... 2.18
Convertible corporate evidences of indebtedness with senior debt
securities rated Baa3 issued by the following type of issuers:
Utility................................................................ 1.48
Industrial............................................................. 1.95
Financial.............................................................. 1.73
Transportation......................................................... 2.33
Convertible corporate bonds with senior debt securities rated Ba3 issued
by the following type of issuers:
Utility................................................................ 1.49
Industrial............................................................. 1.96
Financial.............................................................. 1.74
Transportation......................................................... 2.34
Convertible corporate bonds with senior debt securities rated B1 or B2
issued by the following type of issuers:
Utility................................................................ 1.59
Industrial............................................................. 2.06
Financial.............................................................. 1.84
Transportation......................................................... 2.44
</TABLE>
B-26
<PAGE> 69
NET ASSET VALUE
The net asset value of the Fund's shares is computed based on the market
value of the securities it holds and determined daily as of the close of regular
trading on the New York Stock Exchange and reported in financial newspapers of
general circulation as of the last day of each week.
Portfolio securities which are traded only on stock exchanges are valued at
the last sale price as of the close of regular trading on the day the securities
are being valued, or lacking any sales, at the mean between closing bid and
asked prices. Securities traded in the over-the-counter market which are Nasdaq
National Market securities are valued at the last sale price as of the close of
regular trading on the day the securities are being valued. Other
over-the-counter securities are valued at the most recent bid prices as obtained
from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market, as
determined by the 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.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
The Depository Trust Company ("DTC") will act as securities depository for
the shares of cumulative preferred stock offered pursuant to the Prospectus (the
"Securities"). The information in this section concerning DTC and DTC's
book-entry system is based upon information obtained from DTC. The Securities
offered hereby initially will be issued only as fully-registered securities
registered in the name of Cede & Co. (as nominee for DTC). One or more
fully-registered global Security certificates initially will be issued,
representing in the aggregate the total number of Securities, and deposited with
DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilities the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants").
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for the Securities on DTC's
records. The ownership interest of each actual purchaser of a security
("Beneficial Owner") is in turn to be recorded on the Direct or Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Securities. Transfers of ownership
interests in Securities are to be accomplished by entries made on
B-27
<PAGE> 70
the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners will not receive certificates representing their ownership interests in
Securities, except as provided herein.
DTC has no knowledge of the actual Beneficial Owners of the Securities;
DTC's records reflect only the identity of the Direct Participants to whose
accounts such Securities are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Payments on the Securities will be made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices and will be the responsibility of such Participant and not
of DTC or the Fund, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of dividends to DTC is the
responsibility of the Fund, disbursement of such payments to Direct Participants
is the responsibility of DTC, and disbursement of such payments to the
Beneficial Owners is the responsibility of Direct and indirect Participants.
Furthermore each Beneficial Owner must rely on the procedures of DTC to exercise
any rights under the Securities.
Beneficial Owners may obtain certificates representing the Securities by
contacting State Street Bank and Trust Company, which acts as transfer agent for
the Fund's shares.
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the Fund.
Under such circumstances, in the event that a successor securities depository is
not obtained, certificates representing the Securities will be printed and
delivered.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New
York 10022 is counsel to the Fund.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, has been selected as independent accountants for the Fund.
BENEFICIAL OWNER
There are no persons known to the Fund who may be deemed beneficial owners
of 5% or more of shares of the Fund's Common Stock because they possessed or
shared voting or investment power with respect to shares of the Fund's Common
Stock. As of April 30, 1997, the Directors and Officers of the Fund as a group
beneficially owned approximately 1.78% of the outstanding shares of the Fund's
Common Stock.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the
Fund's Shareholders for the fiscal year ended December 31, 1996, together with
the report of Price Waterhouse LLP thereon, are incorporated herein by reference
from the Fund's Annual Report to Shareholders filed with the Securities and
Exchange Commission on March 18, 1997. 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).
B-28
