[X] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 3
[ ] Post-Effective Amendment No.
and/or
[ ] Registration Statement under the Investment
Company Act of 1940
[X] Amendment No. 30
One Corporate Center
Rye, New York 10580-1422
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Copies to:
Richard T. Prins, Esq. James E. McKee, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, The Gabelli Equity Trust Inc. Simpson Thacher & Bartlett
Meagher & Flom LLP One Corporate Center 425 Lexington Avenue
Four Times Square Rye, New York 10580-1422 New York, New York 10017
New York, New York 10036 (914) 921-5100 (212) 455-2000
(212) 735-3000
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Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as amended, other than securities offered in connection with a dividend reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement].
[ ] This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is .
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=======================================================================================================================
Proposed
Proposed Maximum
Maximum Aggregate
Amount Being Offering Price Offering Amount of
Title of Securities Being Registered Registered Per Share Price (1) Registration Fee
------------------------------------ ---------- --------- --------- ----------------
Series C Auction Rate Cumulative 5,200 Shares $ 25,000 $130,000,000 $31,070(2)
Preferred Stock
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
CROSS-REFERENCE SHEET
N-2 Item Number Location in Part A (Caption)
------------------------------------------------------------------------------------------------------------
PART A
1. Outside Front Cover................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page............................................. Outside Front Cover Page; Inside Front
Cover Page
3. Fee Table and Synopsis............................. Not Applicable
4. Financial Highlights............................... Financial Highlights
5. Plan of Distribution............................... Outside Front Cover Page; The Auction;
Prospectus Summary; Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Use of Proceeds; Investment Objectives and
Policies
8. General Description of the
Registrant....................................... Outside Front Cover Page; Prospectus
Summary; The Fund; Investment Objectives
and Policies; Other Investments; Special
Investment Methods; Risk Factors and
Special Considerations; Description of the
Series C Preferred; The Auction; Anti-Takeover
Provisions of the Charter and By-Laws
9. Management......................................... Outside Front Cover Page; Prospectus
Summary; Management of the Fund;
Custodian, Transfer Agent, Auction Agent and
Dividend-Disbursing Agent
10. Capital Stock, Long-Term Debt,
and Other Securities............................. Outside Front Cover Page; Prospectus
Summary; Investment Objectives and
Policies; Description of the Series C
Preferred; The Auction; Description of
Capital Stock and Other Securities; Taxation
11. Defaults and Arrears on Senior
Securities....................................... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement
of Additional Information........................ Table of Contents of the Statement of
Additional Information
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PART B Location in Statement of
Additional Information
-------------------------------------------------------------------------------------------------------------------
14. Cover Page......................................... Outside Front Cover Page
15. Table of Contents.................................. Outside Front Cover Page
16. General Information and History.................... The Fund
17. Investment Objectives and
Policies......................................... Investment Objectives and Policies;
Investment Restrictions
18. Management......................................... Management of the Fund
19. Control Persons and Principal
Holders of Securities............................ Management of the Fund; Beneficial
Owners
20. Investment Advisory and Other
Services......................................... Management of the Fund
21. Brokerage Allocation and Other
Practices........................................ Portfolio Transactions
22. Tax Status......................................... Taxation
23. Financial Statements............................... Financial Statements
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PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 25, 2002
PROSPECTUS
$130,000,000
The Gabelli
Equity Trust Inc.
Series C Auction Rate Cumulative Preferred Stock 5,200 Shares Liquidation Preference $25,000 per Share
[GABELLI LOGO]
The Gabelli Equity Trust Inc., or the Fund, is a closed-end non-diversified management investment company that has a primary investment objective of long-term growth of capital and a secondary investment objective of income. The Fund's investments are selected by its Investment Adviser, Gabelli Funds, LLC. The Fund invests primarily in equity securities including common stock, preferred stock, convertible or exchangeable securities and warrants and rights to purchase such securities.
This Prospectus offers shares of the Fund's Series C Auction Rate Cumulative Preferred Stock. The Series C Preferred has a liquidation preference of $25,000 per share. As of March 31, 2002, the Fund had outstanding 11,967,900 shares of two other series of preferred stock - the Series A Preferred, which pays a fixed annual dividend of 7.25%, and the Series B Preferred, which pays a fixed annual dividend of 7.20%. The Series A and Series B Preferred are traded on the New York Stock Exchange (the "NYSE") under the symbols GAB Pr and GAB PrB, respectively. As of March 31, 2002, the Fund also had outstanding 130,831,966 common shares that are traded on the NYSE under the symbol GAB. The Series C Preferred ranks pari passu with the Fund's Series A and Series B Preferred with respect to dividends and liquidation preference. The Series C Preferred has priority over the Fund's common shares as to dividends and distribution of assets upon liquidation as described in this Prospectus.
The dividend rate for the initial dividend period for the Series C Preferred will be %. The initial dividend period is from the date of issuance through , 2002. For subsequent dividend periods, the Series C Preferred will pay dividends based on a rate set at auction, usually held weekly.
The Series C Preferred will not be listed on an exchange. It is a condition of closing this offering that the Series C Preferred have a rating of Aaa from Moody's Investors Service, Inc. ("Moody's") and a rating of AAA from Standard & Poor's Rating Services ("S&P"). In order to maintain those ratings, the Fund will be required to maintain a minimum discounted asset coverage with respect to the Series C Preferred and any other preferred stock outstanding under guidelines established by Moody's and S&P. The Fund is also required to maintain a minimum asset coverage for its preferred stock by the Investment Company Act of 1940. If the Fund fails to maintain any applicable asset coverage requirement, the Fund can require that some or all of its preferred stock (including the Series C Preferred) be sold back to it (redeemed). Subject to certain notice and other requirements, the Fund also may redeem shares of the Series C Preferred at any time. In the event the Fund redeems shares of Series C Preferred, such redemptions will be for cash at a price equal to $25,000 per share plus accumulated but unpaid dividends.
Per Share Total
Public Offering Price(1) $25,000 $130,000,000
Underwriting Discount(2) $ 250 $ 1,300,000
Proceeds to the Fund $24,750 $128,700,000
(before expenses)(3)
-----------------
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(1) Plus accumulated dividends, if any, from , 2002.
(2) The Fund and the Investment Adviser have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended.
(3) Offering expenses payable by the Fund are estimated at $500,000.
The Series C Preferred is being offered by the underwriters listed in this Prospectus, subject to prior sale, when, as and if accepted by them and subject to certain conditions. The Fund expects that delivery of the Series C Preferred will be made in book-entry form through the facilities of The Depository Trust Company on or about , 2002.
Salomon Smith Barney
Gabelli & Company, Inc.
, 2002
Investors may only buy or sell Series C Preferred through an order placed at an auction with or through a broker-dealer in accordance with the procedures specified in this Prospectus or in a secondary market maintained by certain broker-dealers should those broker-dealers decide to maintain a secondary market. Broker-dealers are not required to maintain a secondary market in Series C Preferred and a secondary market may not provide you with liquidity.
This Prospectus sets forth concisely important information about the Fund that you should know before deciding whether to invest. You should read the Prospectus and retain it for future reference.
The Fund has also filed with the Securities Exchange Commission a Statement of Additional Information, dated , 2002 (the "SAI"), which contains additional information about the Fund. The SAI is incorporated by reference in its entirety into this Prospectus. You can review the table of contents of the SAI on page 53 of this Prospectus. You may request a free copy of the SAI by writing to the Fund at its address at One Corporate Center, Rye, New York 10580-1422 or calling the Fund toll-free at (800) 422-3554. You may also obtain the SAI on the Securities and Exchange Commission's web site (http://www.sec.gov).
You should rely only on the information contained in or incorporated by reference into this Prospectus. Neither the Fund nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither the Fund nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this Prospectus is accurate as of the date on the front cover of this Prospectus only.
TABLE OF CONTENTS
Page
Prospectus Summary..................................................... 1
Tax Attributes of Preferred Stock Dividends............................ 15
Financial Highlights................................................... 17
Use of Proceeds........................................................ 19
The Fund............................................................... 20
Capitalization......................................................... 20
Investment Objectives and Policies..................................... 21
Risk Factors and Special Considerations................................ 23
How the Fund Manages Risk.............................................. 28
Management of the Fund................................................. 29
Portfolio Transactions................................................. 31
Dividend and Distribution Policy....................................... 31
Description of the Series C Preferred.................................. 32
The Auction............................................................ 41
Description of Capital Stock and Other Securities...................... 44
Taxation............................................................... 45
Anti-Takeover Provisions of the Charter and
By-Laws........................................................... 49
Custodian, Transfer Agent, Auction Agent and
Dividend-Disbursing Agent......................................... 50
Underwriting........................................................... 50
Legal Matters.......................................................... 51
Experts................................................................ 51
Additional Information................................................. 51
Special Note Regarding Forward-Looking Statements...................... 52
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Table of Contents of SAI............................................... 53 Appendix A............................................................. 55 |
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information contained in the Prospectus and the SAI.
The Fund The Fund is a closed-end non-diversified
management investment company that has
been in operation since August 21, 1986.
As of March 31, 2002, the net assets of
the Fund were $1,476,776,614. The Fund's
outstanding common stock, par value $.001
per share, is listed and traded on the NYSE.
As of March 31, 2002, the Fund had
130,831,966 shares of common stock
outstanding. As of March 31, 2002, the Fund
also had outstanding 5,367,900 shares of
Series A Preferred, $25 per share
liquidation preference, and 6,600,000 shares
of Series B Preferred, $25 per share
liquidation preference. The Series C
Preferred, Series A Preferred and Series B
Preferred have the same seniority with
respect to dividends and liquidation
preference.
The Offering The Fund is offering 5,200 shares of
Series C Preferred, par value $0.001,
pursuant to this Prospectus at a
purchase price of $25,000 per share plus
dividends, if any, that have accumulated
from the commencement date of the
dividend period during which such Series
C Preferred is issued. The Series C
Preferred is being offered by Salomon
Smith Barney Inc. and Gabelli & Company,
Inc. as the underwriters.
Series C Preferred shares entitle their
holders to receive cash dividends at
annual rates that likely will vary from
dividend period to dividend period. In
general, except as described under " -
Dividends and Distributions" below and
"Description of the Series C Preferred -
Dividends and Dividend Periods," the
dividend period for the Series C
Preferred will be seven days. The
auction agent will determine the
dividend rate for a particular period by
an auction conducted on the business day
immediately prior to the start of that
dividend period. See "The Auction."
The Series C Preferred will not be
listed on an exchange. Instead,
investors may buy or sell Series C
Preferred in an auction by submitting
orders to broker-dealers that have
entered into an agreement with the
auction agent and the Fund.
Generally, investors in Series C
Preferred will not receive certificates
representing ownership of their shares.
The securities depository (The
Depository Trust Company or any
successor) or its nominee for the
account of the investor's broker-dealer
will maintain record ownership of the
Series C Preferred in book-entry form.
An investor's broker-dealer, in turn,
will maintain records of that investor's
beneficial ownership of Series C
Preferred.
Investment Objectives
and Methodology Investment Objectives. The Fund's
primary investment objective is
long-term growth of capital, primarily
through investment in a portfolio of
equity securities including common
stock, preferred stock, convertible or
exchangeable securities and warrants and
rights to purchase such securities.
Income is a secondary objective of the
Fund. No assurance can be given that the
Fund will achieve its investment
objectives. See "Investment Objectives
and Policies."
Investment Methodology. In selecting
securities for the Fund, the Investment
Adviser normally will consider the
following factors, among others: (i) the
Investment Adviser's own evaluations of
the private market value, cash flow,
earnings per share and other fundamental
aspects of the underlying assets and
business of the company; (ii) the
potential for capital appreciation of
the securities; (iii) the interest or
dividend income generated by the
securities; (iv) the prices of the
securities relative to other comparable
securities; (v) whether the securities
are entitled to the benefits of call
protection or other protective covenants
(e.g., events of acceleration or events
of default for failure to comply with
certain financial ratios or to satisfy
other financial covenants or
benchmarks); (vi) the existence of any
anti-dilution protections or guarantees
of the security; and (vii) the
diversification of the portfolio of the
Fund as to issuers. The Investment
Adviser's investment philosophy with
respect to equity securities seeks to
identify securities of companies that
are selling in the public market at a
discount to their private market value,
which the Investment Adviser defines as
the value informed purchasers are
willing to pay to acquire assets with
similar characteristics. The Investment
Adviser also normally evaluates the
issuer's free cash flow and long-term
earnings trends. Finally, the Investment
Adviser looks for a catalyst - something
in the company's industry or indigenous
to the company or country itself that
will surface additional value.
Portfolio Contents. Although under
normal market conditions at least 65%
(80% commencing on July 31, 2002) of the
Fund's total assets will consist of
equity securities, when a temporary
defensive posture is believed by the
Investment Adviser to be warranted
("temporary defensive periods"), the
Fund may without limitation hold cash or
invest its assets in money market
instruments and repurchase agreements in
respect of those instruments. The Fund
may also invest up to 10% of the market
value of its total assets during
temporary defensive periods in shares of
money market mutual funds that invest
primarily in U.S. government securities
and repurchase agreements in respect of
those securities. Such actions on the
part of the Fund may adversely affect
its ability to achieve its investment
objectives.
The Fund may invest up to 10% of its
total assets in fixed-income securities
issued by U.S. and foreign corporations,
governments and agencies that are rated
below investment grade by primary rating
services such as S&P and Moody's. These
high-yield, higher-risk securities are
commonly known as "junk bonds." These
debt securities are predominantly
speculative and involve major risk
exposure to adverse conditions.
The Fund may invest up to 35% of its
total assets in foreign securities.
Among the foreign securities in which
the Fund may invest are those issued by
companies located in developing
countries, which are countries in the
initial stages of their
industrialization cycles. Investing in
the equity and debt markets of
developing countries involves exposure
to economic structures that are
generally less diverse and less mature,
and to political systems that can be
expected to have less stability, than
those of developed countries. The
markets of developing countries
historically have been more volatile
than the markets of the more mature
economies of developed countries, but
often have provided higher rates of
return to investors. The Fund may also
invest in debt securities of foreign
governments.
Dividends
and Distributions The holders of Series C Preferred are
entitled to receive cash dividends at
annual rates that will vary from
dividend period to dividend period. The
table below shows the dividend rate, the
dividend payment date and the number of
days for the initial dividend period on
the Series C Preferred offered in this
Prospectus. For subsequent dividend
periods, the Series C Preferred will pay
dividends based on a rate set at
auctions, normally held weekly. In most
instances, dividends are also payable
weekly, on the first business
day following the end of the dividend
period. If the day on which dividends
otherwise would be paid is not a
business day, then dividends will be
paid on the first business day that
falls after that day. The Fund may,
subject to certain conditions, designate
special divifund periods for more than
seven days. The dividend payment date
for special dividend periods of more
than seven days will be set out in the
notice designating a special dividend
period. Dividends on the Series C
Preferred will be cumulative from the
date the shares are first issued and
will be paid out of legally available funds.
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Dividend
Payment Date Number of
Initial for Initial Days of Initial
Dividend Rate Dividend Period Dividend Period
Series C
Preferred.......... % , 2002
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In no event will the dividend rate set at auction for the Series C Preferred exceed the maximum applicable rate. The maximum applicable rate means (i) in the case of a dividend period of 184 days or less, the applicable percentage of the "AA" Financial Composite Commercial Paper Rate on the date of such auction determined as set forth in the following chart based on the lower of the credit ratings assigned to the Series C Preferred by Moody's and S&P or (ii) in the case of a dividend period of longer than 184 days, the applicable percentage of the Treasury Index Rate.
Moody's Credit Rating S&P Credit Rating Applicable
Percentage
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 175%
Baa3 to Baa1 BBB- to BBB 250%
Below Baa3 Below BBB- 275%
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See "Description of the Series C Preferred - Dividends - Maximum Applicable Rate." For example, calculated as of December 31, 2001 and March 31, 2002, respectively, the maximum applicable rate for the Series C Preferred (assuming the Series C Preferred is then rated Aa3 or above by Moody's and and AA- or above by S&P) would have been 2.67% and 2.70%, for dividend periods of 90 days, and 4.54% and 5.57% for dividend periods of two years.* There is no minimum applicable rate in respect of any dividend period.
Any designation of a special dividend
period will be effective only if, among
other things, proper notice has been
given, the auction immediately preceding
the special dividend period was not a
failed auction and the Fund has
confirmed that it has assets with an
aggregate discounted value at least
equal to the Series C Preferred Basic
Maintenance Amount (as defined in the
applicable rating agency guidelines). See
"Description of the Series C Preferred -
Dividends" and "Description of the
Series C Preferred - Designation of
Special Dividend Periods" and "The
Auction."
No full dividend shall be declared or
paid or set apart for payment on the
Series C Preferred for any dividend
period or part thereof, unless full
cumulative dividends due through the
most recent dividend payment dates
therefor for all series of preferred
stock of the Fund ranking on a parity
with the Series C Preferred as to the
payment of dividends have been or
contemporaneously are declared and paid
on all such outstanding shares of
preferred stock. If full cumulative
dividends due have not been paid on all
shares of preferred stock of the Fund
ranking on a parity with the Series C
Preferred as to the payment of
dividends, any dividends being paid on
the shares of such preferred stock
(including the Series C Preferred) shall
be paid as nearly pro rata as possible
on all outstanding shares of such
preferred stock on the dividend payment
dates therefor in proportion to the
respective amounts of dividends
accumulated but unpaid on each such
series of preferred stock.
The Fund has a policy, which may be
modified at any time by its Board of
Directors, of paying distributions on
its common stock of at least 10% of
average quarter-end net assets
attributable to common stock.
Auction Procedures You may buy, sell or hold Series C
Preferred in the auction. The following
is a brief summary of the auction
procedures, which are described in more
detail elsewhere in this Prospectus and
in the SAI. These auction procedures are
complicated, and there are exceptions to
these procedures. Many of the terms in
this section have a special meaning. Any
terms in this section not defined have
the meaning assigned to them in the SAI
and the SAI Glossary.
The auctions determine the dividend rate
for the Series C Preferred, but each
dividend rate will not be higher than
the maximum applicable rate. See
"Description of the Series C Preferred -
Dividends."
If you own shares of Series C Preferred,
you may instruct, orally or in writing,
a broker-dealer to enter an order in the
auction. Existing holders of Series C
Preferred can enter three kinds of
orders regarding their Series C
Preferred: sell, bid and hold.
If you enter a sell order, you
indicate that you want to sell
Series C Preferred at $25,000 per
share, no matter what the next
dividend period's rate will be.
If you enter a bid (or "hold at a
rate") order, you indicate that you
want to sell Series C Preferred
only if the next dividend period's
rate is less than the rate you
specify.
If you enter a hold order, you
indicate that you want to continue
to own Series C Preferred, no
matter what the next dividend
period's rate will be.
You may enter different types of orders
for your Series C Preferred, as well as
orders for additional Series C
Preferred. All orders must be for whole
shares. All orders you submit are
irrevocable. There is a fixed number of
Series C Preferred shares, and the
dividend rate likely will vary from
auction to auction depending on the
number of bidders, the number of shares
the bidders seek to buy, and general
economic conditions including current
interest rates. If you own Series C
Preferred and submit a bid higher than
the maximum applicable rate, your bid
will be treated as a sell order. If you
do not enter an order, the broker-dealer
will assume that you want to continue to
hold Series C Preferred, but if you fail
to submit an order and the dividend
period is longer than 28 days, the
broker-dealer will treat your failure to
submit a bid as a sell order.
If you do not then own Series C
Preferred, or want to buy more shares,
you may instruct a broker-dealer to
enter a bid order to buy shares in an
auction at $25,000 per share at or above
a specified dividend rate. If your bid
specifies a rate higher than the maximum
applicable rate, your order will not be
accepted.
Broker-dealers will submit orders from
existing and potential holders of Series
C Preferred to the auction agent.
Neither the Fund nor the auction agent
will be responsible for a broker-
dealer's failure to submit orders from
existing or potential holders of Series
C Preferred. A broker-dealer's failure
to submit orders for Series C Preferred
held by it or its customers will be
treated in the same manner as a holder's
failure to submit an order to the
broker-dealer. A broker-dealer may
submit orders to the auction agent for
its own account provided it is not an
affiliate of the Fund. Neither the Fund
nor the Investment Adviser may submit an
order in any auction, except that any
broker-dealer that is an affiliate of
the Fund or the Investment Adviser may
submit orders in an auction, but only if
such orders are not for its own account.
The auction agent after each auction for
the Series C Preferred will pay to each
broker-dealer, from funds provided by
the Fund, a service charge equal to, in the
case of any auction immediately
preceding a dividend period of less than
one year, the product of (a) a fraction,
the numerator of which is the number of
days in such dividend period and the
denominator of which is 365, times (b)
1/4 of 1%, times (c) $25,000 times
(d) the aggregate number of Series C
Preferred shares placed by such
broker-dealer at such auction, or, in
the case of any auction immediately
preceding a dividend period of one year
or longer, a percentage of the purchase
price of the Series C Preferred placed
by the broker-dealers at the auction
agreed to by the Fund and the
broker-dealers.
If the number of Series C Preferred
shares subject to bid orders by
potential holders with a dividend rate
equal to or lower than the maximum
applicable rate is at least equal to the
number of Series C Preferred shares
subject to sell orders, then the
dividend rate for the next dividend
period will be the lowest rate submitted
which, taking into account that rate and
all lower rates submitted in order from
existing and potential holders, would
result in existing and potential holders
owning all the Series C Preferred
available for purchase in the auction.
If the number of Series C Preferred
shares subject to bid orders by
potential holders with a dividend rate
equal to or lower than the maximum
applicable is less than the number of
Series C Preferred shares subject to
sell orders, then the auction is
considered to be a failed auction, and
the dividend rate will be the maximum
applicable rate. In that event, existing
holders that have submitted sell orders
(or are treated as having submitted sell
orders) may not be able to sell any or
all of the Series C Preferred for which
they submitted sell orders.
The auction agent will not accept a bid
above the maximum applicable rate. The
purpose of the maximum applicable rate
is to place an upper limit on dividends
with respect to the Series C Preferred
and in so doing to help protect the
earnings available to pay dividends on
common shares, and to serve as the
dividend rate in the event of a failed
auction (that is, an auction where there
is more Series C Preferred offered for
sale than there are buyers for those shares).
If broker-dealers submit or are deemed
to submit hold orders for all
outstanding Series C Preferred, the
auction is considered an "all hold"
auction and the dividend rate for the
next dividend period will be the "all
hold rate," which is 80% of the "AA"
Financial Composite Commercial Paper Rate.
The auction procedures include a pro
rata allocation of Series C Preferred
shares for purchase and sale. This
allocation process may result in an
existing holder continuing to hold or
selling, or a potential holder buying,
fewer shares than the number of Series C
Preferred shares in its order. If this
happens, broker-dealers will be
required to make appropriate pro rata
allocations among their customers.
Settlement of purchases and sales will
be made on the next business day (which
also is a dividend payment date) after
the auction date through The Depository
Trust Company. Purchasers will pay for
their Series C Preferred through broker-
dealers in same-day funds to The
Depository Trust Company against
delivery to the broker-dealers. The
Depository Trust Company will make
payment to the sellers' broker-dealers
in accordance with its normal
procedures, which require broker-
dealers to make payment against delivery
in same-day funds. As used in this
Prospectus, a business day is a day on
which the NYSE is open for trading, and
which is not a Saturday, Sunday or any
other day on which banks in New York
City are authorized or obligated by law
to close.
The first auction for Series C Preferred
will be held on , 2002, the business
day preceding the dividend payment date
for the initial dividend period.
Thereafter, except during special
dividend periods, auctions for Series C
Preferred normally will be held every
Tuesday (or the next preceding business
day if Tuesday is a holiday), and each
subsequent dividend period for the
Series C Preferred normally will begin
on the following Wednesday.
If an auction is not held because an
unforeseen event or unforeseen events
cause a day that otherwise would have
been an auction date not to be a
business day, then the length of the
then current dividend period shall be
extended by seven days (or a multiple
thereof if necesary because of such
unforeseen event or events), the
applicable rate for such period shall be
the applicable rate for the then current
dividend period so extended and the
dividend payment date for such dividend
period shall be the first bsuiness day
next succeeding the end of zuch period.
Rating and Asset
Coverage Requirements The Fund will issue Series C Preferred
only if such shares have received a
credit quality rating of Aaa from
Moody's and a rating of AAA from
S&P. The Articles Supplementary of the
Fund setting forth the rights and
preferences of the Series C Preferred
contain certain tests that the Fund must
satisfy to obtain and maintain a rating
of Aaa from Moody's and AAA from S&P
under their current guidelines. See
"Description of the Series C Preferred -
Rating Agency Guidelines." The Articles
Supplementary for the Series C Preferred
have been filed as an exhibit to this
registration statement and may be
obtained through the web site of the
Securities and Exchange Commission
(http://www.sec.gov).
Under the asset coverage tests to which
the Fund is subject, the Fund is
required to maintain (i) a discounted
value of its portfolio greater than or
equal to the Series C Preferred Basic
Maintenance Amount (as defined in the
applicable rating agency guidelines) and
(ii) an asset coverage of at least 200%
(or such higher or lower percentage as
may be required at the time under the
Investment Company Act of 1940, as
amended (the "1940 Act")), with respect
to all outstanding preferred stock of
the Fund, including the Series C
Preferred. See "Description of the
Series C Preferred - Asset Maintenance
Requirements."
The Fund estimates that if the Series C
Preferred offered hereby had been issued
and sold as of March 31, 2002, the asset
coverage under the 1940 Act would have been
approximately 374% immediately following
such issuance and sale (after giving
effect to the deduction of the
underwriting discounts and estimated
offering expenses for such shares of
$[1,800,000]). The asset coverage would
have been computed as follows:
value of Fund assets less
liabilities not constituting senior
securities ($1,604,976,614) /
senior securities representing
indebtedness plus liquidation
preference of each class of
preferred stock ($429,197,500),
expressed as a percentage = 374%.
Mandatory
Redemption The preferred stock of the Fund,
including the Series C Preferred, may be
subject to mandatory redemption by the
Fund to the extent the Fund fails to
maintain the asset coverage requirements
in accordance with the rating agency
guidelines or the 1940 Act described
above and does not cure such failure by
the applicable cure date. The redemption
price for Series C Preferred subject to
mandatory redemption will be $25,000 per
share, plus an amount equal to
accumulated but unpaid dividends
(whether or not earned or declared) to
the date fixed for redemption, plus (in
the case of Series C Preferred having a
dividend period of more than one year)
any applicable redemption premium
determined by the Board of Directors.
Optional Redemption The Fund generally may redeem Series C
Preferred, in whole or part, on not less
than 15 calendar days and not more than
40 calendar days prior notice. Any such
redemption will be made, in the case of
Series C Preferred designated as having
a dividend period of one year or less,
on the next business day after the last
day of such dividend period and in the
case of Series C Preferred having a
dividend period of more than one year,
on any business day prior to the end of
the relevant dividend period.
The redemption price per Series C
Preferred share will equal $25,000, plus
an amount equal to any accumulated but
unpaid dividends thereon (whether or not
earned or declared) to the redemption
date on the next business date after the
last day of such dividend period in the
case of Series C Preferred designated as
having a dividend period of one year or
less and, in the case of Series C
Preferred having a dividend period of
more than one year for the foregoing
redemption price subject to any specific
redemption provisions applicable to such
dividend period on any business day
prior to the end of the relevant
dividend period, which may include the
payment of a redemption premium
determined by the Board of Directors.
Such redemptions are subject to the
limitations of the 1940 Act and Maryland
law. The Fund's other series of
preferred stock, the Series A and Series
B Preferred, are redeemable at the
option of the Fund prior to June 9, 2003
and June 20, 2006 (with respect to each
series respectively) only to the extent
necessary for the Fund to continue to
qualify for tax treatment as a regulated
investment company.
Voting Rights At all times, holders of shares of the
Fund's preferred stock (including the
Series C Preferred) outstanding at the
time, voting as a single class, will be
entitled to elect two members of the
Fund's Board of Directors, and holders
of the 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
any of its preferred stock in an amount
equal to two full years' dividends,
holders of the preferred stock, 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 on all shares of
preferred stock have been paid or
provided for. Holders of Series C
Preferred 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 General Corporation Law.
Except as otherwise indicated in this
Prospectus and as otherwise required by
applicable law, holders of Series C
Preferred will be entitled to one vote
per share on each matter submitted to a
vote of stockholders and will vote
together with holders of shares of
common stock and any other preferred
stock as a single class. See
"Description of the Series C Preferred -
Voting Rights."
Liquidation
Preference The liquidation preference of the Series
C Preferred is $25,000 per share. Upon a
liquidation, each holder of Series C
Preferred will be entitled to receive an
amount per share equal to the
liquidation preference plus any accumulated
but unpaid dividends (whether or not
earned or declared) to the date of
distribution. See "Description of the
Series C Preferred - 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."
Risks and Special
Considerations Risk is inherent in all investing.
Therefore, before investing in Series C
Preferred and the Fund you should
consider certain risks carefully. The
primary risks of investing in Series C
Preferred is:
If an auction fails, you may
not be able to sell some or all
of your Series C Preferred. The
Fund is not obligated to redeem
your Series C Preferred if an
auction fails. The underwriters
are not required to make a
market in the Series C
Preferred. No broker-dealer is
obligated to maintain a
secondary market for the Series
C Preferred apart from the
auctions.
You may receive less than the
price you paid for your Series
C Preferred if you sell
them outside of the auction,
especially when market interest
rates are rising.
A rating agency could downgrade
or withdraw the rating assigned
to the Series C Preferred,
which would likely have an
adverse effect on the liquidity
and market value of the Series
C Preferred. The credit rating
does not eliminate or mitigate
the risks of investing in the
Series C Preferred.
The Fund may be forced to
redeem your Series C Preferred
to meet regulatory or rating
agency requirements or may
voluntarily redeem your Series
C Preferred. Subject to such
redemptions, the Series C
Preferred is perpetual.
The Fund may not meet the asset
coverage requirements or earn
sufficient income from its
investments to pay dividends on
the Series C Preferred.
The Series C Preferred 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
Series C Preferred for the full
redemption price.
The value of the Fund's
investment portfolio may
decline, reducing the asset
coverage for the Series C
Preferred. Further, if an
issuer of a common stock in
which the Fund invests
experiences financial
difficulties or if an issuer's
preferred stock or debt
security is downgraded or
defaults or if an issuer in
which the Fund invests is
affected by other adverse
market factors, there may be a
negative impact on the income
and/or asset value of the
Fund's investment portfolio.
The Fund may invest up to 35%
of its total assets in foreign
securities. Investing in
securities of foreign companies
and foreign governments, which
generally are denominated in
foreign currencies, may involve
certain risks and opportunities
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."
As a non-diversified investment
company, the Fund may invest in
the securities of individual
issuers to a greater degree
than a diversified investment
company. As a result, the Fund
may be more vulnerable to
events affecting a single
issuer and therefore subject to
greater volatility than a fund
that is more broadly
diversified. Accordingly, an
investment in the Fund may
present greater risk to an
investor than an investment in
a diversified company.
The Investment Adviser is
dependent upon the expertise of
Mr. Mario J. Gabelli in
providing advisory services
with respect to the Fund's
investments. If the Investment
Adviser were to lose the
services of Mr. Gabelli, its
ability to service the Fund
could be adversely affected.
There can be no assurance that
a suitable replacement could be
found for Mr. Gabelli in the
event of his death,
resignation, retirement or
inability to act on behalf of
the Investment Adviser.
See "Risk Factors and Special
Considerations."
Interest Rate Transactions In connection with the sale of the
Series C Preferred, the Fund may enter
into interest rate swap or cap
transactions in order to reduce the
impact of changes in the dividend rate
of the Series C Preferred or obtain the
equivalent of a fixed rate for the
Series C Preferred that is lower than
the Fund would have to pay if it issued
fixed rate preferred shares. The use of
interest rate swaps and caps is a highly
specialized activity that involves
investment techniques and risks
different from those associated with
ordinary portfolio security
transactions. In an interest rate swap,
the Fund would agree to pay to the other
party to the interest rate swap (which
is known as the "counterparty")
periodically a fixed rate payment in
exchange for the counterparty agreeing
to pay to the Fund periodically a
variable rate payment that is intended
to approximate the Fund's variable rate
payment obligation on the Series C
Preferred. In an interest rate cap, the
Fund would pay a premium to the
counterparty to the interest rate cap
and, to the extent that a specified
variable rate index exceeds a
predetermined fixed rate, would receive
from the counterparty payments of the
difference based on the notional amount
of such cap. Interest rate swap and cap
transactions introduce additional risk
because the Fund would remain obligated
to pay preferred stock dividends when
due in accordance with the Articles
Supplementary even if the counterparty
defaulted. Depending on the general
state of short- term interest rates and
the returns on the Fund's portfolio
securities at that point in time, such a
default could negatively affect the
Fund's ability to make dividend payments
on the Series C Preferred. In addition,
at the time an interest rate swap or cap
transaction reaches its scheduled
termination date, there is a risk that
the Fund will not be able to obtain a
replacement transaction or that the
terms of the replacement will not be as
favorable as on the expiring
transaction. If this occurs, it could
have a negative impact on the Fund's
ability to make dividend payments on the
Series C Preferred. A sudden and
dramatic decline in interest rates may
result in a significant decline in the
asset coverage. If the Fund fails to
maintain the required asset coverage on
its outstanding preferred stock or fails
to comply with other covenants, the Fund
may be required to redeem some or all of
these shares (including the Series C
Preferred). Such redemption likely
would result in the Fund seeking to
terminate early all or a portion of any
swap or cap transaction. Early
termination of a swap could require the
Fund to make a termination payment to
the counterparty. The Fund intends to
maintain in a segregated account with
its custodian cash or liquid securities
having a value at least equal to the
value of the Fund's net payment
obligations under any swap transaction,
marked to market daily. The Fund does
not presently intend to enter into interest
rate swap or cap transactions relating to
the Series C Preferred in a notional amount
in excess of the outstanding amount of the
Series C Preferred. See "How the Fund Manages
Risk - Interest Rate Transactions" for
additional information.
Use of Leverage As provided in the 1940 Act, the Fund
may issue debt or preferred stock so
long as the Fund's total assets exceed
300% of the amount of the debt
outstanding and exceed 200% of the
amount of preferred stock and debt
outstanding at the time of issuance.
Leverage entails two primary risks. The
first risk is that the use of leverage
magnifies the impact on the common
stockholders of changes in net asset
value. For example, a fund that uses 33%
leverage will show a 1.5% increase or
decline in net asset value for each 1%
increase or decline in the value of its
total assets. The second risk is that
the cost of leverage will exceed the
return on the securities acquired with
the proceeds of leverage, thereby
diminishing rather than enhancing the
return to common stockholders. These two
risks would generally make the Fund's
total return to common stockholders more
volatile to the extent it utilizes
leverage. 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.
If the Fund is utilizing leverage, 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
the level required under the 1940 Act or
the terms of the preferred stock or debt
(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.
Federal Income Tax
Considerations The Fund has qualified, and intends to
remain qualified, for Federal income tax
purposes, as a regulated investment
company under Subchapter M of the Code.
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
preferred stock to the extent necessary
in order to maintain compliance with
such asset coverage requirements. See
"Taxation" in this Prospectus and
"Taxation" in the SAI for more complete
discussions of these and other Federal
income tax considerations.
Potential Tax Benefit
to Certain Investors Most individuals pay Federal income tax
at a lower rate on long term capital
gains than on ordinary income and
short-term capital gains. For
individuals in the highest tax brackets
this differential currently can be as
great as 18.6%, the difference between
38.6% on ordinary income and short-term
capital gains and 20% on long- term
capital gains. In accordance with the
published position of the Internal
Revenue Service ("IRS"), the Fund
intends to allocate its net long-term
capital gain, net short-term capital
gain and ordinary investment income
proportionately among its common stock
and preferred stock. Over the past one,
three and five fiscal years ending
December 31, 2001, the distributions of
taxable income by the Fund consisted of
88%, 84% and 88% long-term capital
gains. If the Fund continues to pay a
portion of its distributions in the form
of long-term capital gain distributions,
most individual investors will
accordingly realize a tax benefit and
pay a lower rate of Federal income tax
on their Series C Preferred dividends
than if the Fund did not distribute
long-term capital gains. See "Tax
Attributes of Preferred Stock
Dividends."
Corporations and other Federal taxpayers
that do not benefit from capital gains
tax treatment will not realize the
potential tax benefits described above.
In addition, because only a relatively
small amount of the dividends on the
Series C Preferred that constitute
taxable income is expected to qualify
for the dividends received deduction
available to corporations, the Series C
Preferred may not be a suitable
investment for corporate taxpayers. For
instance, for the year ended December
31, 2001, approximately 8.2% of
distributions comprising taxable income
on the Fund's preferred stock qualified
for the dividends received deduction.
Secondary Market
Trading The Series C Preferred will not be
listed on an exchange. Broker-dealers
may, but are not obligated to, maintain
a secondary trading market in Series C
Preferred outside of auctions. There can
be no assurance that a secondary market
will provide owners with liquidity. You
may transfer Series C Preferred outside
of auctions only to or through a
broker-dealer that has entered into an
agreement with the auction agent and the
Fund or other persons as the Fund permits.
Investment Adviser Gabelli Funds, LLC, the Fund's
Investment Adviser, is a New York
limited liability company which also
serves as investment adviser to other
closed-end investment companies and
open-end investment companies with
aggregate assets in excess of $26
billion as of March 31, 2002. The
Investment Adviser is a registered
investment adviser under the Investment
Advisers Act of 1940. The Investment
Adviser is compensated for its services
and its related expenses at an annual
rate of 1.00% of the Fund's average
weekly net assets. This fee will be paid
on assets attributable to the Series C
Preferred only to the extent the Fund's net
asset value total return for the year exceeds
the dividend rate for the Series C Preferred
at the beginning of each year (including
the anticipated cost of a swap or cap if
the Fund hedges its Series C Preferred
dividend obligations). The Investment
Adviser is responsible for
administration of the Fund and currently
utilizes and pays the fees of a third
party administrator.
Repurchase of Common
Stock and Anti-takeover
Provisions The Fund is authorized, subject to
maintaining required asset coverage on
its 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 Charter and By-Laws may be
regarded as "anti-takeover" provisions.
Pursuant to these provisions, only one
of three classes of directors is elected
each year, and the affirmative vote of
the holders of 66 2/3% of the
outstanding shares of each class of
stock of the Fund is necessary to
authorize the conversion of the Fund
from a closed-end to an open-end
investment company and an affirmative
vote of 66 2/3% of each class of the
outstanding voting shares of the Fund
may be necessary to authorize certain
business transactions with any
beneficial owner of more than 5% of the
outstanding shares of the Fund. The
overall effect of these provisions is to
render more difficult the accomplishment
of a merger with, or the assumption of
control by, a principal stockholder.
These provisions may have the effect of
depriving Fund stockholders of an
opportunity to sell their shares at a
premium to the prevailing market price.
See "Anti-Takeover Provisions of the Charter
and By Laws."
Custodian, Transfer Agent
and Paying Agent
and Auction Agent. Boston Safe Deposit and Trust Company
serves as the Fund's custodian. With
respect to the Series C Preferred, The
Bank of New York serves as transfer and
paying agent and registrar and as agent
to provide notice of redemption and
certain voting rights. See "Custodian,
Transfer Agent and Paying Agent." The
Bank of New York will serve as the
Fund's auction agent for the Series C
Preferred.
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TAX ATTRIBUTES OF PREFERRED STOCK DIVIDENDS
The Fund intends to distribute to its stockholders substantially all of its net capital gains and net investment income. The Fund operates as a regulated investment company under the Code, and distributions by a regulated investment company generally retain their character as capital gain or ordinary income when received by its preferred and common stockholders. Distributions of short-term capital gain are taxed at ordinary income rates. The dividends paid by the Fund to holders of the Series C Preferred may, for Federal income tax purposes, consist of varying proportions of long-term capital gain, short-term capital gain, ordinary income and/or returns of capital.
Both long-term and short-term capital gains of corporations are currently taxed at the rates applicable to ordinary income. For non-corporate taxpayers, however, distributions of capital gain on assets held by the Fund longer than 12 months generally are currently taxable to individuals at a maximum rate of 20%. Distributions of net investment income and short-term capital gain of the Fund are currently taxable to individuals at a maximum rate of 38.6%.
Although the Fund is not managed using a tax-focused investment strategy and does not seek to achieve any particular distribution composition, individual investors in Series C Preferred would, under current Federal income tax law, realize a tax savings on their investment to the extent that distributions by the Fund to its stockholders are composed of long-term capital gain taxed at a lower rate. In contrast, preferred stock dividends distributed by corporations that are not regulated investment companies are generally comprised, for Federal income tax purposes, only of ordinary income.
Over the past one, three and five fiscal years ending December 31, 2001, the distributions of taxable income by the Fund consisted of 88%, 84%, and 88% long-term capital gains. The Fund has no reason to expect that these percentages will decrease materially in the future although it cannot provide any assurances in this regard. Conversely, for the year ended December 31, 2001, approximately 8.2% of distributions of taxable income on the Fund's preferred stock qualified for the dividends received deduction available to corporations.
The Federal income tax characteristics of the Fund and the taxation of its stockholders are described more fully under "Taxation."
ASSUMPTIONS
The following tables show examples of the pure ordinary income equivalent yield that would be generated by the stated dividend rate on the Series C Preferred, assuming distributions for Federal income tax purposes consisting of different proportions of long-term capital gain and ordinary income (including short-term capital gain) for an individual in the 38.6% and 30.0% Federal marginal income tax brackets. In reading these tables, you should understand that a number of factors could affect the actual composition for Federal income tax purposes of the Fund's distributions each year. Such factors include (i) the Fund's investment performance for any particular year, which may result in distributions of varying proportions of long-term capital gain, ordinary income and/or return of capital, and (ii) revocation or revision of the IRS revenue ruling requiring the proportionate allocation of types of income among holders of various classes of a regulated investment company's capital stock.
These tables are for illustrative purposes only and cannot be taken as an indication of the actual composition for Federal income tax purposes of the Fund's future distributions.
Series C Preferred Series C Preferred
Illustrative Annual Illustrative Annual
Dividend Rate* Dividend Rate*
--------------- --------------
1.75% 2.25% 1.75% 2.25%
|
Percentage of Series C Preferred Tax Equivalent Yield for an Tax Equivalent Yield for an
Share Illustrative Annual Dividend Individual in the 38.6% Individual in the 30.0%
Comprised of Federal Income Tax Bracket1 Federal Income Tax Bracket1
-------------------------- --------------------------
Long-Term Ordinary
Capital Gains Income
90.0% 10.0% 2.23% 2.86% 1.98% 2.54%
83.3% 16.7% 2.19% 2.82% 1.96% 2.52%
75.0% 25.0% 2.15% 2.76% 1.94% 2.49%
66.7% 33.3% 2.10% 2.70% 1.92% 2.46%
50.0% 50.0% 2.02% 2.59% 1.88% 2.41%
33.3% 66.7% 1.93% 2.48% 1.83% 2.36%
25.0% 75.0% 1.88% 2.42% 1.81% 2.33%
16.7% 83.3% 1.84% 2.36% 1.79% 2.30%
10.0% 90.0% 1.80% 2.32% 1.78% 2.28%
0.0% 100.0% 1.75% 2.25% 1.75% 2.25%
------------------------
* Actual dividend rates for the Series C Preferred will vary. See "Description of the Series C
Preferred - Dividends and Distributions."
(1) Annual taxable income levels corresponding to the 2002 Federal marginal tax brackets are as follows:
|
2002 Federal Income Tax Bracket(2) Single Joint
---------------------------------- ------ -----
38.6% over $ 307,050 over $307,050
35.0% over $141,250 - $307,050 over $171,950 - $307,050
30.0% over $67,700 - $141,250 over $112,850 - $171,950
27.0% over $27,950 - $67,700 over $46,700 - $112,850
15.0% over $6,000 - $27,950 over $12,000 - $46,700
10.0% up to and including $6,000 up to and including $12,000
|
Your Federal marginal income tax rates may exceed the rates shown in the above tables due to the reduction, or possible elimination, of the personal exemption deduction for high-income taxpayers and an overall limit on itemized deductions. Income may be subject to certain state, local and foreign taxes. If you pay alternative minimum tax, or AMT, equivalent yields may be lower than those shown above. The tax rates shown above do not apply to corporate taxpayers.
(2) The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for taxable years beginning after December 31, 2000, creates a new 10 percent income tax bracket and reduces the tax rates applicable to ordinary income over a six year phase-in period. Beginning in the taxable year 2006, ordinary income will be subject to a 35% maximum rate, with approximately proportionate reductions in the other ordinary rates.
FINANCIAL HIGHLIGHTS
The selected data set forth on the following pages is for shares of common stock outstanding for the periods presented. The financial information was derived from and should be read in conjunction with the Financial Statements of the Fund incorporated by reference into this Prospectus and the SAI. The financial information for each of the five years ended December 31, 2001 has been audited by PricewaterhouseCoopers LLP, independent accountants, whose unqualified report on such financial statements is incorporated by reference in the SAI.
Year Ended December 31,
---------------------------------------------------------------------------
2001(a) 2000(a) 1999(a) 1998(a) 1997(a)
Per Common Share Operating Performance:
Net asset value, beginning of period.......... $10.89 $12.75 $11.47 $11.56 $ 9.77
Net investment income......................... 0.08 0.05 0.04 0.07 0.08
Net realized and unrealized gain (loss) on
investments................................. (0.16) (0.51) 3.25 1.09 2.75
Total from investment operations.............. (0.08) (0.46) 3.29 1.16 2.83
Increase (decrease) in net asset
value from Fund share transactions.......... 0.03 -- -- -- --
Decrease in net asset value from shares issued
in rights offering.......................... (0.62) -- -- -- --
Offering expenses charged to capital surplus.. (0.05) -- -- (0.04) --
Distributions to Common Stock Shareholders:
Net investment income......................... (0.06) (0.04) (0.03)(c) (0.06) (0.08)
In excess of net investment income............ -- -- -- -- (0.00)(d)
Net realized gain on investments.............. (1.02) (1.27) (1.21)(c) (1.10) (0.93)
In excess of net realized gains on investments -- -- -- -- --
Paid-in capital............................... -- -- (0.68)(c) -- (0.03)
Distributions to Preferred Stock Shareholders:
Net investment income......................... (0.01) (0.00)(d) (0.00)(d) (0.00)(d) --
Net realized gain on investments ............. (0.11) (0.09) (0.09) (0.05) --
Total distributions........................... (1.20) (1.40) (2.01) (1.21) (1.04)
Net asset value, end of period................... $ 8.97 $10.89 $12.75 $11.47 $11.56
Market value, end of period................... $10.79 $11.44 $12.56 $11.56 $11.69
Net asset value total return*................. (3.68)% (4.39)% 29.49% 9.55% 30.46%
Total investment return**..................... 10.32% 1.91% 26.57% 9.23% 37.46%
Ratios to Average Net Assets Available to Common
Stock Shareholders and Supplemental Data:
Net assets, end of period (in 000's).......... $1,465,369 $1,318,263 $1,503,641 $1,352,190 $1,210,570
Net assets attributable to common shares, end
of period (in 000's)........................ $1,166,171 $1,184,041 $1,368,981 $1,217,190 $1,210,570
Ratio of net investment income to average net
assets attributable to common stock......... 0.81% 0.42% 0.34% 0.60% 0.76%
Ratio of operating expenses to average total net
assets attributable to common stock(g) ..... 1.12% 1.14% 1.27% 1.15% 1.14%
Ratio of operating expenses to average total net
assets(e)(f)(g)............................. 0.95% 1.03% 1.15% 1.09% 1.14%
Portfolio turnover rate....................... 23.9% 32.1% 38.0% 39.8% 39.2%
Series A Preferred Stock(f):
Liquidation value, end of period (in 000's)... $134,198 $134,223 $134,660 $135,000 --
Total shares outstanding (in 000's)........... 5,368 5,369 5,386 5,400 --
Asset coverage(h)............................. 490% 982% 1,117% 1,001% --
Asset coverage per share(h)................... $122.44 $ 245.54 $279.16 $250.41 --
Liquidation preference per share.............. $ 25.00 $ 25.00 $25.00 $25.00 --
Average market value(i)....................... $ 25.39 $22.62 $24.43 $25.63 --
Series B Preferred Stock(f):
Liquidation value, end of period (in 000's)... $165,000 -- -- -- --
Total shares outstanding (in 000's)........... 6,600 -- -- -- --
Asset coverage(h)............................. 490% -- -- -- --
Asset coverage per share(h)................... $122.44 -- -- -- --
Liquidation preference per share.............. $25.00 -- -- -- --
Average market value(i)....................... $25.60 -- -- -- --
------------------------
See footnotes on following page.
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FINANCIAL HIGHLIGHTS (Cont.)
Year Ended December 31,
------------------------------------------------------------------------
1996(a) 1995(a) 1994(a) 1993(a) 1992
------- ------- ------- ------- ----
Per Common Share Operating Performance:
Net asset value, beginning of period................... $ 9.95 $ 9.46 $11.23 $10.58 $10.61
Net investment income.................................. 0.11 0.13 0.14 0.14 0.19
Net realized and unrealized gain (loss) on investments. 0.71 1.74 (0.08) 2.13 1.21
Total from investment operations....................... 0.82 1.87 0.06 2.27 1.40
Increase (decrease) in net asset
value from Fund share transactions.................. -- (0.37) -- (0.50) (0.36)
Decrease in net asset value from shares issued in
rights offering................................... -- -- -- -- --
Offering expenses charged to capital surplus........... -- (0.01) -- (0.01) (0.01)
Distributions to Common Stock Shareholders:
Net investment income.................................. (0.11) (0.13) (0.14)(b) (0.11) (0.19)
In excess of net investment income..................... -- -- -- -- --
Net realized gain on investments ...................... (0.78) (0.47) (0.37)(b) (0.77) (0.38)
In excess of net realized gain on investments.......... (0.00)(d) (0.02) -- (0.02) --
Paid-in capital........................................ (0.11) (0.38) (1.32)(b) (0.21) (0.49)
Distributions to Preferred Stock Shareholders:
Net investment income.................................. -- -- -- -- --
Net realized gain on investments ...................... -- -- -- -- --
Total distributions.................................... (1.00) (1.00) (1.83) (1.11) (1.06)
Net asset value, end of period........................ $ 9.77 $ 9.95 $ 9.46 $11.23 $10.58
Market value, end of period............................ $ 9.38 $ 9.375 $ 9.625 $12.125 $10.250
Net asset value total return*.......................... 9.00% 20.60% 0.50% 22.40% 14.20%
Total investment return**.............................. 11.00% 11.70% (5.10)% 36.50% 15.90%
Ratios to Average Net Assets Available to Common Stock
Shareholders and Supplemental Data:
Net assets, end of period (in 000's)................... $1,015,437 $1,034,091 $825,193 $937,773 $725,263
Net assets attributable to common shares, end
of period (in 000's)................................. $1,015,437 $1,034,091 $825,193 $937,773 $725,263
Ratio of net investment income to average net assets
attributable to common stock......................... 1.07% 1.26% 1.29% 1.25% 1.88%
Ratio of operating expenses to average total net
assets(e)............................................ 1.18% 1.21% 1.19% 1.20% 1.22%
Portfolio turnover rate................................ 18.9% 25.1% 22.2% 24.4% 12.5%
Preferred Stock(f):
Liquidation value, end of period (in 000's)............ -- -- -- -- --
Total shares outstanding (in 000's).................... -- -- -- -- --
Asset coverage per share............................... -- -- -- -- --
Liquidation preference per share....................... -- -- -- -- --
Average market value(h)................................ --
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The following table provides information about the Fund's Series A Preferred, since its issuance in June 1998, and Series B Preferred, since its issuance in June 2001. The information has been audited by PricewaterhouseCoopers LLP, independent accountants.
Involuntary
Liquidation Average
Year ended Shares Asset Coverage Preference Market
December 31, Outstanding Per Share Per Share Value Per Share
------------ ----------- --------- --------- ---------------
2001 5,367,900 Series A $122.44 $25.00 $25.39
6,600,000 Series B $122.44 $25.00 $25.60
2000 5,368,900 Series A $245.54 $25.00 $22.62
1999 5,386,400 Series A $279.16 $25.00 $24.43
1998 5,400,000 Series A $250.41 $25.00 $25.63
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For purposes of the foregoing table, the Asset Coverage Per Share is calculated by dividing the total value of the Fund's assets on December 31 of the relevant year by the aggregate number of shares of Series A Preferred and Series B Preferred outstanding on that date. Involuntary Liquidation Preference Per Share refers to the amount holders of Series A Preferred and/or Series B Preferred are entitled to receive per share in the event of liquidation of the Fund (not including any accrued but unpaid dividends) prior to the holders of common stock being entitled to receive any amounts in respect of the assets of the Fund. The Average Market Value Per Share is the average of the weekly closing prices of the Series A Preferred or Series B Preferred, as the case may be, on the New York Stock Exchange each week during the relevant year.
USE OF PROCEEDS
The net proceeds of the Offering are estimated at $128,200,000 after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Investment Adviser expects that it will be able to invest the proceeds of the Offering according to the Fund's investment objectives and policies within six months after the completion of the Offering. Pending such investment, the Fund will hold the proceeds in high quality short-term debt securities and instruments.
THE FUND
The Fund, incorporated in Maryland on May 20, 1986, is a non-diversified, closed-end management investment company registered under the 1940 Act. The Fund's common stock is traded on the New York Stock Exchange under the symbol "GAB." The Fund's Series A Preferred is traded on the NYSE under the symbol "GAB Pr" and its Series B Preferred under the symbol "GAB PrB." The Series C Preferred will not be listed on an exchange or the National Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ") stock market.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as of March 31, 2002, and its adjusted capitalization assuming the Series C Preferred offered in this Prospectus had been issued as of that date.
AS OF MARCH 31, 2002
ACTUAL AS ADJUSTED
(Unaudited)
SHAREHOLDERS' EQUITY (as of March 31, 2002):
Preferred stock, $0.001 par value, 16,000,000 shares authorized.
(The "ACTUAL" column reflects the Fund's outstanding
5,367,900 shares of Series A Preferred, $25.00 liquidation
preference, and 6,600,000 shares of Series B Preferred, $25.00
liquidation preference; the "AS ADJUSTED" column
assumes the issuance of an additional [5,200] shares of Series
C Preferred, $25,000 liquidation preference)..................$ 299,197,500 $ 429,197,500
Shareholders' Equity Applicable to Common Shares
Common stock, $.001 par value per share; 184,000,000 shares
authorized, 130,831,966 shares outstanding....................$ 130,832 $ 130,832
Paid-in surplus*--............................................... 839,325,590 837,525,590
Undistributed net investment income.............................. 11,541,531 11,541,531
Accumulated net realized loss from investment
transactions.................................................. (42,470,808) (42,470,808)
Net unrealized appreciation ..................................... 369,051,969 369,051,969
Net assets applicable to common shareholders.....................$ 1,177,579,114 $1,175,779,114
Net assets, plus liquidation preference of preferred stock.......$ 1,476,776,614 $1,604,976,614
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* As adjusted paid in surplus reflects a reduction for the sale load and estimated offering cost of the Series C Preferred issuance of $1,800,000.
As used in this Prospectus, unless otherwise noted, the Fund's "net assets" include assets of the Fund attributable to any outstanding shares of its preferred stock, with no deduction for the liquidation preference of such shares. For financial reporting purposes, however, the Fund is required to deduct the liquidation preference of its outstanding preferred stock from "net assets," so long as the preferred stock has redemption features that are not solely within the control of the Fund. For all regulatory purposes, the Fund's preferred stock will be treated as stock (rather than as indebtedness).
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is long-term growth of capital. Income is a secondary objective of the Fund. Under normal market conditions, the Fund will invest at least 65% (80% commencing on July 31, 2002) of its total assets in equity securities. The Fund attempts to achieve its investment objectives by investing primarily in a portfolio of equity securities consisting of common stock, preferred stock, convertible or exchangeable securities and warrants and rights to purchase such securities selected by the Investment Adviser. The Investment Adviser selects investments on the basis of fundamental value and, accordingly, the Fund typically invests in the securities of companies that are believed by the Investment Adviser to be priced lower than justified in relation to their underlying assets. Other important factors in the selection of investments include favorable price/earnings and debt/equity ratios and strong management.
The Fund seeks to achieve its secondary investment objective of income, in part, by investing up to 10% of its total assets in a portfolio consisting primarily of high-yielding, fixed- income securities, such as corporate bonds, debentures, notes, convertible securities, preferred stocks and domestic and foreign government obligations. Generally, debt securities purchased by the Fund will be rated in the lower rating categories of recognized statistical rating agencies, such as securities rated CCC or lower by S&P or Caa or lower by Moody's, or will be nonrated securities of comparable quality. These debt securities are predominantly speculative and involve major risk exposure to adverse conditions and are often referred to in the financial press as "junk bonds."
The Fund's investment objectives of long-term growth of capital and income are fundamental policies and may not be changed without shareholder approval.
INVESTMENT METHODOLOGY OF THE FUND
In selecting securities for the Fund, the Investment Adviser
normally will consider the following factors, among others: (i) the
Investment Adviser's own evaluations of the private market value, cash
flow, earnings per share and other fundamental aspects of the underlying
assets and business of the company; (ii) the potential for capital
appreciation of the securities; (iii) the interest or dividend income
generated by the securities; (iv) the prices of the securities relative to
other comparable securities; (v) whether the securities are entitled to the
benefits of call protection or other protective covenants (e.g., events of
acceleration or events of default for failure to comply with certain
financial ratios or to satisfy other financial covenants or benchmarks);
(vi) the existence of any anti-dilution protections or guarantees of the
security; and (vii) the diversification of the portfolio of the Fund as to
issuers. The Investment Adviser's investment philosophy with respect to
equity securities seeks to identify securities of companies that are
selling in the public market at a discount to their private market value,
which the Investment Adviser defines as the value informed purchasers are
willing to pay to acquire assets with similar characteristics. The
Investment Adviser also normally evaluates the issuer's free cash flow and
long-term earnings trends. Finally, the Investment Adviser looks for a
catalyst - something in the company's industry or indigenous to the company
or country itself that will surface additional value.
INVESTMENT PRACTICES
Foreign Securities. The Fund may invest up to 35% of its total assets in foreign securities. Among the foreign securities in which the Fund may invest are those issued by companies located in developing countries, which are countries in the initial stages of their industrialization cycles. Investing in the equity and debt markets of developing countries involves exposure to economic structures that are generally less diverse and less mature, and to political systems that can be expected to have less stability than those of developed countries. The markets of developing countries historically have been more volatile than the markets of the more mature economies of developed countries, but often have provided higher rates of return to investors. The Fund may also invest in debt securities of foreign governments.
Temporary Investments. Although under normal market conditions at least 65% (80% commencing on July 31, 2002) of the Fund's total assets will consist of equity securities, when a temporary defensive posture is believed by the Investment Adviser to be warranted ("temporary defensive periods"), the Fund may without limitation hold cash or invest its assets in money market instruments and repurchase agreements in respect of those instruments. The Fund may also invest up to 10% of the market value of its total assets during temporary defensive periods in shares of money market mutual funds that invest primarily in U.S. government securities and repurchase agreements in respect of those securities. For a further description of such transactions, see "Investment Objectives and Policies - Investment Practices" in the SAI. Such actions on the part of the Fund may adversely affect its ability to achieve its investment objectives.
Lower Rated Securities. The Fund may invest up to 10% of its total assets in fixed- income securities issued by U.S. and foreign corporations, governments and agencies that are rated below investment grade by primary rating services such as S&P and Moody's. These high- yield, higher-risk securities are commonly known as "junk bonds." These debt securities are predominantly speculative and involve major risk exposure to adverse conditions.
Repurchase Agreements. The Fund may engage in repurchase agreement transactions with banks, registered broker-dealers and government securities dealers approved by the Investment Adviser under the supervision of the Board of Directors. The Fund will not enter into repurchase agreements with the Investment Adviser or any of its affiliates. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying debt obligation for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed price and time, thereby determining the yield during its holding period. Thus, repurchase agreements may be seen to be loans by the Fund collateralized by the underlying debt obligation. This arrangement results in a fixed rate of return that is not subject to market fluctuations during the holding period. The value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including interest. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed in or prevented from exercising its rights to dispose of the collateral securities, including the risk of a possible decline in the value of the underlying securities during the period in which it seeks to assert these rights. The Investment Adviser, acting under the supervision of the Fund's Board of Directors, reviews the creditworthiness of those banks and dealers with which the Fund enters into repurchase agreements to evaluate these risks and monitors on an ongoing basis the value of the securities subject to repurchase agreements to ensure that the value is maintained at the required level.
Other Investments. The Fund is permitted to invest in special situations, illiquid securities, warrants, options and other rights and futures contracts, engage in forward currency transactions and enter into forward commitments for the purchase or sale of securities, including on a "when issued" or "delayed delivery" basis. See the SAI for a discussion of these investments and techniques and the risks associated with them.
LEVERAGING
As provided in the 1940 Act, the Fund may issue debt or preferred stock so long as the Fund's total assets exceed 300% of the amount of the debt outstanding and exceed 200% of the amount of preferred stock and debt outstanding at the time of issuance. Leverage entails two primary risks. The first risk is that the use of leverage magnifies the impact on the common stockholders of changes in net asset value. For example, a fund that uses 33% leverage will show a 1.5% increase or decline in net asset value for each 1% increase or decline in the value of its total assets. The second risk is that the cost of leverage will exceed the return on the securities acquired with the proceeds of leverage, thereby diminishing rather than enhancing the return to common stockholders. These two risks would generally make the Fund's total return to common stockholders more volatile to the extent it utilizes leverage. 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.
If the Fund is utilizing leverage, 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 Code. See "Taxation." Finally, if the asset coverage for preferred stock or debt securities declines to less than the level required under the 1940 Act or the terms of the preferred stock or debt (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 of the Fund is set forth in the SAI.
INVESTMENT RESTRICTIONS
The Fund operates under certain restrictions that may not be changed without shareholder approval. For a description of such restrictions, see "Investment Restrictions" in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following risk factors and special considerations associated with investing in the Fund.
PREFERRED STOCK
General. There are a number of risks associated with an investment in Series C Preferred. The value of the Series C Preferred will be influenced by changes in interest rates, the perceived credit quality of the Series C Preferred and other factors. The Series C Preferred is subject to redemption and investors may not be able to reinvest the proceeds of any such redemption in an investment providing the same or a better rate of return than that of the Series C Preferred. Subject to such circumstances, the Series C Preferred is perpetual. The credit rating on the Series C Preferred 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 Series C Preferred. A reduction or withdrawal of the credit rating would likely have an adverse effect on the market value of the Series C Preferred. The Series C Preferred is not an obligation of the Fund. The preferred stock of the Fund (including the Series C Preferred) would be junior in respect of dividends and liquidation preference to any indebtedness incurred by the Fund. Although unlikely, precipitous declines in the value of the Fund's assets could result in the Fund having insufficient assets to redeem all of the Series C Preferred for the full redemption price.
Leverage Risk. The Fund uses financial leverage for investment purposes by issuing preferred stock. It is currently anticipated that, taking into account the Series C Preferred being offered in this Prospectus, the amount of leverage will represent approximately 27% of the Fund's managed assets (as defined below). The Fund's leveraged capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the Series C Preferred's asset coverage.
Because the fee paid to the Investment Adviser will be calculated on the basis of the Fund's managed assets (which equal the aggregate net asset value of the common shares plus the liquidation preference of the preferred stock), the fee will be higher when leverage is utilized, giving the Investment Adviser an incentive to utilize leverage.
Interest Rate Risk. The Fund issues Series C Preferred, which pays dividends based on short-term interest rates. The Fund purchases equity securities that pay dividends that are based on the performance of the issuing companies. The Fund also may buy debt securities that pay interest based on longer-yield terms. These dividends and interest payments are typically, although not always, higher than short-term interest rates. Portfolio company dividends, as well as long-term and short-term interest rates, fluctuate. If short-term interest rates rise, dividend rates on the Series C Preferred may rise so that the amount of dividends to be paid to holders of the Series C Preferred exceeds the income from the portfolio securities. Because income from the Fund's entire investment portfolio (not just the portion of the portfolio purchased with the proceeds of this offering of Series C Preferred) is available to pay dividends on the Fund's preferred stock, however, dividend rates on the Series C Preferred, Series A Preferred and Series B Preferred would need to greatly exceed the Fund's net portfolio income before the Fund's ability to pay dividends on the Series C Preferred would be jeopardized. If long-term interest rates rise, this could negatively impact the value of the Fund's investment portfolio, reducing the amount of assets serving as asset coverage for its preferred stock, including the Series C Preferred. The Fund anticipates entering into interest rate swap or cap transactions with the intent to reduce or eliminate the risk posed by an increase in short-term interest rates. There is no guarantee that the Fund will engage in these transactions or that these transactions will be successful in reducing or eliminating interest rate risk. Further, these transactions will introduce additional risk since the Fund will remain obligated to pay Series C Preferred dividends even if the counterparty defaults. See "How the Fund Manages Risk."
Auction Risk. You may not be able to sell your Series C Preferred at an auction if the auction fails, i.e., if there is more Series C Preferred offered for sale than there are buyers for those shares. Also, if you place hold orders (orders to retain Series C Preferred) at an auction only at a specified rate, and that bid rate exceeds the rate set at the auction, you will not retain your Series C Preferred. Additionally, if you buy shares or elect to retain shares without specifying a rate below which you would not wish to continue to hold those shares, and the auction sets a below-market rate, you may receive a lower rate of return on your shares than the market rate. Finally, the dividend period may be changed, subject to certain conditions and with notice to the holders of the Series C Preferred, which could also affect the liquidity of your investment. See "Description of the Series C Preferred" and "The Auction."
Secondary Market Risk. If you try to sell your Series C Preferred between auctions, you may not be able to sell any or all of your shares, or you may not be able to sell them for $25,000 per share or $25,000 per share plus accumulated dividends. If the Fund has designated a special dividend period of more than seven days, changes in interest rates could affect the price you would receive if you sold your shares in the secondary market. Broker-dealers that maintain a secondary trading market for the Series C Preferred are not required to maintain this market, and the Fund is not required to redeem shares either if an auction or an attempted secondary market sale fails because of a lack of buyers. The Series C Preferred is not registered on a stock exchange or the NASDAQ stock market. If you sell your Series C Preferred to a broker-dealer between auctions, you may receive less than the price you paid for them, especially when market interest rates have risen since the last auction and during a special dividend period.
Ratings and Asset Coverage Risk. While it is a condition to the closing of the offering that Moody's assigns a rating of Aaa and S&P assigns a rating of AAA to the Series C Preferred, the ratings do not eliminate or necessarily mitigate the risks of investing in Series C Preferred. In addition, Moody's, S&P or another rating agency then rating the Series C Preferred could downgrade the Series C Preferred, which may make your shares less liquid at an auction or in the secondary market. If a rating agency rating the Series C Preferred at the Fund's request downgrades the Series C Preferred, the dividend rate on the Series C Preferred will be the applicable maximum rate based on the credit rating of the Series C Preferred, which will be a rate higher than is payable currently on the Series C Preferred. See "Description of the Series C Preferred - Rating Agency Guidelines" for a description of the asset maintenance tests the Fund must meet.
Restrictions on Dividends and other Distributions. Restrictions imposed on the declaration and payment of dividends or other distributions to the holders of the Fund's common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund's ability to maintain its qualification as a regulated investment company for federal income tax purposes. While the Fund intends to redeem its preferred stock (including the Series C Preferred) to enable the Fund to distribute its income as required to maintain its qualification as a regulated investment company under the Code, there can be no assurance that such actions can be effected in time to meet the Code requirements. See "Taxation" in the SAI.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the 1940 Act, which means the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. However, the Fund has in the past conducted and intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Code, which will relieve it of any liability for Federal income tax to the extent its earnings are distributed to shareholders. To qualify as a "regulated investment company," among other requirements, the Fund will limit its investments so that, with certain exceptions, at the close of each quarter of the taxable year:
o not more than 25% of the market value of its total assets will be invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of a single issuer or any two or more issuers that the Fund controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses, and
o at least 50% of the market value of the Fund's assets will be represented by cash, securities of other regulated investment companies, U.S. government securities 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 not more than 10% of the outstanding voting securities of such issuer.
The investments of the Fund in U.S. government securities are not subject to the foregoing limitations. As a non-diversified investment company, the Fund may invest in the securities of individual issuers to a greater degree than a diversified investment company. As a result, the Fund may be more vulnerable to events affecting a single issuer and therefore subject to greater volatility than a fund that is more broadly diversified. Accordingly, an investment in the Fund may present greater risk to an investor than an investment in a diversified company.
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, also sometimes referred to as "junk bonds," are predominately speculative and generally pay a premium above the yields of U.S. government securities or debt securities of investment grade issuers because they are subject to greater risks than these securities. These risks, which reflect their speculative character, include the following:
o greater volatility
o greater credit risk
o potentially greater sensitivity to general economic or industry conditions
o potential lack of attractive resale opportunities
(illiquidity)
o additional expenses to seek recovery from issuers who default
The market value of lower-rated securities may be more volatile than the market value of higher-rated securities and generally tends to reflect the market's perception of the creditworthiness of the issuer and short-term market developments to a greater extent than more highly rated securities, which reflect primarily fluctuations in general levels of interest rates.
Ratings are relative and subjective and not absolute standards of quality. Securities ratings are based largely on the issuer's historical financial condition and the rating agencies' analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition.
For a further description of lower rated securities and the risks associated therewith, see "Investment Objectives and Policies - Investment Practices" in the SAI. For a description of the ratings categories of certain recognized statistical ratings agencies, see Appendix A to this Prospectus.
FOREIGN SECURITIES
The Fund may invest up to 35% of its total assets in foreign securities. The risks which the Fund faces when it invests in securities of foreign companies and foreign governments include:
o fluctuations in exchange rates between the US dollar and foreign currencies
o unavailable or deficient information about an issuer, security or market
o lack of uniform financial reporting standards and other regulatory requirements
o expropriations, capital or currency controls, punitive taxes or nationalizations
o economic policy changes, social and political instability, military action and war
o changed circumstances in dealings between nations
o greater volatility and illiquidity of foreign securities
o costs incurred in connection with conversion between various currencies
o higher foreign brokerage commissions
o possible extended settlement period
o revaluations of currencies
o transfer taxes or transaction charges
o greater difficulty in protecting and enforcing the Fund's rights
Each of the above risks is more pronounced with respect to the Fund's investments in securities of companies and governments in the world's emerging (less developed) markets. For a further description of the Fund's investments in foreign securities, see "Investment Objectives and Policies - Investment Practices - Foreign Securities."
The Fund may purchase sponsored American Depository Receipts of U.S. denominated securities of foreign issuers, which shall not be included in the Fund's 35% foreign securities investment 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.
DEPENDENCE ON KEY PERSONNEL
The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory services with respect to the Fund's investments. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
RECENT DEVELOPMENTS
As a result of the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, some of the U.S. securities markets were closed for a four-day period. These terrorist attacks and related events have led to increased short-term market volatility and may have long-term effects on U.S. and world economies and markets. A similar disruption of financial markets could affect interest rates, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the Series C Preferred.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations are fundamental and may not be changed without the approval of the holders of a majority, as defined in the 1940 Act, of the outstanding shares of common stock and preferred stock voting together as a single class, and the approval of the holders of a majority, as defined in the 1940 Act, of the outstanding preferred stock, including the Series C Preferred, voting as a separate class. The Fund may become subject to guidelines that are more limiting than the investment restrictions set forth above in order to obtain and maintain ratings from Moody's or S&P on the Series C Preferred. See "Investment Restrictions" in the SAI for a complete list of the fundamental and non-fundamental investment policies of the Fund.
INTEREST RATE TRANSACTIONS
In order to reduce the impact of changes in the dividend rate of the Series C Preferred or obtain the equivalent of a fixed rate for the Series C Preferred that is lower than the Fund would have to pay if it issued fixed rate preferred shares, the Fund may enter into interest rate swap or cap transactions.
The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions. In an interest rate swap, the Fund would agree to pay to the other party to the interest rate swap (which is known as the "counterparty") periodically a fixed rate payment in exchange for the counterparty agreeing to pay to the Fund periodically a variable rate payment that is intended to approximate the Fund's variable rate payment obligation on the Series C Preferred. In an interest rate cap, the Fund would pay a premium to the counterparty to the interest rate cap and, to the extent that a specified variable rate index exceeds a predetermined fixed rate, would receive from the counterparty payments of the difference based on the notional amount of such cap. Interest rate swap and cap transactions introduce additional risk because the Fund would remain obligated to pay preferred stock dividends when due in accordance with the Articles Supplementary even if the counterparty defaulted. Depending on the general state of short-term interest rates and the returns on the Fund's portfolio securities at that point in time, such a default could negatively affect the Fund's ability to make dividend payments on the Series C Preferred. In addition, at the time an interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement will not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the Fund's ability to make dividend payments on the Series C Preferred. To the extent there is a decline in interest rates, the value of the interest rate swap or cap could decline, resulting in a decline in the asset coverage for the Series C Preferred. A sudden and dramatic decline in interest rates may result in a significant decline in the asset coverage. Under the Articles Supplementary, if the Fund fails to maintain the required asset coverage on the outstanding preferred stock (including the Series C Preferred) or fails to comply with other covenants, the Fund may be required to redeem some or all of these shares. The Fund may also choose to redeem some or all of the Series C Preferred at any time. Such redemption would likely result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Early termination of a swap could result in a termination payment by the Fund to the counterparty, while early termination of a cap could result in a termination payment to the Fund.
The Fund will usually enter into swaps or caps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The Fund intends to maintain in a segregated account with its custodian cash or liquid securities having a value at least equal to the value of the Fund's net payment obligations under any swap transaction, marked to market daily. The Fund does not presently intend to enter into interest rate swap or cap transactions relating to Series C Preferred in a notional amount in excess of the outstanding amount of the Series C Preferred.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the Fund's Board of Directors, and the day-to-day operations of the Fund are conducted through or under the direction of the officers of the Fund. Karl Otto Pohl, one of its Directors, is a resident of Germany, and substantially all of his assets are located outside of the United States. Mr. Pohl has not authorized an agent for service of process in the United States. Consequently, it may be difficult for investors to effect service of process upon him within the United States or to enforce, in United States courts, judgments against him obtained in such courts predicated on the civil liability provisions of the United States securities laws. In addition, there is doubt as to the enforceability in German courts of liabilities predicated solely upon the United States securities laws, whether or not such liabilities are based upon judgments of courts in the United States. For certain information regarding the Directors and officers of the Fund, see "Management of the Fund" in the SAI.
INVESTMENT ADVISER
The Investment Adviser, whose principal business address is One Corporate Center, Rye, New York 10580-1422, is a New York limited liability company which also serves as investment adviser to other closed-end investment companies and open-end investment companies with aggregate assets in excess of $26 billion as of March 31, 2002. The Investment Adviser is a registered investment adviser under the Investment Advisers Act of 1940. Mr. Mario J. Gabelli may be deemed a "controlling person" of the Investment Adviser on the basis of his controlling interest in the parent company of the Investment Adviser. The Investment Adviser has several affiliates that provide investment advisory services: GAMCO Investors, Inc. acts as investment adviser for individuals, pension trusts, profit-sharing trusts and endowments, and had assets under management of approximately $13.0 billion under its management as of March 31, 2002; Gabelli Advisers, Inc. acts as investment adviser to the Gabelli Westwood Funds with assets under management of approximately $548 million as of March 31, 2002; Gabelli Securities, Inc. acts as general partner or investment manager to certain alternative investments products, consisting primarily of risk arbitrage and merchant banking limited partnerships and offshore companies, with assets under management of approximately $605 million as of March 31, 2002; and Gabelli Fixed Income, LLC acts as investment adviser for the three portfolios of The Treasurer's Fund and separate accounts having assets under management of approximately $1.5 billion as of March 31, 2002.
The Investment Adviser has sole investment discretion for the Fund with respect to the Fund's portfolio under the supervision of the Fund's Board of Directors and in accordance with the Fund's stated policies. The Investment Adviser will select investments for the Fund and will place purchase and sale orders on behalf of the Fund. For its services, the Investment Adviser is paid a fee computed daily and paid monthly at an annual rate of 1.00% of the average weekly net assets of the Fund. The Investment Adviser is responsible for administration of the Fund and currently utilizes and pays the fees of a third party administrator. Notwithstanding the foregoing, the Investment Adviser will waive the portion of its investment advisory fee attributable to an amount of assets of the Fund equal to the aggregate stated value of the applicable series of its preferred stock for any calendar year in which the net asset value total return of the Fund allocable to the common stock, including distributions and the advisory fee subject to potential waiver, is less than (i) in the case of the Series A Preferred or Series B Preferred, the stated annual dividend rate of such series and (ii) in the case of the Series C Preferred, the dividend rate for the Series C Preferred at the beginning of such year (including the anticipated cost of a swap or cap if the Fund hedges its Series C Preferred dividend obligations), in every case prorated during the year such series is issued and the final year such series is outstanding). For additional information regarding the Investment Adviser, see "Management of the Fund - The Investment Adviser" in the SAI.
Non-U.S. shareholders should note that there may be difficulty enforcing any legal rights against the Investment Adviser because it is resident only in the U.S. and all of its assets are situated in the U.S.
PORTFOLIO MANAGEMENT
Mario J. Gabelli, who is Chief Investment Officer of the Investment Adviser, has managed the Fund's assets since its inception. In addition, over the past five years, Mr. Gabelli has served as Chairman of the Board and Chief Executive Officer of Gabelli Asset Management Inc.; Chief Investment Officer of GAMCO Investors, Inc.; Chairman of the Board and Chief Executive Officer of Lynch Corporation, a diversified manufacturing company, and Lynch Interactive Corporation, a multimedia and communications services company; and Director of Spinnaker Industries, Inc., a manufacturing company.
A portion of the Fund's foreign holdings are managed by Caesar Bryan. For the past five years, Mr. Bryan has served as the portfolio manager of the Gabelli International Growth Fund and as co-manager of the Gabelli Global Opportunity Fund and the Gabelli Global Growth Fund.
SUB-ADMINISTRATOR
The Investment Adviser has certain administrative responsibilities to the Fund under its Advisory Agreement with the Fund. The Investment Adviser has retained PFPC, Inc. as Sub- Administrator to provide certain administrative services necessary for the Fund's operations other than those performed by the Investment Adviser under its Advisory Agreement. These services include, but are not limited to, supplying the Investment Adviser with office facilities, statistical and research data, data processing services, clerical, accounting and bookkeeping services, internal audit and regulatory administration services, the preparation and distribution of materials for meetings of the Fund's Board of Directors, compliance testing of the Fund's activities and the preparation of stockholder reports, tax returns and other regulatory filings. For such services by the Sub-Administrator, the Investment Adviser pays the Sub-Administrator a monthly fee based upon the aggregate average daily net assets of certain funds advised by the Investment Adviser, including the Fund, as follows: .0275% on aggregate net assets under administration of $0-$10 billion, .0125% on aggregate net assets under administration of $10-$15 billion and .0100% on aggregate net assets under administration over $15 billion, which together with services rendered, is subject to re-negotiation if net assets under administration exceed $20 billion. The Investment Adviser also reimburses the Sub-Administrator for certain out-of-pocket expenses incurred by the Sub-Administrator as a result of its duties under the sub-administrative agreement. The Sub- Administrator has its principal office located at 3200 Horizon Drive, King of Prussia, Pennsylvania 19406.
PAYMENT OF EXPENSES
For purposes of the calculation of the fees payable to the Investment Adviser by the Fund, average weekly net assets of the Fund are determined at the end of each month on the basis of its average net assets for each week during the month. The assets for each weekly period are determined by averaging the net assets at the end of a week with the net assets at the end of the prior week.
The Investment Adviser will be obligated to pay expenses associated with providing the services contemplated by the Advisory Agreement including compensation of and office space for its officers and employees connected with investment and economic research, trading and investment management and administration of the Fund, as well as the fees of all Directors of the Fund who are affiliated with the Investment Adviser. The Fund pays all other expenses incurred in its operation including, among other things, expenses for legal and independent accountants' services, costs of printing proxies, stock certificates and shareholder reports, rating agency fees, charges of the custodian, any subcustodian and transfer and dividend paying agent, Securities and Exchange Commission fees, fees and expenses of unaffiliated Directors, accounting and pricing costs, membership fees in trade associations, fidelity bond coverage for its officers and employees, directors' and officers' errors and omission insurance coverage, interest, brokerage costs, taxes, stock exchange listing fees and expenses, expenses of qualifying its shares for sale in various states, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund.
PORTFOLIO TRANSACTIONS
Principal transactions are not entered into with affiliates of the Fund. However, Gabelli & Company, Inc., an affiliate of the Investment Adviser, may execute portfolio transactions on stock exchanges and in the over-the-counter markets on an agency basis and receive a stated commission therefor. For a more detailed discussion of the Fund's brokerage allocation practice, see "Portfolio Transactions" in the SAI.
DIVIDEND AND DISTRIBUTION POLICY
DISTRIBUTION POLICY
The Fund's policy is to make quarterly distributions of $0.27 per share at the end of each of the first three calendar quarters of each year to holders of its common stock. The Fund's distribution in December for each calendar year is an adjusting distribution (equal to the sum of 2.5% of the net asset value of the Fund as of the last day of the four preceding calendar quarters less the aggregate distributions of $0.81 per share made for the most recent three calendar quarters) in order to meet the Fund's 10% pay-out goal.
The dividend policy of the Fund may be modified from time to time by the Board of Directors. As a regulated investment company under the Code, the Fund will not be subjected to U.S. Federal income tax on its net investment income that it distributes to shareholders, provided that at least 90% of its net investment income for the taxable year is distributed to its shareholders.
The Fund, along with other closed-end registered investment
companies advised by the Investment Adviser has obtained an exemption from
Section 19(b) of the 1940 Act and Rule 19b-1 thereunder permitting the Fund
to make periodic distributions of long-term capital gains provided that the
Fund maintains distribution policies with respect to the common stock and
preferred stock calling for periodic distributions over a specified period
of time in an amount equal to a fixed dollar amount or percentage of the
Fund's average net asset value or market price per share of common stock
or, in the case of the preferred stock, in accordance with its terms. If
the total distributions required by the proposed periodic pay-out policy
exceed the Fund's net investment income and net capital gains, the excess
will be treated as a return of capital. If the Fund's net investment
income, net short-term capital gains and net long-term capital gains for
any year exceed the amount required to be distributed under the proposed
periodic pay-out policy, the Fund generally intends to pay such excess once
a year, but may, in its discretion, retain and not distribute net long-term
capital gains to the extent of such excess.
DESCRIPTION OF THE SERIES C PREFERRED
The following is a brief description of the terms of the Series C Preferred. This description does not purport to be complete and is qualified by reference to the Fund's Charter, including the provisions of the Articles Supplementary establishing the Series C Preferred. For complete terms of the Series C Preferred, including definitions of terms used in this Prospectus, please refer to the actual terms of the Series C Preferred, which are set forth in the Articles Supplementary.
GENERAL
Under the Articles Supplementary, the Fund is authorized to issue up to 6,000 shares of Series C Preferred. No fractional Series C Preferred shares will be issued. In addition, as of March 31, 2002, there were outstanding 5,367,900 shares of Series A Preferred and 6,600,000 shares of Series B Preferred. The Board of Directors reserves the right to issue additional shares of preferred stock, including Series C Preferred, from time to time, subject to the restrictions in the Articles Supplementary and the 1940 Act.
The Series C Preferred will have a liquidation preference of $25,000 per share. Upon a liquidation, each holder of Series C Preferred will be entitled to receive an amount per share equal to the liquidation preference plus any accumulated but unpaid dividends (whether or not earned or declared) to the date of distribution. The Series C Preferred will rank on a parity with shares of any other series of preferred stock of the Fund as to the payment of dividends and the distribution of assets upon liquidation. The Series C Preferred carries one vote per share on all matters on which such shares are entitled to vote. The Series C Preferred will, upon issuance, be fully paid and nonassessable and will have no preemptive, exchange or conversion rights. Any Series C Preferred 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 capital stock of the Fund from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or terms or conditions of redemption. The Fund will not issue any class of stock senior to the Series C Preferred.
RATING AGENCY GUIDELINES
The Fund is required under Moody's and S&P guidelines to maintain assets having in the aggregate a discounted value at least equal to the Series C Preferred Basic Maintenance Amount (as defined below) with respect to the separate guidelines Moody's and S&P have each established for determining discounted value. To the extent any particular portfolio holding does not satisfy the applicable rating agency's guidelines, all or a portion of such holding's value will not be included in the calculation of discounted value (as defined by the rating agency). The Moody's and S&P guidelines also impose certain diversification requirements and industry concentration limitations on the Fund's overall portfolio, and apply specified discounts to securities held by the Fund (except certain money market securities). The "Series C Preferred Basic Maintenance Amount" includes the sum of (i) the aggregate liquidation preference of the preferred stock then outstanding plus (to the extent not included in the liquidation preference of such preferred stock) an amount equal to the aggregate accumulated but unpaid dividends (whether or not earned or declared) in respect of such preferred stock, (ii) the total principal of any senior debt (plus accrued and projected dividends), (iii) certain Fund expenses and (iv) certain other current liabilities.
If the Fund does not timely cure a failure to maintain a discounted value of its portfolio equal to the Series C Preferred Basic Maintenance Amount in accordance with the requirements of the applicable rating agency or agencies then rating the Series C Preferred, the Fund will be required to redeem preferred stock, including the Series C Preferred, as described below under "Description of the Series C Preferred - Redemption."
The Fund may, but is not required to, adopt any modifications to the guidelines that may hereafter be established by Moody's or S&P. Failure to adopt any such modifications, however, may result in a change in the ratings or a withdrawal of the ratings altogether. In addition, any rating agency providing a rating for the Series C Preferred may, at any time, change or withdraw any such rating. The Board of Directors, without further action by the stockholders, may amend, alter, add to or repeal certain of the definitions and related provisions that have been adopted by the Fund pursuant to the rating agency guidelines if the Board determines that such modification is necessary to prevent a reduction in rating of the shares of preferred stock by Moody's and/or S&P, as the case may be, is in the best interests of the holders of shares of common stock and is not adverse to the holders of preferred stock in view of advice to the Fund by Moody's and S&P (or such other rating agency then rating the Series C Preferred at the request of the Fund) that such modification would not adversely affect its then current rating of the Series C Preferred.
The Board of Directors may amend the Articles Supplementary definition of "Maximum Rate" (the "maximum applicable rate" as defined below under "-- Dividends -- Maximum Applicable Rate") to increase the percentage amount by which the "Reference Rate" (as defined in the Articles Supplementary) is multiplied to determine the maximum applicable rate without the vote or consent of the holders of Series C Preferred or any other stockholder of the Fund, but only after consultation with the broker-dealers and with confirmation from each applicable rating agency that the Fund could meet the Series C Preferred Basic Maintenance Amount Test immediately following any such increase.
As described by Moody's and S&P, the Series C Preferred's rating is an assessment of the capacity and willingness of the Fund to pay Series C Preferred obligations. The ratings on the Series C Preferred are not recommendations to purchase, hold or sell Series C Preferred, inasmuch as the ratings do not comment as to market price or suitability for a particular investor. The rating agency guidelines also do not address the likelihood that an owner of Series C Preferred will be able to sell such shares in an auction or otherwise. The ratings are based on current information furnished to Moody's and S&P by the Fund and the Investment Adviser and information obtained from other sources. The ratings may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information.
The rating agency guidelines will apply to the Series C Preferred only so long as such rating agency is rating these shares at the request of the Fund. The Fund will pay fees to Moody's and S&P for rating the Series C Preferred.
ASSET MAINTENANCE REQUIREMENTS
In addition to the requirements summarized under "- Rating Agency Guidelines" above, the Fund must also satisfy asset maintenance requirements under the 1940 Act with respect to its preferred stock.
The Fund will be required under the Articles Supplementary to determine as of the last business day of each week, or such other date as the Fund and the rating agencies then rating the Series C Preferred at the Fund's request may determine, that "asset coverage" (as defined in the 1940 Act) exists 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 Series C Preferred. If the Fund fails to maintain the asset coverage required under the 1940 Act on such dates and such failure is not cured within 10 days, the Fund will be required under certain circumstances to redeem shares of preferred stock (including Series C Preferred) sufficient to satisfy such asset coverage. See "- Redemption" below.
If the Series C Preferred offered hereby had been issued and sold as of March 31, 2002, the asset coverage required under the 1940 Act immediately following such issuance and sale (after giving effect to the deduction of the underwriting discounts and estimated offering expenses for such shares of $[1,800,000]), would have been computed as follows:
value of Fund assets less liabilities not constituting senior securities ($1,604,976,614) / senior securities representing indebtedness plus liquidation preference of each class of preferred stock ($429,197,500), expressed as a percentage = 374%.
DIVIDENDS
General. The following is a general description of dividends and dividend rate periods. See the SAI for a more detailed discussion of this topic. The holders of Series C Preferred are entitled to receive cash dividends at annual rates that will vary from dividend period to dividend period. The dividend rate for the initial dividend period for the Series C Preferred offered in this Prospectus will be the rate set out on the cover of this Prospectus. For subsequent dividend periods, the Series C Preferred will pay dividends based on a rate set at the auction, normally held weekly, but the rates set at the auction will not exceed the maximum applicable rate. Dividend periods generally will be seven days, and the dividend periods generally will begin on the first business day after an auction. In most instances, dividends are also paid weekly, on the business day following the end of the dividend period. The Fund, subject to some limitations, may change the length of the dividend periods, designating them as "special dividend periods," as described below.
Dividend Payments. Except as described below, the dividend payment
date will be the first business day after the dividend period ends. The
dividend payment dates for special dividend periods of more than seven days
will be set out in the notice designating a special dividend period. See "
- Designation of Special Dividend Periods" for a discussion of payment
dates for a special dividend period.
Dividends on Series C Preferred will be paid on the dividend payment date to holders of record as their names appear on the Fund's stock ledger or stock records on the business day next preceding the dividend payment date. If dividends are in arrears, they may be declared and paid at any time to holders of record as their names appear on the Fund's stock ledger or stock records on such date, not more than 15 days before the payment date, as the Fund's Board of Directors may fix.
The Depository Trust Company, in accordance with its current procedures, is expected to credit in same-day funds on each dividend payment date dividends received from the Fund to the accounts of broker-dealers who act on behalf of holders of the Series C Preferred. Such broker-dealers, in turn, are expected to distribute dividend payments to the person for whom they are acting as agents. If a broker-dealer does not make dividends available to Series C Preferred holders in same-day funds, these stockholders will not have funds available until the next business day.
Dividend Rate Set at Auction. The Series C Preferred pays dividends based on a rate set at auction and Series C Preferred may be bought and sold at the auction. The auction usually is held weekly, but may be held less frequently. The Bank of New York, the auction agent, reviews orders from broker-dealers on behalf of existing holders that wish to sell, hold at the auction rate, or hold only at a specified dividend rate, and on behalf of potential holders that wish to buy Series C Preferred. The auction agent then determines the lowest dividend rate that will result in all of the Series C Preferred continuing to be held. See "The Auction."
If an auction is not held because an unforeseen event or unforeseen events cause a day that otherwise would have been an auction date not be to a business day, then the length of the then current dividend period shall be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events), the applicable rate for such period shall be the applicable rate for the then current dividend period so extended and the dividend payment date for such dividend period shall be the first business day next succeeding the end of such period.
Determination of Dividend Rates. The Fund computes the dividends per share by multiplying the dividend rate determined at the auction by a fraction, the numerator of which normally is seven and the denominator of which normally is 360. This rate is then multiplied by $25,000 to arrive at the dividend per share. The numerator may be different if the dividend period includes a holiday.
If an auction for any subsequent dividend rate period of the Series C Preferred is not held for any reason other than as described below, the dividend rate on those shares will be the maximum applicable rate on the auction date for that subsequent dividend period.
Maximum Applicable Rate. The dividend rate that results from an
auction for the Series C Preferred will not be greater than the "maximum
applicable rate." The maximum applicable rate means (i) in the case of a
dividend period of 184 days or less, the applicable percentage of the "AA"
Financial Composite Commercial Paper Rate on the date of such auction
determined as set forth in the following chart based on the lower of the
credit ratings assigned to the Series C Preferred by Moody's and S&P or
(ii) in the case of a dividend period of longer than 184 days, the
applicable percentage of the Treasury Index Rate.
Moody's Credit Rating S&P Credit Rating Applicable Percentage
--------------------- ----------------- ---------------------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 175%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
|
The "Treasury Index Rate" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities having the same number of 30-day periods to maturity as the length of the applicable dividend period, determined, to the extent necessary, by linear interpolation based upon the yield for such securities having the next shorter and next longer number of 30-day periods to maturity treating all dividend periods with a length greater than the longest maturity for such securities as having a length equal to such longest maturity, in all cases based upon data set forth in the most recent weekly statistical release published by the Board of Governors of the Federal Reserve System (currently in H.15 (519)); provided, however, if the most recent such statistical release shall not have been published during the 15 days preceding the date of computation, the foregoing computations shall be based upon the average of comparable data as quoted to the Fund by at least three recognized dealers in U.S. Government Securities selected by the Fund. There is no minimum applicable dividend rate in respect of any dividend period.
There is no minimum applicable dividend rate in respect of any dividend period.
Effect of Failure to Pay Dividends in a Timely Manner. If the Fund fails to pay the paying agent the full amount of any dividend for Series C Preferred in a timely manner, but the Fund cures the failure and pays any late charge before 12:00 noon, New York City time on the third business day following the date the failure occurred, no auction will be held for the Series C Preferred for the first subsequent dividend period thereafter, and the dividend rate for the Series C Preferred for that subsequent dividend period will be the maximum applicable rate.
However, if the Fund does not effect a timely cure, no auction will be held for the Series C Preferred for the first subsequent dividend period thereafter - and for any subsequent dividend period to and including the dividend period during which the failure is cured and the late charge is paid - and the dividend rate for the Series C Preferred for each such subsequent dividend period will be the default rate.
The default rate means 300% of the applicable "AA" Financial Composite Commercial Paper Rate for a dividend period of fewer than 184 days and 300% of the applicable Treasury Index Rate for a dividend period of 184 days or more. Late charges are also calculated at the applicable default rate.
Restrictions on Dividends and Other Distributions. When the Fund has any Series C Preferred outstanding, the Fund may not pay any dividend or distribution (other than a dividend or distribution paid in shares, or options, warrants or rights to subscribe for or purchase, common shares) in respect of the common shares or call for redemption, redeem, purchase or otherwise acquire for consideration any common shares (except by conversion into or exchange for shares of the Fund ranking junior to the Series C Preferred as to the payment of dividends and the distribution of assets upon liquidation), unless (i) it has paid all cumulative dividends on the Series C Preferred; (ii) the Fund has redeemed any shares of Series C Preferred that it has called for mandatory redemption; and (iii) after paying the dividend, the Fund meets applicable asset coverage requirements described under " - Rating Agency Guidelines" and "- Asset Maintenance Requirements."
No full dividend shall be declared or paid or set apart for payment on the Series C Preferred for any dividend period or part thereof, unless full cumulative dividends due through the most recent dividend payment dates therefor for all series of preferred stock of the Fund ranking on a parity with the Series C Preferred as to the payment of dividends have been or contemporaneously are declared and paid on all such outstanding shares of preferred stock. If full cumulative dividends due have not been paid on all shares of preferred stock of the Fund ranking on a parity with the Series C Preferred as to the payment of dividends, any dividends being paid on the shares of such preferred stock (including the Series C Preferred) shall be paid as nearly pro rata as possible on all outstanding shares of such preferred stock on the dividend payment dates therefor in proportion to the respective amounts of dividends accumulated but unpaid on each such series of preferred stock.
DESIGNATION OF SPECIAL DIVIDEND PERIODS
The Fund may instruct the auction agent to hold auctions and pay dividends less frequently than weekly. The Fund may do this if, for example, the Fund expects that short-term rates might increase or market conditions otherwise change, in an effort to optimize the effect of the Fund's leverage on holders of its common shares. The Fund does not currently expect to hold auctions and pay dividends less frequently than weekly in the near future. If the Fund designates a special dividend period, changes in interest rates could affect the price received if shares of Series C Preferred are sold in the secondary market.
Any designation of a special dividend period will be effective only if (i) notice thereof shall have been given as provided for in the Charter, (ii) any failure to pay in a timely matter to the auction agent the full amount of any dividend on, or the redemption price of, the Series C Preferred shall have been cured as provided for in the Charter, (iii) the auction immediately preceding the special dividend period was not a failed auction, (iv) the Fund shall have deposited with the paying agent all funds necessary for redemption if the Fund shall have mailed a notice of redemption with respect to Series C Preferred, and (v) the Fund has confirmed that as of the auction date next preceding the first day of such special dividend period, it has assets with an aggregate discounted value at least equal to the Series C Preferred Basic Maintenance Amount (as defined below), and the Fund has consulted with the broker-dealers and has provided notice of such designation and a Series C Preferred Basic Maintenance Report to each rating agency.
The dividend payment date for any special dividend period will be the first business day after the end of the special dividend period. In addition, for special dividend periods of (x) at least 91 days but not more than one year, dividend payment dates will occur on the 91st, 181st and 271st days within such dividend period, if applicable, and on the business day following the last day of such dividend period and (y) of more than one year, dividend payment dates will occur on each March 26, June 26, September 26 and December 26 during the special dividend period.
Before the Fund designates a special dividend period: (x) at least seven business days (or two business days in the event the duration of the dividend period prior to such special dividend period is less than eight days) and not more than 30 business days before the first day of the proposed special dividend period, the Fund shall issue a press release stating its intention to designate a special dividend period and inform the auction agent of the proposed special dividend period by telephonic or other means and confirm it in writing promptly thereafter and (y) the Fund must inform the auction agent of the proposed special dividend period by 3:00 p.m., New York City time on the second business day before the first day of the proposed special dividend period.
See the SAI for more information.
REDEMPTION
Mandatory Redemption Relating to Asset Coverage Requirements. The Fund will be required to redeem preferred stock (including, at its discretion, the Series C Preferred) in the event that:
o the Fund fails to maintain the asset coverage requirements specified under the 1940 Act and such failure is not cured on or before 10 days following such failure; or
o the Fund fails to maintain the asset coverage requirements as calculated in accordance with the applicable rating agency guidelines as of any valuation date, and such failure is not cured on or before 10 business days after such valuation date.
The redemption price for the Series C Preferred subject to mandatory redemption will be $25,000 per share, plus an amount equal to any accumulated but unpaid dividends (whether or not earned or declared) to the date fixed for redemption, plus (in the case of the Series C Preferred having a dividend period of more than one year) any applicable redemption premium determined by the Board of Directors.
The number of shares of preferred stock that will be redeemed in the case of a mandatory redemption will equal the minimum number of outstanding shares of preferred stock the redemption of which, if such redemption had occurred immediately prior to the opening of business on the applicable cure date, would have resulted in the relevant asset coverage requirement having been met or, if the required asset coverage cannot be so restored, all of the shares of preferred stock. In the event that shares of preferred stock are redeemed due to a failure to satisfy the 1940 Act asset coverage requirements, the Fund may, but is not required to, redeem a sufficient number of shares of preferred stock so that the Fund's assets exceed the asset coverage requirements under the 1940 Act after the redemption by 10% (that is, 220% asset coverage). In the event that shares of preferred stock are redeemed due to a failure to satisfy applicable rating agency guidelines, the Fund may, but is not required to, redeem a sufficient number of shares of preferred stock so that the Fund's discounted portfolio value (as determined in accordance with the applicable rating agency guidelines) after redemption exceeds the rating agency guidelines' asset coverage requirements by up to 10%. In addition, as discussed under "-Optional Redemption" below, the Fund generally may exercise its optional redemption rights with respect to the Series C Preferred at any time.
If the Fund does not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of 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 from each holder whose shares are to be redeemed ratably in proportion to the sum of the respective liquidation preferences and amounts of accrued but unpaid dividends of such shares, 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.
If fewer than all shares of the preferred stock are to be redeemed, the Fund, at its discretion will select the series of preferred stock from which shares will be redeemed. If fewer than all of the shares of a series of preferred stock are to be redeemed, such redemption will be made as among the holders of that series pro rata in accordance with the respective number of shares of such series held by each such holder on the record date for such redemption. If fewer than all shares of the 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.
Optional Redemption. To the extent permitted under the 1940 Act and Maryland law, the Fund generally may, on not less than 15 calendar days and not more than 40 calendar days notice, redeem Series C Preferred, in whole or part, in the case of (i) a dividend period of one year or less, on the next business day after the last day of such dividend period for cash at a price per share equal to $25,000 per share plus accumulated and unpaid dividends (whether or not earned or declared) to the redemption date on the next business day after the last day of such dividend period and (ii) in the case of a dividend period of more than one year, on any business day prior to the end of the relevant dividend period for the amount per share set forth in (i) subject to any specific redemption provisions applicable to such dividend period on any business day prior to the end of the relevant dividend period, which may include the payment of a redemption premium determined by the Board of Directors. 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 preferred stock selected for redemption not less than 15 or more than 40 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 preferred stock to be redeemed, (iii) the CUSIP number(s) of such shares, (iv) the redemption price (specifying the amount of accumulated dividends to be included therein), (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 Series C Preferred then outstanding will be entitled to receive out of the assets of the Fund available for distribution to stockholders, after satisfying claims of creditors but before any distribution or payment of assets is made to holders of the common stock or any other class of stock of the Fund ranking junior to the Series C Preferred as to liquidation payments, a liquidation distribution in the amount of $25,000 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), and such holders will be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up. If, upon any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the holders of all outstanding shares of preferred stock of the Fund ranking on a parity with the Series C Preferred as to payment upon liquidation will be insufficient to permit the payment in full to such holders of the Series C Preferred and other parity preferred stock of the amounts due upon liquidation with respect to such shares, then such available assets will be distributed among the holders of the Series C Preferred and such other parity preferred stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the liquidation payments due to holders of the Series C Preferred and such other parity preferred stock have been paid in full, no dividends or distributions will be made to holders of the common stock or any other stock of the Fund ranking junior to the Series C Preferred and other parity preferred stock as to liquidation.
VOTING RIGHTS
Except as otherwise stated in this Prospectus, specified in the Fund's Charter or as otherwise required by applicable law, holders of the Series C Preferred, along with holders of other series of preferred stock, will be entitled to one vote per share on each matter submitted to a vote of stockholders and will vote together with holders of shares of common stock and of any other preferred stock then outstanding as a single class.
In connection with the election of the Fund's directors, holders of the Series C Preferred and the other series of preferred stock, voting together 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 the Series C Preferred and other series of preferred stock, voting together as a single class. In addition, if (i) at any time dividends on outstanding shares of the Series C Preferred and/or any other preferred stock are unpaid in an amount equal to at least two full years' dividends thereon and sufficient cash or specified securities shall not have been deposited with the paying agent for the payment of such accumulated dividends or (ii) at any time holders of any other series of preferred stock are entitled to elect a majority of the directors of the Fund under the 1940 Act or the Articles Supplementary creating such shares, 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 the Series C Preferred and other series of 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 the Series C Preferred and the other series of preferred stock, voting together as a single class, at a special meeting of stockholders which will be called as soon as practicable and will be held not less than 10 or more than 20 days after the mailing date of the meeting notice. If the Fund fails to send such meeting notice or to call such a special meeting, the meeting may be called by any preferred stockholder on like notice. 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 preferred stock for all past dividend periods or the holders of other series of preferred stock are no longer entitled to elect such additional directors, the additional voting rights of the holders of the preferred stock as described above will cease, and the terms of office of all of the additional or replacement directors elected by the holders of the 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 preferred stock have the right to elect as a separate class in any event) will terminate at the earliest time permitted by law.
So long as shares of Series C Preferred are outstanding, the Fund will not, without the affirmative vote of the holders of a majority (as defined in the 1940 Act) of the shares of preferred stock outstanding at the time (including the preferred shares), voting separately as one class, amend, alter or repeal the provisions of the Fund's 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 preferred stock. Also, to the extent permitted under the 1940 Act, in the event shares of more than one series of preferred stock are outstanding, the Fund shall not approve any of the actions set forth in the preceding sentence which materially adversely affect the contract rights expressly set forth in the Charter of a holder of shares of a series of preferred stock (such as the Series C Preferred) differently than those of a holder of shares of any other series of preferred stock without the affirmative vote of the holders of at least a majority of the shares of preferred stock of each series materially adversely affected and outstanding at such time (each such materially adversely affected series voting separately as a class to the extent its rights are affected differently). Unless a higher percentage is provided for under the Charter or applicable provisions of Maryland General Corporation Law, the affirmative vote of a majority of the votes entitled to be cast by holders of outstanding shares of the preferred stock (including the Series C Preferred), voting together as a single 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. For purposes of this paragraph, except as otherwise required under the 1940 Act, the phrase "vote of the holders of a majority of the outstanding shares of preferred stock" means, in accordance with Section 2(a)(42) of the 1940 Act, the vote, at the annual or a special meeting of the stockholders of the Fund duly called (i) of 67% or more of the shares of preferred stock present at such meeting, if the holders of more than 50% of the outstanding shares of preferred stock are present or represented by proxy or (ii) more than 50% of the outstanding shares of preferred stock, whichever is less. The class vote of holders of shares of the preferred stock described above in each case will be in addition to a separate vote of the requisite percentage of shares of common stock, Series C Preferred and any other preferred stock, voting together as a single class, that may be necessary to authorize the action in question.
The calculation of the elements and definitions of certain terms of the rating agency guidelines may be modified by action of the Board of Directors without further action by the stockholders if the Board determines that such modification is necessary to prevent a reduction in rating of the shares of preferred stock by Moody's and/or S&P, (or any other rating agency then rating the Series C Preferred at the request of the Fund), as the case may be, is in the best interests of the holders of shares of common stock and is not adverse to the holders of preferred stock in view of advice to the Fund by the relevant rating agencies that such modification would not adversely affect its then current rating of the preferred stock.
The foregoing voting provisions will not apply to any Series C Preferred 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 redeemed or called for redemption and sufficient cash or cash equivalents provided to the paying agent to effect such redemption. The holders of Series C Preferred 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 Series C Preferred is 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 Series C Preferred is outstanding, subject to receipt of approval from Moody's and S&P, 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 Series C Preferred, 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 preferred stock of the Fund then outstanding (including the Series C Preferred) and all indebtedness of the Fund constituting senior securities and no such additional preferred stock will have any preference or priority over any other preferred stock of the Fund upon the distribution of the assets of the Fund or in respect of the payment of dividends.
REPURCHASE OF PREFERRED SHARES
The Fund is a closed-end investment company and, as such, holders of the Series C Preferred do not, and will not, have the right to redeem their shares of the Fund. The Fund, however, may repurchase Series C Preferred 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.
THE AUCTION
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures, which are described in more detail in the SAI. These auction procedures are complicated, and there are exceptions to these procedures. Many of the terms in this section have a special meaning. Any terms in this section not defined have the meaning assigned to them in the SAI and the SAI Glossary. The auctions determine the dividend rate for the Series C Preferred, but each dividend rate will not be higher than the maximum applicable rate. See "Description of the Series C Preferred - Dividends." You may buy, sell or hold shares of Series C Preferred in the auction.
If you own shares of Series C Preferred, you may instruct, orally or in writing, a broker-dealer to enter an order in the auction. Existing holders of Series C Preferred can enter three kinds of orders regarding their Series C Preferred: sell, bid and hold.
If you enter a sell order, you indicate that you want to sell Series C Preferred at $25,000 per share, no matter what the next dividend period's rate will be.
If you enter a bid (or "hold at a rate") order, you indicate that you want to sell Series C Preferred only if the next dividend period's rate is less than the rate you specify.
If you enter a hold order, you indicate that you want to continue to own Series C Preferred, no matter what the next dividend period's rate will be.
You may enter different types of orders for your Series C Preferred, as well as orders for additional Series C Preferred. All orders must be for whole shares. All orders you submit are irrevocable. There is a fixed number of Series C Preferred shares, and the dividend rate likely will vary from auction to auction depending on the number of bidders, the number of shares the bidders seek to buy, and general economic conditions including current interest rates. If you own Series C Preferred and submit a bid higher than the maximum applicable rate, your bid will be treated as a sell order. If you do not enter an order, the broker-dealer will assume that you want to continue to hold Series C Preferred, but if you fail to submit an order and the dividend period is longer than 28 days, the broker-dealer will treat your failure to submit a bid as a sell order.
If you do not then own Series C Preferred, or want to buy more shares, you may instruct a broker-dealer to enter a bid order to buy shares in an auction at $25,000 per share at or above a specified dividend rate. If your bid specifies a rate higher than the maximum applicable rate, your order will not be accepted.
Broker-dealers will submit orders from existing and potential holders of Series C Preferred to the auction agent. Neither the Fund nor the auction agent will be responsible for a broker-dealer's failure to submit orders from existing or potential holders of Series C Preferred. A broker-dealer's failure to submit orders for Series C Preferred held by it or its customers will be treated in the same manner as a holder's failure to submit an order to the broker-dealer. A broker-dealer may submit orders to the auction agent for its own account provided it is not an affiliate of the Fund. Neither the Fund nor the Investment Adviser may submit an order in any auction, except that any broker-dealer that is an affiliate of the Fund or the Investment Adviser may submit orders in an auction, but only if such orders are not for its own account.
The auction agent after each auction for the Series C Preferred will pay to each broker-dealer, from funds provided by the Fund, a service charge equal to, in the case of any auction immediately preceding a dividend period of less than one year, the product of (a) a fraction, the numerator of which is the number of days in such dividend period and the denominator of which is 365, times (b) 1/4 of 1%, times (c) $25,000 times (d) the aggregate number of Series C Preferred shares placed by such broker-dealer at such auction, or, in the case of any auction immediately preceding a dividend period of one year or longer, a percentage of the purchase price of the Series C Preferred placed by the broker-dealers at the auction agreed to by the Fund and the broker-dealers.
If the number of Series C Preferred shares subject to bid orders with a dividend rate equal to or lower than the maximum applicable rate is at least equal to the number of Series C Preferred shares subject to sell orders, then the dividend rate for the next dividend period will be the lowest rate submitted which, taking into account that rate and all lower rates submitted in order from existing and potential holders, would result in existing and potential holders owning all the Series C Preferred available for purchase in the auction.
If the number of Series C Preferred shares subject to bid orders with a dividend rate equal to or lower than the maximum applicable rate ss than the number of Series C Preferred shares subject to sell orders, then the auction is considered to be a failed auction, and the dividend rate will be the maximum applicable rate. In that event, existing holders that have submitted sell orders (or are treated as having submitted sell orders) may not be able to sell any or all of the Series C Preferred for which they submitted sell orders.
The auction agent will not accept a bid above the maximum applicable rate. The purpose of the maximum applicable rate is to place an upper limit on dividends with respect to the Series C Preferred and in so doing to help protect the earnings available to pay dividends on common shares, and to serve as the dividend rate in the event of a failed auction (that is, an auction where there are more shares of Series C Preferred offered for sale than there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all outstanding shares of Series C Preferred, the auction is considered an "all hold" auction and the dividend rate for the next dividend period will be the "all hold rate," which is 80% of the "AA" Financial Composite Commercial Paper Rate.
The auction procedures include a pro rata allocation of the Series C Preferred shares for purchase and sale. This allocation process may result in an existing holder continuing to hold or selling, or a potential holder buying, fewer shares than the number of the Series C Preferred shares in its order. If this happens, broker-dealers will be required to make appropriate pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day (which also is a dividend payment date) after the auction date through The Depository Trust Company. Purchasers will pay for their Series C Preferred through broker-dealers in same-day funds to The Depository Trust Company against delivery to the broker-dealers. The Depository Trust Company will make payment to the sellers' broker-dealers in accordance with its normal procedures, which require broker-dealers to make payment against delivery in same-day funds. As used in this Prospectus, a business day is a day on which the NYSE is open for trading, and which is not a Saturday, Sunday or any other day on which banks in New York City are authorized or obligated by law to close.
The first auction for Series C Preferred will be held on , 2002, the business day preceding the dividend payment date for the initial dividend period. Thereafter, except during special dividend periods, auctions for Series C Preferred normally will be held every Tuesday (or the next preceding business day if Tuesday is a holiday), and each subsequent dividend period for the Series C Preferred normally will begin on the following Wednesday.
The following is a simplified example of how a typical auction works. Assume that the Fund has 1,000 outstanding Series C Preferred shares and three current holders. The three current holders and three potential holders submit orders through broker-dealers at the auction:
Current Holder A Owns 500 shares, wants to sell all 500 Bid order of 2.1% rate for all
shares if auction rate is less than 2.1% 500 shares
Current Holder B Owns 300 shares, wants to hold Hold order - will take the
auction rate
Current Holder C Owns 200 shares, wants to sell all 200 Bid order of 1.9% rate for all
shares if auction rate is less than 1.9% 200 shares
Potential Holder D Wants to buy 200 shares Places order to buy at or above
2.0%
Potential Holder E Wants to buy 300 shares Places order to buy at or above
1.9%
Potential Holder F Wants to buy 200 shares Places order to buy at or above
2.1%
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The lowest dividend rate that will result in all 1,000 Series C Preferred shares continuing to be held is 2.0% (the offer by D). Therefore, the dividend rate will be 2.0%. Current holders B and C will continue to own their shares. Current holder A will sell its shares because A's dividend rate bid was higher than the dividend rate. Potential holder D will buy 200 shares and potential holder E will buy 300 shares because their bid rates were at or below the dividend rate. Potential holder F will not buy any shares because its bid rate was above the dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The underwriters are not required to make a market in the Series C Preferred. The broker-dealers (including the underwriters) may maintain a secondary trading market for outside of auctions, but they are not required to do so. There can be no assurance that a secondary trading market for the Series C Preferred will develop or, if it does develop, that it will provide owners with liquidity of investment. The Series C Preferred will not be registered on any stock exchange or on the NASDAQ market. Investors who purchase Series C Preferred in an auction for a special dividend period should note that because the dividend rate on such shares will be fixed for the length of that dividend period, the value of such shares may fluctuate in response to the changes in interest rates, and may be more or less than their original cost if sold on the open market in advance of the next auction thereof, depending on market conditions.
You may sell, transfer, or otherwise dispose of the Series C Preferred only in whole shares and only pursuant to a bid or sell order placed with the auction agent in accordance with the auction procedures, to the Fund or its affiliates or to or through a broker-dealer that has been selected by the Fund or to such other persons as may be permitted by the Fund. However, if you hold your Series C Preferred in the name of a broker-dealer, a sale or transfer of your Series C Preferred to that broker-dealer, or to another customer of that broker-dealer, will not be considered a sale or transfer for purposes of the foregoing if the shares remain in the name of the broker-dealer immediately after your transaction. In addition, in the case of all transfers other than through an auction, the broker-dealer (or other person, if the Fund permits) receiving the transfer must advise the auction agent of the transfer.
Further description of the auction procedures can be found in the SAI.
DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES
Common Stock. The Fund, which was incorporated under the laws of the State of Maryland on May 20, 1986, is authorized to issue 200,000,000 shares of capital stock of which 184,000,000 shares are currently classified as common stock, par value $.001 per share. Each share of common stock has equal voting, dividend, distribution and liquidation rights. The Fund's capital stock is subject to reclassification from time to time by the Board of Directors. The shares of common stock outstanding are fully paid and nonassessable. Shares of the common stock are not redeemable and have no preemptive, conversion or cumulative voting rights. The Fund's shares of common stock are listed and traded on the NYSE under the symbol "GAB."
Preferred Stock. Currently, 16,000,000 shares of the Fund's capital stock are authorized as preferred stock, par value $.001 per share. The terms of such preferred stock may be fixed by the Board of Directors and would materially limit and/or qualify the rights of the holders of the Fund's common stock. As of December 31, 2001, the Fund had outstanding 5,367,900 shares of Series A Preferred and 6,600,000 shares of Series B Preferred, which series are senior securities of the Fund. The Series A Preferred is the same class as the Series B Preferred and is ranked on a parity with the Series B Preferred as to dividend and liquidation preference. Dividends on the Series A Preferred accrue at an annual rate of 7.25% of the liquidation preference of $25 per share, are cumulative from the date of original issuance thereof and are payable quarterly on March 26, June 26, September 26 and December 26 in each year. The Series A Preferred is listed and traded on the NYSE under the symbol "GAB Pr." Dividends on the Series B Preferred accrue at an annual rate of 7.20% of the liquidation preference of $25 per share, are cumulative from the date of original issuance thereof and are payable quarterly on March 26, June 26, September 26 and December 26 in each year. The Series B Preferred is listed and traded on the NYSE under the symbol "GAB PrB."
The Series A Preferred and Series B Preferred are rated Aaa by Moody's and the Fund is required to meet identical asset coverage requirements with respect to each series as are described in Articles Supplementary. All shares of Series A Preferred and Series B Preferred are fully paid and nonassessable.
Each of the Series A Preferred and Series B Preferred is subject to mandatory redemption in whole or in part at its redemption price if the Fund fails to maintain either of the minimum asset coverages required by Moody's or the 1940 Act. Commencing June 9, 2003 and thereafter, the Fund at its option may redeem the Series A Preferred in whole or in part for cash at a price equal to its redemption price. Prior to June 9, 2003, the Series A Preferred may be redeemed, at the option of the Fund, for a cash price equal to its redemption price, only to the extent necessary for the Fund to meet the asset coverage requirements of the Articles Supplementary relating to the Series A Preferred or the 1940 Act or to continue to qualify for tax treatment as a regulated investment company. Commencing June 20, 2006 and thereafter, the Fund at its option may redeem the Series B Preferred in whole or in part for cash at a price equal to its redemption price. Prior to June 20, 2006, the Series B Preferred may be redeemed, at the option of the Fund, for a cash price equal to its redemption price, only to the extent necessary for the Fund to meet the asset coverage requirements of the Articles Supplementary relating to the Series B Preferred or the 1940 Act or to continue to qualify for tax treatment as a regulated investment company.
The following table shows the number of shares of (i) capital stock authorized, (ii) capital stock held by the Fund for its own account and (iii) capital stock outstanding for each class of authorized securities of the Fund as of March 31, 2002.
AMOUNT HELD BY
FUND OR FOR AMOUNT
CLASS OF STOCK AMOUNT AUTHORIZED ITS ACCOUNT OUTSTANDING
--------------- ----------------- ----------- -----------
Common Stock................. 184,000,000 shares N/A 130,831,966 shares
Preferred Stock.............. 16,000,000 shares N/A 11,967,900 shares*
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* Does not include the Series C Preferred being offered pursuant to this Prospectus.
TAXATION
The following is a description of certain U.S. Federal income tax consequences to a stockholder of acquiring, holding and disposing of preferred stock of the Fund (including the Series C Preferred). 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 IRS retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S. Federal, state, local and foreign tax concerns affecting the Fund and its stockholders, and the discussion set forth herein does not constitute tax advice. Investors are urged to consult their own tax advisers to determine the tax consequences to them of investing in the Fund.
TAXATION OF THE FUND
The Fund has elected to be treated and has qualified as, and intends to continue to qualify as, a regulated investment company under Subchapter M of the Code. As a regulated investment company, the Fund will not be subject to U.S. Federal income tax on the portion of its net investment income (i.e., its investment company taxable income as defined in the Code without regard to the deduction for dividends paid) and its net capital gain (i.e., the excess of its net realized long-term capital gain over its net realized short-term capital loss) which it distributes to its stockholders in each taxable year, provided that it distributes to its stockholders at least 90% of the sum of its net investment income and any tax-exempt income for such taxable year.
Qualification as a regulated investment company 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 or foreign currencies or other income (including gains from options, futures or forward contracts) derived from its business of investing in stock, securities or currencies and (b) diversify its holdings so that, at the end of each quarter of each taxable year, subject to certain exceptions, (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 regulated investment companies, 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 the Fund's assets is invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of any one issuer or any two or more issuers that the Fund controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses.
If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify to be taxed as a regulated investment company in any year, the Fund would be subject to tax in such year on all of its taxable income, whether or not it made any distributions. To re-qualify to be taxed as a regulated investment company in a subsequent year, the Fund would be required to distribute to preferred stockholders and common stockholders its earnings and profits attributable to non-regulated investment company 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 regulated investment company 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) or, alternatively, to elect to be subject to taxation on such built- in gains recognized for a period of ten years, in order to qualify as a regulated investment company in a subsequent year.
Under the Code, amounts not distributed by a regulated investment
company on a timely basis in accordance with a calendar year distribution
requirement are subject to a 4% excise tax. To avoid the tax, the Fund must
distribute during each calendar year an amount at least equal to the sum of
(1) 98% of its ordinary income for the calendar year, (2) 98% of its
capital gain net income (both long-term and short-term) for the one year
period ending on October 31 of such year or, in the case of a fund (such as
the Fund) with a fiscal year ending in November or December that makes an
election, the end of its fiscal year, and (3) all ordinary income and
capital gain net income for previous years that were not previously
distributed or subject to tax under Subchapter M. While the Fund intends to
distribute its ordinary income and capital gain net income in a manner that
will 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 its Articles Supplementary and the 1940 Act, the Fund will be required to suspend distributions to the holders of the common stock until the asset coverage is restored. See "Description of the Series C Preferred - 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 Federal income taxation on the Fund's distributions, or might prevent it from distributing enough income and capital gain to avoid completely the imposition of an excise tax. Upon any failure to meet the asset coverage requirements of the Articles Supplementary relating to any series of the Fund's preferred stock or the 1940 Act, the Fund may, and in certain circumstances will, be required to partially redeem the shares of preferred stock in order to restore the requisite asset coverage and avoid the adverse consequences to the Fund and its stockholders of failing to qualify as a regulated investment company. If asset coverage were restored, the Fund would again be able to pay dividends and would generally be able to avoid Fund-level Federal income taxation on the income that it distributes.
TAXATION OF STOCKHOLDERS
Dividends paid by the Fund are taxable to stockholders whether such dividends are paid in cash or paid in additional shares of stock under the Fund's plan for the automatic reinvestment of dividends. Dividends paid by the Fund from its net investment income are taxable to stockholders as ordinary income. Dividends paid from net capital gain (including gains or losses from certain transactions in warrants, rights, futures and options) and properly designated by the Fund as capital gain dividends are taxable to stockholders as long-term capital gains, regardless of the length of time the stockholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the stockholder (or credited to the stockholder as an undistributed capital gain) with respect to such shares. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gain to such holder (assuming the shares are held as a capital asset).
Dividends paid by the Fund to a corporate stockholder, to the extent such dividends are attributable to dividends received by the Fund from U.S. corporations and to the extent the aggregate amount of such dividends do not exceed the aggregate dividends received by the Fund for the taxable year, may, subject to limitations, be eligible for the dividends received deduction. The Fund expects to distribute a relatively small amount of income that would be eligible for the dividends received deduction. Moreover, the alternative minimum tax applicable to corporations may reduce the value of the dividends received deduction.
Both long-term and short-term capital gains of corporations are currently taxed at the rates applicable to ordinary income. For non-corporate taxpayers, however, capital gain dividends may be taxed at a lower rate than ordinary income dividends. See "Tax Attributes of Preferred Stock Dividends."
Not later than 60 days after the close of its taxable year, the Fund will provide its stockholders with a written notice designating the amounts of any ordinary income dividends or capital gain dividends or dividends eligible for the dividends received deduction. If the Fund pays a dividend in January which was declared in the previous October, November or December to stockholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its stockholders on December 31 of the year in which such dividend was declared.
Stockholders may be entitled to offset their capital gain dividends with capital losses. There are a number of statutory provisions affecting when capital losses may be offset against capital gains, and limiting the use of losses from certain investments and activities. Accordingly, stockholders with capital losses are urged to consult their tax advisers.
Gain or loss, if any, recognized on the sale or other disposition of shares of the Fund, including, without limitation, a redemption by the Fund, will be taxed as a capital gain or loss if the shares are capital assets in the stockholder's hands and will be taxed as long-term or short- term gain or loss, as the case may be. A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares of the same class are acquired within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Ordinary income dividends (but not capital gain dividends) paid to stockholders who are non-resident aliens or foreign entities will be subject to a 30% United States withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident stockholders are urged to consult their own tax advisers concerning the applicability of the United States withholding tax.
Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
Under certain provisions of the Code, non-corporate stockholders
who fail to provide the Fund with their correct taxpayer identification
number or certification of foreign or other exempt status may be subject to
a withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). A stockholder, however, may
generally avoid becoming subject to this requirement by filing an
appropriate form with the payor (i.e., the financial institution or
brokerage firm where the stockholder maintains his or her account),
certifying under penalties of perjury that such stockholder's taxpayer
identification number is correct and that such stockholder (i) has never
been notified by the IRS that he or she is subject to backup withholding,
(ii) has been notified by the IRS that he or she is no longer subject to
backup withholding, or (iii) is exempt from backup withholding. Corporate
stockholders and certain other stockholders are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from payments made to a
stockholder may be credited against such stockholder's Federal income tax
liability.
At the time of a stockholder's purchase, the market price of the Fund's common stock or Preferred Stock may reflect undistributed net investment income or net capital gain. A subsequent distribution of these amounts by the Fund will be taxable to the stockholder even though the distribution economically is a return of part of the stockholder's investment. Investors should carefully consider the tax implications of acquiring shares just prior to a distribution, as they will receive a distribution that would nevertheless be taxable to them.
Since the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes. The Fund will not invest more than 35% of its total assets in foreign securities. Accordingly, the Fund will not be eligible to elect to "pass-through" to stockholders of the Fund the ability to use the foreign tax deduction or foreign tax credit for foreign taxes paid with respect to qualifying taxes. In order to make such an election, at least 50% of the Fund's total assets would be required to be invested in foreign securities at the close of the Fund's fiscal year.
Designation of Capital Gain Dividends to Preferred Stock. The IRS has taken the position in Revenue Ruling 89-81, 1989-1 C.B. 226, that if a regulated investment company has two classes of stock, 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. A class's proportionate share of a particular type of income is determined according to the percentage of total dividends paid by the regulated investment company during such year that was paid to such class. Consequently, the Fund will designate distributions made to the common stock and preferred stock as consisting of particular types of income in accordance with the classes' proportionate shares of such income. Because of this rule, the Fund is required to allocate a portion of its net capital gain, ordinary investment income and dividends qualifying for the dividends received deduction to holders of common stock and preferred stock. The amount of net capital gain and ordinary investment income and dividends qualifying for the dividends received deduction allocable among holders of the common stock and the preferred stock will depend upon the amount of such net capital gain and ordinary investment income and dividends qualifying for the dividends received deduction realized by the Fund and the total dividends paid by the Fund on shares of common stock and the preferred stock during a taxable year.
The Fund believes that under current law the manner in which the Fund intends to allocate net capital gain, ordinary investment income and dividends qualifying for the dividends received deduction between shares of common stock and preferred stock will be respected for Federal income tax purposes. However, the Fund has not requested and will not request direct guidance from the IRS specifically addressing whether the Fund's method of allocation will be respected for Federal income tax purposes, and it is possible that the IRS could disagree with the Fund and attempt to reallocate the Fund's net capital gain, ordinary investment income and dividends qualifying for the dividends received deduction.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. A more complete discussion of the tax rules applicable to the Fund can be found in the SAI which is incorporated by reference into this Prospectus. For the complete provisions applicable to both stockholders and the Fund, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action, either prospectively or retroactively.
ANTI-TAKEOVER PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter and By-Laws which could have the effect of limiting, in each case:
o the ability of other entities or persons to acquire control of the Fund;
o the Fund's freedom to engage in certain transactions; or
o the ability of the Fund's Directors or shareholders to amend the Charter and By-Laws or effectuate changes in the Fund's management.
These provisions may be regarded as "anti-takeover" provisions. The Board of Directors of the Fund is divided into three classes, each having a term of no more than three years. Each year the term of one class of Directors will expire. Accordingly, only those Directors in one class may be changed in any one year, and it would require two years to change a majority of the Board of Directors. Such system of electing Directors may have the effect of maintaining the continuity of management and, thus, make it more difficult for the shareholders of the Fund to change the majority of Directors. See "Management of the Fund" in the SAI. A Director of the Fund may be removed, with or without cause and by a vote of a majority of the votes entitled to be cast for the election of Directors of the Fund.
In addition, the affirmative vote of the holders of 66 2/3% of the Fund's outstanding shares of each class is required to authorize the conversion of the Fund from a closed-end to an open-end investment company or generally to authorize any of the following transactions:
o the merger or consolidation of the Fund with any entity;
o the issuance of any securities of the Fund for cash to any entity or person;
o the 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
o the 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 any class of capital stock 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 Charter and By-Laws of the Fund, on file with the Securities and Exchange Commission.
The provisions of the Charter and By-Laws described above could have the effect of depriving the owners of shares in the Fund of opportunities to sell their shares at a premium over prevailing market prices, by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a principal shareholder. The Board of Directors has determined that the foregoing voting requirements, which are generally greater than the minimum requirements under Maryland law and the 1940 Act, are in the best interests of the shareholders generally.
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND-DISBURSING AGENT
Boston Safe Deposit and Trust Company, located at One Boston Place, Boston, Massachusetts 02019, serves as the custodian of the Fund's assets pursuant to a custody agreement. Under the custody agreement, the Custodian holds the Fund's assets in compliance with the 1940 Act. For its services, the Custodian will receive a monthly fee based upon the average weekly value of the total assets of the Fund, plus certain charges for securities transactions.
Equiserve Trust Company, located 150 Royall Street, Canton, Massachusetts 02021, serves as the Fund's paying agent, as agent under the Fund's dividend reinvestment plan and as transfer agent and registrar for shares of the Fund (except with respect to the Series C Preferred).
The Bank of New York, located at 5 Penn Plaza, 13th Floor, New York, NY 10001, will serve as the Fund's auction agent, transfer agent, registrar, dividend paying agent and redeption agent with respect to the Series C Preferred.
UNDERWRITING
Salomon Smith Barney Inc. and Gabelli & Company, Inc. are acting as underwriters in this offering. Subject to the terms and conditions of the Underwriting Agreement with the Fund dated the date of this Prospectus, each underwriter named below has agreed to purchase, and the Fund has agreed to sell to that underwriter, the number of Series C Preferred shares set forth opposite the name of such underwriter.
Number of Series Underwriter C Preferred Shares
Salomon Smith Barney Inc......................... Gabelli & Company, Inc...........................
Total........................................
The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the Series C Preferred if they purchase any of the shares. The Fund and the Investment Adviser have agreed to indemnify the underwriters against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, or to contribute to payments the underwriters may be required to make for any of those liabilities.
The Fund has been advised by the underwriters that they propose initially to offer some of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $137.50 per share. The sales load the Fund will pay of $250 per share is equal to 1% of the initial offering price. After the initial public offering, the underwriters may change the public offering price and the concession. Investors must pay for any Series C Preferred purchased in the initial public offering on or before , 2002.
The underwriters have performed investment banking and advisory services for the Fund from time to time for which they have received customary fees and expenses. The underwriters and their affilites may from time to time engage in transactions with and preform services for the Fund in the ordinary course of their business.
The underwriters have acted in the past and the Fund anticipates that the underwriters may continue from time to time act as brokers or dealers in executing the Fund's portfolio transactions and that the underwriters, or their affiliates, may act as a counterparty in connection with the interest rate transactions described under "How the Fund Manages Risk--Interest Rate Transactions" after they have ceased to be underwriters. The Fund anticipates that the underwriters or their respective affiliates may, from time to time, act in auctions as broker dealers and receive fees as set forth under "The Auction" and in the SAI. The underwriters are active underwriters of, and dealers in, securities and act as market makers in a number of such securities, and therefore can be expected to engage in portfolio transactions with, and perform services for, the Fund.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich Street, New York, New York 10013. The principal business of Gabelli & Company, Inc. is One Corporate Center, Rye, New York 10580.
Gabelli & Company, Inc. is a wholly-owned subsidiary of Gabelli Securities, Inc., which is a majority-owned subsidiary of the parent company of the Investment Adviser which is, in turn, indirectly majority-owned by Mario J. Gabelli. As a result of these relationships, Mr. Gabelli, the Fund's President and Chief Investment Officer, may be deemed to be a "controlling person" of Gabelli & Company, Inc.
The settlement date for the purchase of the Series C Preferred will be , 2002, as agreed upon by the underwriters, the Fund and the Investment Adviser pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the Series C Preferred will be passed on by Miles & Stockbridge P.C., Baltimore, Maryland. Certain legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, special counsel to the Fund in connection with the offering of the Series C Preferred, and by Simpson Thacher & Bartlett, New York, New York, counsel to the underwriters. Skadden, Arps, Slate, Meagher & Flom LLP and Simpson Thacher & Bartlett will each rely as to matters of Maryland law on the opinion of Miles & Stockbridge P.C.
EXPERTS
The audited financial statements of the Fund as of December 31, 2001 have been incorporated by reference into the SAI in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The report of PricewaterhouseCoopers LLP is incorporated by reference in the SAI. PricewaterhouseCoopers LLP is located at 1177 Avenue of the Americas, New York, New York 10036.
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 Securities and Exchange Commission. Reports, proxy statements and other information filed by the Fund with the Securities and Exchange Commission pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission 450 Fifth Street, N.W., Washington, D.C. 20549 and 500 West Madison Street, Chicago, Illinois 60661. The Securities and Exchange Commission 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 Securities and Exchange Commission.
The Fund's common stock, Series A Preferred and Series B Preferred are listed on the NYSE, and reports, proxy statements and other information concerning the Fund and filed with the Securities and Exchange Commission 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 Securities and Exchange Commission 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 Series C Preferred 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 Securities and Exchange Commission. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the Securities and Exchange Commission upon payment of the fee prescribed by its rules and regulations or free of charge through the Securities and Exchange Commission's web site (http://www.sec.gov).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Fund to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those listed under "Risk Factors" and elsewhere in this Prospectus. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity or achievements, and neither the Fund nor any other person assumes responsibility for the accuracy and completeness of such statements.
TABLE OF CONTENTS OF SAI
An SAI dated , 2002 has been filed with the Securities and Exchange Commission 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 10580-1422 or by calling the Fund toll-free at (800) GABELLI (422-3554). The Table of Contents of the SAI is as follows:
PAGE
THE FUND ............................................................. B-3
INVESTMENT OBJECTIVES AND POLICIES ................................... B-3
INVESTMENT RESTRICTIONS............................................... B-15
MANAGEMENT OF THE FUND................................................ B-17
PORTFOLIO TRANSACTIONS ............................................... B-26
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN........................................ B-28
TAXATION ............................................................. B-29
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR
SERIES C PREFERRED.................................................... B-35
DESCRIPTION OF THE SERIES C PREFERRED................................. B-44
MOODY'S AND S&P GUIDELINES ........................................... B-55
NET ASSET VALUE....................................................... B-66
BENEFICIAL OWNERS..................................................... B-67
GENERAL INFORMATION................................................... B-68
FINANCIAL STATEMENTS.................................................. B-70
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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 Investment 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.
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risk appear somewhat larger than in Aaa
Securities.
A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade
obligations i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future Uncertainty of position characterizes bonds in
this class.
B Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small. Moody's applies numerical modifiers
(1, 2, and 3) with respect to the bonds rated Aa through B. The
modifier 1 indicates that the company ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the company ranks in
the lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
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STANDARD & POOR'S RATINGS SERVICES
AAA This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and
repay principal.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are
regarded as safe. Debt rated A has a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
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Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation, and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated C 1 is reserved for income bonds on which no interest is being paid and debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r" symbol is attached to derivatives, hybrids and certain other obligations that S&P believes may experience high variability in expected returns due to noncredit risks created by the terms of the obligations.
AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy.
$130,000,000
THE GABELLI EQUITY TRUST INC.
Series C Auction Rate Cumulative Preferred Stock
5,200 Shares
PROSPECTUS
, 2002
Salomon Smith Barney Gabelli & Company, Inc.
Information contained in this Statement of Additional Information is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Statement of Additional Information shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale is not permitted.
Subject to Completion, Dated June 24, 2002
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Equity Trust Inc. (the "Fund") is a non-diversified, closed-end management investment company that seeks long-term growth of capital by investing primarily in a portfolio of equity securities selected by Gabelli Funds, LLC, the Investment Adviser to the Fund. Income is a secondary investment objective. It is the policy of the Fund, under normal market conditions, to invest at least 65% (80% commencing on July 31, 2002) of its total assets in equity securities.
This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the prospectus relating to the Series C Auction Rate Cumulative Preferred Stock of the Fund dated , 2002 (the "Prospectus"). Investors should obtain and read the Prospectus prior to purchasing Series C Preferred. A copy of the Prospectus may be obtained without charge by calling the Fund at 1- 800-GABELLI (1-800-422-3554) or (914) 921-5070. This SAI incorporates by reference the entire Prospectus.
Capitalized terms used but not defined in this SAI have the meanings assigned to them in the Prospectus or in the glossary of this SAI.
TABLE OF CONTENTS
Page
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The Fund....................................................................B-
Investment Objectives and Policies..........................................B-
Investment Restrictions.....................................................B-
Management of the Fund......................................................B-
Portfolio Transactions......................................................B-
Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan............B-
Taxation....................................................................B-
Additional Information Concerning the Auctions for the Series C Preferred...B-
Description of the Series C Preferred.......................................B-
Moody's and S&P Guidelines..................................................B-
Net Asset Value.............................................................B-
Beneficial Owners...........................................................B-
General Information.........................................................B-
Financial Statements........................................................B-
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The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission, Washington, D.C. The registration statement may be obtained from the Securities and Exchange Commission upon payment of the fee prescribed, or inspected at the Securities and Exchange Commission's office at no charge.
This SAI is dated , 2002.
THE FUND
The Gabelli Equity Trust Inc., or the Fund, is a closed-end non-diversified management investment company organized as a Maryland corporation on May 20, 1986 and registered under the 1940 Act that has a primary investment objective of long-term growth of capital and a secondary investment objective of income. The Fund commenced investment operations on August 21, 1986. The Fund's investments are selected by Gabelli Funds, LLC, its Investment Adviser. The Fund invests primarily in equity securities including common stock, preferred stock, convertible or exchangeable securities and warrants and rights to purchase such securities.
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% (80% commencing on July 31, 2002) of its total assets in equity securities. See "Investment Objectives and Policies" in the Prospectus.
INVESTMENT PRACTICES
Special Situations. Subject to the Fund's policy of investing at least 65% (80% commencing on July 31, 2002) of its total assets in companies on the basis of fundamental value, the Fund from time to time may, as a non-principal investment strategy, invest in companies that are determined by Investment Adviser to possess "special situation" characteristics. In general, a special situation company is a company whose securities are expected to increase in value solely by reason of a development particularly or uniquely applicable to the company. Developments that may create special situations include, among others, a liquidation, reorganization, recapitalization or merger, material litigation, technological breakthrough or new management or management policies. The principal risk associated with investments in special situation companies is that the anticipated development thought to create the special situation may not occur and the investment therefore may not appreciate in value or may decline in value.
Temporary Investments. Although under normal market conditions at least 65% (80% commencing on July 31, 2002) of the Fund's assets will consist of equity securities, including common stock, preferred stock, convertible securities, options and warrants, when a temporary defensive posture is believed by the Investment Adviser to be warranted ("temporary defensive periods"), the Fund may hold without limitation cash or invest its assets in money market instruments and repurchase agreements in respect of those instruments. The money market instruments in which the Fund may invest are U.S. Government Obligations; commercial paper rated A-1 or higher by Standard & Poor's Ratings Services ("S&P") or Prime-1 by Moody's Investors Service, Inc. ("Moody's"); and certificates of deposit and bankers' acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation. For a description of such ratings, see Appendix A to the Prospectus. The Fund may also invest up to 10% of the market value of its total assets during temporary defensive periods in shares of money market mutual funds that invest primarily in U.S. Government Obligations and repurchase agreements in respect of those securities. Money market mutual funds are investment companies and the investments by the Fund in those companies are subject to certain other limitations. See "Investment Restrictions." As a shareholder in a mutual fund, the Fund will bear its ratable share of the fund's expenses, including management fees, and will remain subject to payment of the fees to the Investment Adviser with respect to assets so invested.
Lower Rated Securities. The Fund may invest up to 10% of its total assets in fixed-income securities rated in the lower rating categories of recognized statistical rating agencies, such as securities rated CCC or lower by S&P or Caa or lower by Moody's, or non-rated securities of comparable quality. These debt securities are predominantly speculative and involve major risk exposure to adverse conditions and are often referred to in the financial press as "junk bonds."
Generally, such lower rated securities and unrated securities of comparable quality offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions and (ii) are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds. In addition, such lower rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because such lower rated securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. In light of these risks, the Investment Adviser, in evaluating the creditworthiness of an issue, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer's financial resources, its sensitivity to economic conditions and trends, the operating history of and the community support for the facility financed by the issue, the ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower rated categories is more volatile than that of higher quality securities, and the markets in which such lower rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Fund to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. Moreover, the lack of a liquid trading market may restrict the availability of securities for the Fund to purchase and may also have the effect of limiting the ability of the Fund to sell securities at their fair market value to respond to changes in the economy or the financial markets.
Lower rated debt obligations also present risks based on payment expectations. If an issuer calls the obligation for redemption (often a typical feature of fixed income securities), the Fund may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, as the principal value of bonds moves inversely with movements in interest rates, in the event of rising interest rates the value of the securities held by the Fund may decline proportionately more than a portfolio consisting of higher rated securities. Investments in zero coupon bonds may be more speculative and subject to greater fluctuations in value due to changes in interest rates than bonds that pay interest currently.
The Fund may invest in securities of issuers in default. The Fund will invest in securities of issuers in default only when the Investment Adviser believes that such issuers will honor their obligations or emerge from bankruptcy protection and the value of these securities will appreciate. By investing in securities of issuers in default, the Fund bears the risk that these issuers will not continue to honor their obligations or emerge from bankruptcy protection or that the value of the securities will not appreciate.
In addition to using recognized rating agencies and other sources, the Investment Adviser also performs its own analysis in seeking investments that it believes to be underrated (and thus higher-yielding) in light of the financial condition of the issuer. Its analysis of issuers may include, among other things, current and anticipated cash flow and borrowing requirements, value of assets in relation to historical cost, strength of management, responsiveness to business conditions, credit standing and current and anticipated results of operations. In selecting investments for the Fund, the Investment Adviser may also consider general business conditions, anticipated changes in interest rates and the outlook for specific industries.
Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced. In addition, it is possible that statistical rating agencies might not change their ratings of a particular issue or reflect subsequent events on a timely basis. Moreover, such ratings do not assess the risk of a decline in market value. None of these events will require the sale of the securities by the Fund, although the Investment Adviser will consider these events in determining whether the Fund should continue to hold the securities.
The market for certain lower rated and comparable unrated securities has in the past experienced a major economic recession. The recession adversely affected the value of such securities as well as the ability of certain issuers of such securities to repay principal and pay interest thereon. The market for those securities could react in a similar fashion in the event of any future economic recession.
As a result of all these factors, to the extent the Fund invests in high yield bonds, its net asset value is expected to be more volatile than the net asset value of funds that 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 upon
conversion or exchange of another instrument held in its portfolio or for
additional cash consideration held in a segregated account by its
custodian. 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 (i) equal to or less than the exercise price of the call written or
(ii) greater than the exercise price of the call written if the difference
is maintained by the Fund in cash, U.S. Government Obligations 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 effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that a closing purchase or sale transaction can be effected when the Fund so desires.
The Fund will realize a profit from a closing transaction if the price of the transaction is less than the premium received from writing the option or is more than the premium paid to purchase the option; the Fund will realize a loss from a closing transaction if the price of the transaction is more than the premium received from writing the option or is less than the premium paid to purchase the option. Since call option prices generally reflect increases in the price of the underlying security, any loss resulting from the repurchase of a call option may also be wholly or partially offset by unrealized appreciation of the underlying security. Other principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price and price volatility of the underlying security and the time remaining until the expiration date. Gains and losses on investments in options depend, in part, on the ability of the Investment Adviser to predict correctly the effect of these factors. The use of options cannot serve as a complete hedge since the price movement of securities underlying the options will not necessarily follow the price movements of the portfolio securities subject to the hedge.
An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option. In such event, it might not be possible to effect closing transactions in particular options, so that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or otherwise covers the position.
In addition to options on securities, the Fund may also purchase and sell call and put options on securities indices. A stock index reflects in a single number the market value of many different stocks. Relative values are assigned to the stocks included in an index and the index fluctuates with changes in the market values of the stocks. The options give the holder the right to receive a cash settlement during the term of the option based on the difference between the exercise price and the value of the index. By writing a put or call option on a securities index, the Fund is obligated, in return for the premium received, to make delivery of this amount. The Fund may offset its position in the stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised.
The Fund also may buy or sell and call options on foreign currencies. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Fund to reduce foreign currency risk using such options. Over-the-counter options differ from exchange-traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller and generally do not have as much market liquidity as exchange-traded options. Over-the-counter options are illiquid securities.
Use of options on securities indices entails the risk that trading in the options may be interrupted if trading in certain securities included in the index is interrupted. The Fund will not purchase these options unless the Investment Adviser is satisfied with the development, depth and liquidity of the market and the Investment Adviser believes the options can be closed out.
Price movements in the portfolio of the Fund may not correlate precisely with movements in the level of an index and, therefore, the use of options on indexes cannot serve as a complete hedge and will depend, in part, on the ability of the Investment Adviser to predict correctly movements in the direction of the stock market generally or of a particular industry. Because options on securities indexes require settlement in cash, the Investment Adviser may be forced to liquidate portfolio securities to meet settlement obligations.
Although the Investment Adviser will attempt to take appropriate measures to minimize the risks relating to the Fund's writing of put and call options, there can be no assurance that the Fund will succeed in any option writing program it undertakes.
Futures Contracts and Options on Futures. The Fund will not enter into futures contracts or options on futures contracts unless (i) the aggregate initial margins and premiums do not exceed 5% of the fair market value of its assets and (ii) the aggregate market value of its outstanding futures contracts and the market value of the currencies and futures contracts subject to outstanding options written by the Fund, as the case may be, do not exceed 50% of the market value of its total assets. It is anticipated that these investments, if any, will be made by the Fund solely for the purpose of bona fide hedging against changes in the value of its portfolio securities and in the value of securities it intends to purchase. Such investments will only be made if they are economically appropriate to the reduction of risks involved in the management of the Fund. In this regard, the Fund may enter into futures contracts or options on futures for the purchase or sale of securities indices or other financial instruments including but not limited to U.S. Government Obligations.
A "sale" of a futures contract (or a "short" futures position) means the assumption of a contractual obligation to deliver the assets underlying the contract at a specified price at a specified future time. A "purchaser" of a futures contract (or a "long" futures position) means the assumption of a contractual obligation to acquire the assets underlying the contract at a specified future time. Certain futures contracts, including stock and bond index futures, are settled on a net cash payment basis rather than by the sale and delivery of the assets underlying the futures contracts.
No consideration will be paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund will be required to deposit with the broker an amount of cash or cash equivalents equal to approximately 1% to 10% of the contract amount (this amount is subject to change by the exchange or board of trade on which the contract is traded and brokers or members of such board of trade may charge a higher amount). This amount is known as "initial margin" and is in the nature of a performance bond or good faith deposit on the contract. Subsequent payments, known as "variation margin," to and from the broker will be made daily as the price of the index or security underlying the futures contract fluctuates. At any time prior to the expiration of a futures contract, the Fund may elect to close the position by taking an opposite position, which will operate to terminate its existing position in the contract.
An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time to the expiration of the option. Upon exercise of an option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's futures margin account attributable to that contract, which represents the amount by which the market price of the futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The potential loss related to the purchase of an option on futures contracts is limited to the premium paid for the option (plus transaction costs). Because the value of the option purchased is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net assets of the Fund.
Futures and options on futures entail certain risks, including but not limited to the following: no assurance that futures contracts or options on futures can be offset at favorable prices, possible reduction of the yield of the Fund due to the use of hedging, possible reduction in value of both the securities hedged and the hedging instrument, possible lack of liquidity due to daily limits on price fluctuations, imperfect correlation between the contracts and the securities being hedged, losses from investing in futures transactions that are potentially unlimited and the segregation requirements described below.
In the event the Fund sells a put option or enters into long futures contracts, under current interpretations of the Investment Company Act of 1940, as amended (the "1940 Act") an amount of cash or liquid securities equal to the market value of the contract must be deposited and maintained in a segregated account with the custodian of the Fund to collateralize the positions, thereby ensuring that the use of the contract is unleveraged. For short positions in futures contracts and sales of call options, the Fund may establish a segregated account (not with a futures commission merchant or broker) with cash or liquid securities that, when added to amounts deposited with a futures commission merchant or a broker as margin, equal the market value of the instruments or currency underlying the futures contract or call options, respectively (but are not less than the stock price of the call option or the market price at which the short positions were established).
Interest Rate Futures Contracts and Options Thereon. The Fund may purchase or sell interest rate futures contracts to take advantage of or to protect the Fund against fluctuations in interest rates affecting the value of debt securities which the Fund holds or intends to acquire. For example, if interest rates are expected to increase, the Fund might sell futures contracts on debt securities, the values of which historically have a high degree of positive correlation to the values of the Fund's portfolio securities. Such a sale would have an effect similar to selling an equivalent value of the Fund's portfolio securities. If interest rates increase, the value of the Fund's portfolio securities will decline, but the value of the futures contracts to the Fund will increase at approximately an equivalent rate thereby keeping the net asset value of the Fund from declining as much as it otherwise would have. The Fund could accomplish similar results by selling debt securities with longer maturities and investing in debt securities with shorter maturities when interest rates are expected to increase. However, since the futures market may be more liquid than the cash market, the use of futures contracts as a risk management technique allows the Fund to maintain a defensive position without having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it is expected that interest rates may decline. The purchase of futures contracts for this purpose constitutes a hedge against increases in the price of debt securities (caused by declining interest rates) which the Fund intends to acquire. Since fluctuations in the value of appropriately selected futures contracts should approximate that of the debt securities that will be purchased, the Fund can take advantage of the anticipated rise in the cost of the debt securities without actually buying them. Subsequently, the Fund can make its intended purchase of the debt securities in the cash market and currently liquidate its futures position. To the extent the Fund enters into futures contracts for this purpose, it will maintain in a segregated asset account with the Fund's custodian assets sufficient to cover the Fund's obligations with respect to such futures contracts, which will consist of cash or other liquid securities from its portfolio in an amount equal to the difference between the fluctuating market value of such futures contracts and the aggregate value of the initial margin deposited by the Fund with its custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the 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 US 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 US dollar, the Fund can attempt to "lock in" the US 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 US 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 US dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the price of the premium and related transaction costs it must pay for the option, to decide whether or not to buy (in the case of a call option) or to sell (in the case of a put option) a futures contract at a specified price at any time during the period before the option expires. If the Investment Adviser, in purchasing an option, has been correct in its judgment concerning the direction in which the price of a foreign currency would move as against the US dollar, the Fund may exercise the option and thereby take a futures position to hedge against the risk it had correctly anticipated or close out the option position at a gain that will offset, to some extent, currency exchange losses otherwise suffered by the Fund. If exchange rates move in a way the Fund did not anticipate, however, the Fund will have incurred the expense of the option without obtaining the expected benefit; any such movement in exchange rates may also thereby reduce rather than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or sales of securities index futures contracts are used for hedging purposes to attempt to protect the Fund's current or intended investments from broad fluctuations in stock or bond prices. For example, the Fund may sell securities index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Fund's securities portfolio that might otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the futures position. When the Fund is not fully invested in the securities market and anticipates a significant market advance, it may purchase securities index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of 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 Commodity Futures Trading Commission, or CFTC, and not for speculation.
Regulations of the CFTC applicable to the Fund permit the Fund's futures and options on futures transactions to include (i) bona fide hedging transactions without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) non-hedging transactions, provided that the Fund not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund's existing futures positions and option premiums would exceed 5% of the market value of the Fund's liquidating value, after taking into account unrealized profits and unrealized losses on any such transactions.
Forward Currency Exchange Contracts. The Fund may engage in currency transactions otherwise than on futures exchanges to protect against future changes in the level of future currency exchange rates. The Fund will conduct such currency exchange transactions either on a spot (i.e., cash) basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into forward contracts to purchase or sell currency. A forward contract on foreign currency involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract, at a price set on the date of the contract. The risk of shifting of a forward currency contract will be substantially the same as a futures contract having similar terms. The Fund's dealing in forward currency exchange will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward currency with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities and accruals of interest receivable and Fund expenses. Position hedging is the forward sale of currency with respect to portfolio security positions denominated or quoted in that currency or in a currency bearing a high degree of positive correlation to the value of that currency.
The Fund may not position hedge with respect to a particular currency for an amount greater than the aggregate market value (determined at the time of making any sale of forward currency) of the securities held in its portfolio denominated or quoted in, or currently convertible into, such currency. If the Fund enters into a position hedging transaction, the Fund's custodian or subcustodian will place cash or other liquid securities in a segregated account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of the given forward contract. If the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will, at all times, equal the amount of the Fund's commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and offset its contractual obligations to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency which it is obligated to delivery. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement has occurred in forward contract prices. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to purchase is less than the price of the currency it has agreed to sell. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Closing out forward purchase contracts involves similar offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because forward 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, the Fund may not be able to contract to sell the currency at a price above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon. The Fund's ability to establish and close out positions in futures contracts and options thereon will be subject to the development and maintenance of liquid markets. Although the Fund generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Fund maintains a position, it will not be possible to effect a closing transaction in that contract or to do so at a satisfactory price and the Fund would have to either make or take delivery under the futures contract or, in the case of a written option, wait to sell the underlying securities until the option expires or is exercised or, in the case of a purchased option, exercise the option. In the case of a futures contract or an option thereon which the Fund has written and which the Fund is unable to close, the Fund would be required to maintain margin deposits on the futures contract or option thereon and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon and forward contracts by the Fund is subject to the ability of the Investment Adviser to predict correctly movements in the direction of interest and foreign currency rates. If the Investment Adviser's expectations are not met, the Fund will be in a worse position than if a hedging strategy had not been pursued. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of securities in its portfolio and the price of such securities increases instead, the Fund will lose part or all of the benefit of the increased value of its securities because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash to meet daily variation margin requirements, it may have to sell securities to meet the requirements. These sales may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it is disadvantageous to do so.
Additional Risks of Foreign Options, Futures Contracts, Options on
Futures Contracts and Forward Contracts. Options, futures contracts and
options thereon and forward contracts on securities and currencies may be
traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by
(i) other complex foreign political, legal and economic factors, (ii)
lesser availability than in the U.S. of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in the foreign markets during non-business hours in the U.S.,
(iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (v) lesser trading
volume.
Exchanges on which options, futures and options on futures are traded may impose limits on the positions that the Fund may take in certain circumstances.
Risks of Currency Transactions. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulation, or exchange restrictions imposed by governments. These forms of governmental action can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs.
When Issued, Delayed Delivery Securities and Forward Commitments. The Fund may enter into forward commitments for the purchase or sale of securities, including on a "when issued" or "delayed delivery" basis, in excess of customary settlement periods for the type of security involved. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as approval and consummation of a merger, corporate reorganization or debt restructuring, i.e., a when, as and if issued security. When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future, generally a month or more after the date of the commitment. While it may only enter into a forward commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date. The Fund will segregate with its custodian cash or liquid securities in an aggregate amount at least equal to the amount of its outstanding forward commitments.
Restricted and Illiquid Securities. The Fund may invest up to a total of 10% of its net assets in securities that are subject to restrictions on resale and securities the markets for which are illiquid, including repurchase agreements with more than seven days to maturity. Illiquid securities include securities the disposition of which is subject to substantial legal or contractual restrictions. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale. Unseasoned issuers are companies (including predecessors) that have operated less than three years. The continued liquidity of such securities may not be 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 10% 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.
In accordance with pronouncements of the Securities and Exchange Commission, the Fund may invest in restricted securities that can be traded among qualified institutional buyers under Rule 144A under the Securities Act of 1933 without registration under the Securities Act and may treat them as liquid for purposes of the foregoing 10% test if such securities are found to be liquid. The Board of Directors has adopted guidelines and delegated to the Investment Adviser, subject to the supervision of the Board of Directors, the function of determining and monitoring the liquidity of particular Rule 144A 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:
o Invest 25% or more of its total assets, taken at market value at the time of each investment, in the securities of issuers in any particular industry. This restriction does not apply to investments in U.S. Government Obligations.
o 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.
o 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.
o Purchase any securities on margin or make short sales, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.
o Make loans of money, except by the purchase of a portion of publicly distributed debt obligations in which the Fund may invest, and repurchase agreements with respect to those obligations, consistent with its investment objectives and policies. The Fund reserves the authority to make loans of its portfolio securities to financial intermediaries in an aggregate amount not exceeding 20% of its total assets. Any such loans may only be made upon approval of, and subject to any conditions imposed by, the Board of Directors of the Fund. Because these loans would at all times be fully collateralized, the risk of loss in the event of default of the borrower should be slight.
o 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.
o Issue senior securities, except to the extent permitted by applicable law.
o Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act in selling portfolio securities; provided, however, this restriction shall not apply to securities of any investment company organized by the Fund that are to be distributed pro rata as a dividend to its shareholders.
o Invest more than 10% of its total assets in illiquid securities, such as repurchase agreements with maturities in excess of seven days, or securities that at the time of purchase have legal or contractual restrictions on resale.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of the Fund rests with its Board of Directors. The Board of Directors approves all significant agreements between the Fund and the companies that furnish the Fund with services, including agreements with the Investment Adviser, Boston Safe Deposit and Trust Company, the Fund's custodian (the "Custodian"), Equiserve Trust Company ("Equiserve"), the Fund's transfer agent, and The Bank of New York, the Fund's auction agent, paying agent and registrar with respect to the Series C Preferred. The day-to-day operations of the Fund are delegated to the Investment Adviser.
The names and business addresses of the Directors and Officers of the Fund are set forth in the following table, together with their positions with the Fund and their principal business occupations during the past five years and their affiliations, if any, with the Investment Adviser or the Fund's Administrator.
As of May 31, 2002 the Directors and Officers of the Fund as a group beneficially owned 1,619,873 shares of the Fund equaling 1.13% of the Fund's outstanding shares.
NUMBER OF
TERM OF PORTFOLIOS IN
OFFICE AND FUND
NAME, POSITION(S) LENGTH OF COMPLEX OTHER
ADDRESS1 TIME OVERSEEN BY PRINCIPAL OCCUPATION(S) DIRECTORSHIPS
AND AGE SERVED2 DIRECTOR DURING PAST FIVE YEARS HELD BY DIRECTOR
------------------------- --------- --------- ------------------------ ----------------
INTERESTED DIRECTORS3:
MARIO J. GABELLI Since 1986** 21 Chairman of the Board and Director of Morgan
Director, President and Chief Executive Officer of Group Holdings, Inc.
Chief Investment Officer Gabelli Asset Management (transportation
Age: 59 Inc. and Chief Investment services); Vice
Officer of Gabelli Funds, Chairman of Lynch
LLC and GAMCO Investors, Corporation (diversified
Inc; Chairman and Chief manufacturing
Executive Officer of Lynch company).
Interactive Corporation
(multimedia and services);
Chairman and Director of
other registered investment
companies in the Gabelli
fund complex.
KARL OTTO POHL Since 1992* 30 Member of the Shareholder Director of Gabelli
Director Committee of Sal. Asset Management Inc.;
Age: 72 Oppenheim Jr. & Cie (private Chairman, Incentive
investment bank); Former Capital and Incentive
President of the Deutsche Asset Management
Bundesbank and Chairman of (Zurich); Director at Sal
its Central Bank Council Oppenheim Jr. & Cie,
(1980-1991); Director of Zurich.
other registered investment
companies in the Gabelli
fund complex.
NON-INTERESTED DIRECTORS:
THOMAS E. BRATTER Since 1986** 3 Director, President and -
Director Founder, The John Dewey
Age: 62 Academy (residential college
preparatory therapeutic
high school); Director of
other registered
investment companies in
the Gabelli fund complex.
ANTHONY J. COLAVITA4 Since 1999*** 32 President and Attorney at
Director Law in the law firm of
Age: 66 Anthony J. Colavita, P.C.;
Director of other
registered investment
companies in the Gabelli
fund complex.
JAMES P. CONN4 Since 1989* 11 Former Managing Director Director of LaQuinta
Director and Chief Investment Officer Corp. (hotels) and First
Age: 64 of Financial Security Republic Bank
Assurance Holdings Ltd.
(1992-1998); Director of
First Republic Bank; Director
of other registered
investment companies in the
Gabelli fund complex.
FRANK J. FAHRENKOPF JR. Since 1998*** 3 President and Chief --
Director Executive Officer of the
Age: 62 American Gaming
Association since June
1995; Partner of Hogan &
Hartson (law firm);
Chairman of International
Trade Practice Group;
Co-Chairman of the
Commission on Presidential
Debates; Former Chairman
of the Republican National
Committee; Director of
other registered
investment companies in
the Gabelli fund complex.
ARTHUR V. FERRARA Since 2001* * 9 Formerly, Chairman of the Director of The Guardian
Director Board and Chief Executive Life Insurance Company
Age: 71 Officer of The Guardian Life of America; Director of
Insurance Company of
America The Guardian
Insurance & (1993-1995);
President, Chief Annuity
Company, Inc., Executive
Officer and a
DirectoGuardian Investor
prior thereto; Director of
otheServices Corporation,
and registered investment
5 mutual funds within the
companies in the Gabelli
Guardian Fund Complex fund
complex.
ANTHONY R. PUSTORINO Since 1986* 16 Certified Public Accountant; -
Director Professor Emeritus, Pace
Age: 76 University; Director of other
registered investment
companies in the Gabelli
fund complex.
SALVATORE J. ZIZZA Since 1986*** 8 Chairman of Hallmark Director of Hollis Eden
Director Electrical Supplies Corp.; Pharmaceuticals, Bion
Age: 56 Former Executive Vice Environmental
President of FMG Group (a Technologies Inc. and
healthcare provider); Former The Credit Store Inc.
President and Chief
Executive Officer of the
Lehigh Group Inc. (an
interior construction
company) through 1997;
Director of other registered
investment companies in the
Gabelli fund complex.
OFFICERS:
BRUCE N. ALPERT Since 1998 -- Executive Vice President and
Vice President and Treasurer Chief Operating Officer of
Age: 50 the Gabelli Funds, LLC and
an officer of all mutual funds
advised by Gabelli Funds,
LLC and its affiliates.
Director and President of
Gabelli Advisers, Inc.
CARTER W. AUSTIN Since 2000 -- Vice President at the Fund since
Vice President 2000. Vice President of Gabelli
Age: 34 Funds, LLC since 1996.
JAMES E. MCKEE Since 1995 -- Vice President General
Secretary Counsel and Secretary of
Age: 38 Gabelli Asset Management,
Inc. since 1999 and GAMCO
Investors, Inc. since 1993;
Secretary of all mutual funds
advised by Gabelli Advisers,
Inc. and Gabelli Funds, LLC.
---------------------
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(1) Address: One Corporate Center, Rye, NY 10580, unless otherwise noted.
(2) The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of office of one class expires and the successor or successors elected to such class serve for a three year term. The three year term for each class expires as follows:
* - Term expires at the Fund's 2003 Annual Meeting of Shareholders and until their successors are duly elected and qualified. ** - Term expires at the Fund's 2004 Annual Meeting of Shareholders and until their successors are duly elected and qualified. *** - Term expires at the Fund's 2005 Annual Meeting of Shareholders and until their successors are duly elected and qualified.
(3) "Interested person" of the Fund as defined in the Investment Company Act of 1940. Messrs. Gabelli and Pohl are each considered an "interested person" because of their affiliation with Gabelli Funds, LLC which acts as the Fund's investment adviser.
(4) Represents holders of the Fund's 7.25% Series A and 7.20% Series B Cumulative Preferred Stock.
The Board of Directors of the Fund is divided into three classes, with a class having a term of three years. Each year the term of office of one class of Directors of the Fund will expire. The terms of Messrs. Conn, Pohl and Pustorino as Directors of the Fund expire in 2003; the terms of Messrs. Bratter, Ferrara and Gabelli as Directors of the Fund expire in 2004; and the terms of Messrs. Colavita, Fahrenkopf and Zizza as Directors of the Fund expire in 2005. See "Anti-Takeover Provisions of the Charter and By-Laws" in the Prospectus.
The following table reflects the beneficial ownership of Directors of the Fund in securities of the Fund and in securities of other Gabelli Fund complex registered investment companies overseen by such Director.
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund*(1) Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of Investment
Companies*
INTERESTED DIRECTOR
Mario J. Gabelli E E
Karl Otto Pohl A A
DISINTERESTED DIRECTORS
Dr. Thomas E. Bratter E E
Anthony J. Colavita C E
James P. Conn E E
Frank J. Fahrenkopf, Jr. A A
Arthur V. Ferrara A E
Anthony R. Pustorino E E
Salvatore J. Zizza E E
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* Key to Dollar Ranges
A. None
B. $1-$10,000
C. $10,001-$50,000
D. $50,001-$100,000
E. Over $100,000
(1) This information has been furnished by each Director as of December
31, 2001. "Beneficial Ownership" is determined in accordance with
Section 16a-1(a)(2) of the Securities Exchange Act of 1934, as
amended.
The Directors serving on the Fund's Nominating Committee are Messrs. Colavita (Chairman) and Zizza. The Nominating Committee is responsible for recommending qualified candidates to the Board in the event that a position is vacated or created. The Nominating Committee would consider recommendations by shareholders if a vacancy were to exist. Such recommendations should be forwarded to the Secretary of the Fund. The Nominating Committee met once during the year ended December 31, 2001. The Fund does not have a standing compensation committee.
Messrs. Pustorino (Chairman), Colavita and Zizza serve on the Fund's Audit Committee and these Directors are not "interested persons" of the Fund as defined in the 1940 Act. The Audit Committee is responsible for reviewing and evaluating issues related to the accounting and financial reporting policies and internal controls of the Fund and the internal controls of certain service providers, overseeing the quality and objectivity of the Fund's financial statements and the audit thereof and to act as a liaison between the Board of Directors and the Fund's independent accountants. During the year ended December 31, 2001, the Audit Committee met twice.
The economic terms of the Advisory Agreement between the Fund and its Investment Adviser were unanimously approved by the Fund's Board of Directors at its May 16, 2001 meeting. The Board's approval included a majority of the Directors who are not parties to the Advisory Agreement or interested persons of any such party (as such term is defined in the 1940 Act). In approving the Advisory Agreement, the Board of Directors considered, among other things, the nature and quality of services to be provided by the Investment Adviser, the profitability to the Investment Adviser of its relationship with the Fund, economies of scale and comparative fees and expense ratios.
The Fund and the Investment Adviser have adopted a code of ethics (the "Code of Ethics") under Rule 17j-1 of the 1940 Act. The Code of Ethics permits personnel, subject to the Code of Ethics and its restrictive provisions, to invest in securities, including securities that may be purchased or held by the Fund. The Code of Ethics can be reviewed and copied at the United States Securities and Exchange Commission's Public Reference Room in Washington, D.C. Information on the operations of the Reference Room may be obtained by calling the Securities and Exchange Commission at (202) 942-8090. The Code of Ethics is also available on the EDGAR database on the Securities and Exchange Commission's Internet Site at http://www.sec.gov. Copies of the Code of Ethics may also be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Securities and Exchange Commission's Public Reference Room Section, Washington, D.C. 20549- 0102.
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not affiliated with the Investment Adviser a fee of $12,000 per year plus $1,500 per Directors' meeting attended and $500 per meeting by telephone, together with each Director's actual out-of-pocket expenses relating to attendance at such meetings. The aggregate remuneration accrued by the Fund during the year ended December 31, 2001 amounted to $147,765.
The following table shows certain compensation information for the Directors of the Fund for the year ended December 31, 2001. Officers and Directors of the Fund who are employed by the Investment Adviser received no compensation or expense reimbursement from the Fund.
Aggregate Compensation Total Compensation From Fund
Name of from and Fund Complex Paid to
Director/Officers Fund Directors/Officers*
----------------- ------ ---------------------
Mario J. Gabelli $ 0 $ 0 (21)
Dr. Thomas E. Bratter $ 18,500 $ 31,500 (3)
Anthony J. Colavita $ 22,500 $ 145,016(32)
James P. Conn $ 20,000 $ 53,750 (11)
Frank J. Fahrenkopf, Jr. $ 18,500 $ 31,500 (3)
Arthur V. Ferrara $ 7,532 $ 15,099 (9)
Karl Otto Pohl $ 0 $ 0 (30)
Anthony R. Pustorino $ 24,000 $ 125,250(16)
Salvatore J. Zizza $ 20,500 $ 64,266 (8)
Carter W. Austin $ 125,000 $ 125,000(1)
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* Represents the total compensation paid to such persons during the calendar year ended December 31, 2001 by investment companies (including the Fund) or portfolios thereof 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 and portfolios from which such person received compensation.
LIMITATION OF OFFICERS' AND DIRECTOR, LIABILITY
The By-Laws of the Fund provide that the Fund will indemnify its Directors and officers and may indemnify its employees or agents against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund, to the fullest extent permitted by law. In addition, the Charter of the Fund provides that the Fund's Directors and officers will not be liable to shareholders for money damages, except in limited instances. However, nothing in the Charter or the By-Laws protects or indemnifies a Director, officer, employee or agent of the Fund against any liability to which such person would otherwise be subject in the event of such person's active or deliberate dishonesty which is material to the cause of action or to the extent that the person received an improper benefit or profit in money, property or services to the extent of such money, property or services. In addition, indemnification is not permitted for any act or omission committed in bad faith which is material to the cause of action or, with respect to any criminal proceeding, if the person had reasonable cause to believe that the act or omission was unlawful. In addition, indemnification may not be provided in respect of any proceeding in which the person had been adjudged to be liable to the Fund.
THE INVESTMENT ADVISER
The Investment Adviser is a New York limited liability company that also serves as Investment Adviser to other closed-end investment companies and open-end investment companies with aggregate assets in excess of $26 billion as of March 31, 2002. The Investment Adviser is a registered investment adviser under the 1940 Act. Mr. Mario J. Gabelli may be deemed a "controlling person" of the Investment Adviser on the basis of his controlling interest in the parent company of the Investment Adviser. The Investment Adviser has several affiliates that provide investment advisory services: GAMCO Investors, Inc. ("GAMCO") a wholly-owned subsidiary of the Investment Adviser acts as investment adviser for individuals, pension trusts, profit-sharing trusts and endowments, and had assets under management of approximately $13.0 billion under its management as of March 31, 2002; Gabelli Advisers, Inc. acts as to the Gabelli Westwood Funds with assets under management of approximately $548 million as of March 31, 2002; Gabelli Securities, Inc. acts as general partner or investment manager to certain alternative investments products, consisting primarily of risk arbitrage and merchant banking limited partnerships and offshore companies, with assets under management of approximately $605 million as of March 31, 2002; and Gabelli Fixed Income, LLC acts as investment adviser for the three portfolios of The Treasurer's Fund and separate accounts having assets under management of approximately $1.5 billion as of March 31, 2002.
Affiliates of the Investment Adviser may, in the ordinary course of their business, acquire for their own account or for the accounts of their advisory clients, significant (and possibly controlling) positions in the securities of companies that may also be suitable for investment by the Fund. The securities in which the Fund might invest may thereby be limited to some extent. For instance, many companies in the past several years have adopted so-called "poison pill" or other defensive measures designed to discourage or prevent the completion of non-negotiated offers for control of the company. Such defensive measures may have the effect of limiting the shares of the company which might otherwise be acquired by the Fund if the affiliates of the Investment Adviser or their advisory accounts have or acquire a significant position in the same securities However, the Investment Adviser does not believe that the investment activities of its affiliates will have a material adverse effect upon the Fund in seeking to achieve its investment objectives. Securities purchased or sold pursuant to contemporaneous orders entered on behalf of the investment company accounts of the Investment Adviser or the advisory accounts managed by its affiliates for their unaffiliated clients are allocated pursuant to principles believed to be fair over time and not disadvantageous to any such accounts. The Investment Adviser may on occasion give advice or take action with respect to other clients that differ from the actions taken with respect to the Fund. The Fund may invest in the securities of companies which are investment management clients of GAMCO. In addition, portfolio companies or their officers or directors may be minority shareholders of the Investment Adviser or its affiliates.
Pursuant to an advisory agreement (the "Advisory Agreement"), the Investment Adviser manages the portfolio of the Fund in accordance with its stated investment objectives and policies, makes investment decisions for the Fund, places orders to purchase and sell securities on behalf of the Fund and manages its other business and affairs, all subject to the supervision and direction of the Fund's Board of Directors. In addition, under the Advisory Agreement, the Investment Adviser oversees the administration of all aspects of the Fund's business and affairs and provides, or arranges for others to provide, at the Investment Adviser's expense, certain enumerated services, including maintaining the Fund's books and records, preparing reports to the Fund's shareholders and supervising the calculation of the net asset value of its shares. All expenses of computing the net asset value of the Fund, including any equipment or services obtained solely for the purpose of pricing shares or valuing its investment portfolio, are considered to be an expense of the Fund under its Advisory Agreement.
The Advisory Agreement combines investment advisory and administrative responsibilities in one agreement. The Investment Adviser has in turn retained PFPC, Inc. to act as sub-administrator to the Fund. See "Management of the Fund - Sub-Administrator" in the Prospectus.
For services rendered by the Investment Adviser on behalf of the Fund under the Advisory Agreement, the Fund pays the Investment Adviser a fee computed daily and paid monthly at the annual rate of 1.00% of the average weekly net assets of the Fund. The fees payable under the Advisory Agreement are higher than the fees payable by most registered investment companies. Notwithstanding the foregoing, the Investment Adviser will waive the portion of its investment advisory fee attributable to an amount of assets of the Fund equal to the aggregate stated value of the applicable series of its Preferred Stock for any calendar year in which the net asset value total return of the Fund allocable to the common stock, including distributions and the advisory fee subject to potential waiver, is less than (i) in the case of the Series A Preferred or Series B Preferred, the stated annual dividend rate of such series and (ii) in the case of the Series C Preferred, the dividend rate for the Series C Preferred at the beginning of such year (including the anticipated cost of a swap or cap if the Fund hedges its Series C Preferred dividend obligations), in every case prorated during the year such series is issued and the final year such series is outstanding.
The Advisory Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations and duties thereunder, the Investment 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 Investment Adviser's property, and that in the event the Investment Adviser ceases to act as an investment adviser to the Fund, the Fund will change its name to one not including the word "Gabelli."
The Advisory Agreement was initially approved by the Board of Directors at a meeting held on July 17, 1986 and was approved most recently by the Board of Directors on May 16, 2001. The Advisory Agreement is terminable without penalty by the Fund on not more than sixty days written notice when authorized by the Board of Directors of the Fund, by the holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or by the Investment Adviser. The Advisory Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act. The Advisory Agreement provides that, unless terminated, it will remain in effect so long as continuance of the Advisory Agreement is approved annually by the Board of Directors of the Fund, or the shareholders of the Fund and in either case, by a majority vote of the Directors who are not parties to the Advisory Contract or "interested persons" as defined in the 1940 Act of any such person cast in person at a meeting called specifically for the purpose of voting on the continuance of the Advisory Agreement.
For each of the years ended December 31, 1999, December 31, 2000 and December 31, 2001, the Investment Adviser was paid $14,000,719, $13,085,773 and $12,063,874, respectively, for advisory and administrative services rendered to the Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the Investment Adviser is responsible for placing purchase and sale orders and the allocation of brokerage on behalf of the Fund. Transactions in equity securities are in most cases effected on U.S. stock exchanges and involve the payment of negotiated brokerage commissions. In general, there may be no stated commission in the case of certain debt securities and securities traded in over-the- counter markets, but the prices of those securities may include undisclosed commissions or mark-ups. Principal transactions are not entered into with affiliates of the Fund. However, Gabelli & Company, Inc. ("Gabelli & Company") may execute transactions in the over-the counter markets on an agency basis and receive a stated commission therefrom. To the extent consistent with applicable provisions of the 1940 Act and the rules and exemptions adopted by the Securities and Exchange Commission thereunder, as well as other regulatory requirements, the Fund's Board of Directors has determined that portfolio transactions may be executed through Gabelli & Company and its broker-dealer affiliates if, in the judgment of the Investment Adviser, the use of those broker-dealers is likely to result in price and execution at least as favorable as those of other qualified broker-dealers, and if, in particular transactions, those broker-dealers charge the Fund a rate consistent with that charged to comparable unaffiliated customers in similar transactions. The Fund has no obligation to deal with any broker or group of brokers in executing transactions in portfolio securities. In executing transactions, the Investment Adviser seeks to obtain the best price and execution for the Fund, taking into account such factors as the price, size of order, difficulty of execution and operational facilities of the firm involved and the firm's risk in positioning a block of securities. While the Investment Adviser generally seeks reasonably competitive commission rates, the Fund does not necessarily pay the lowest commission available.
For the fiscal years ended December 1999, December 31, 2000 and December 31, 2001, the Fund paid a total of $1,137,510, $847,808 and $987,659, respectively, in brokerage commissions, of which Gabelli & Company, Inc. and its affiliates received $554,925, $586,533 and $664,606, respectively. The amount received by Gabelli & Company, Inc. and its affiliates from the Fund in respect of brokerage commissions for the fiscal year ended December 31, 2001 represented approximately 68% of the aggregate dollar amount of brokerage commissions paid by the Fund for such period and approximately 63% of the aggregate dollar amount of transactions by the Fund for such period.
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 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.
During the Fund's most recent fiscal year, it has acquired securities of certain of its regular brokers or dealers or their parents. The following table provides information regarding the identity of these entities and the value of the Fund's aggregate holdings of the securities of each such entity as of the close of the Fund's most recent fiscal year.
-----------------------------------------------------------------
Value of the Fund's
Name of Broker or Dealer Aggregate Holdings
-----------------------------------------------------------------
JP Morgan Chase & Company $1,817,500
-----------------------------------------------------------------
Mellon Financial Corp. $3,126,222
-----------------------------------------------------------------
State Street Corp. $4,180,000
-----------------------------------------------------------------
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AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (the "Plan"), a stockholder whose shares of the Fund's common stock is registered in his own name will have all distributions reinvested automatically by Equiserve, which is agent under the Plan, unless the stockholder elects to receive cash. Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in "street name") will be reinvested by the broker or nominee in additional shares under the Plan, unless the service is not provided by the broker or nominee or the stockholder elects to receive distributions in cash. Investors who own common stock registered in street name should consult their broker-dealers for details regarding reinvestment. All distributions to investors who do not participate in the Plan will be paid by check mailed directly to the record holder by Equiserve as dividend disbursing agent.
Under the Plan, whenever the market price of the common stock is equal to or exceeds net asset value at the time shares are valued for purposes of determining the number of shares equivalent to the cash dividend or capital gains distribution, participants in the Plan are issued shares of common stock, valued at the greater of (i) the net asset value as most recently determined or (ii) 95% of the then current market price of the common stock. The valuation date is the dividend or distribution payment date or, if that date is not a New York Stock Exchange trading day, the next preceding trading day. If the net asset value of the common stock at the time of valuation exceeds the market price of the common stock, participants will receive shares from the Fund, valued at market price. If the Fund should declare a dividend or capital gains distribution payable only in cash, Equiserve will buy the common stock for such Plan in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts, except that Equiserve will endeavor to terminate purchases in the open market and cause the Fund to issue shares at net asset value if, following the commencement of such purchases, the market value of the common stock exceeds net asset value.
Participants in the Plan have the option of making additional cash payments to Equiserve, monthly, for investment in the shares as applicable. Such payments may be made in any amount from $250 to $10,000. Equiserve will use all funds received from participants to purchase shares of the Fund in the open market on or about the 15th of each month. Equiserve will charge each stockholder who participates $0.75, plus a pro rata share of the brokerage commissions. Brokerage charges for such purchases are expected to be less than the usual brokerage charge for such transactions. It is suggested that participants send voluntary cash payments to Equiserve in a manner that ensures that Equiserve will receive these payments approximately 10 days before the 15th of the month. A participant may without charge withdraw a voluntary cash payment by written notice, if the notice is received by Equiserve at least 48 hours before such payment is to be invested.
Equiserve maintains all stockholder accounts in the Plan and furnishes written confirmations of all transactions in the account, including information needed by stockholders for personal and tax records. Shares in the account of each Plan participant will be held by Equiserve in noncertificated form in the name of the participant. A Plan participant may send its share certificates to Equiserve so that the shares represented by such certificates will be held by Equiserve in the participant's stockholder account under the Plan.
In the case of stockholders such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, Equiserve will administer the Plan on the basis of the number of shares certified from time to time by the stockholder as representing the total amount registered in the stockholder's name and held for the account of beneficial owners who participate in the Plan.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to written notice of the change sent to the Plan members at least 90 days before the record date for such dividend or distribution. The Plan also may be amended or terminated by Equiserve on at least 90 days written notice to the Plan participants.
TAXATION
The following discussion is a brief summary of certain additional United States Federal income tax considerations affecting the Fund and its stockholders. No attempt is made to present a detailed explanation of all Federal, state, local and foreign tax concerns, and the discussions set forth here and in the Prospectus do not constitute tax advice. Investors are urged to consult their own tax advisers with any specific questions relating to Federal, state, local and foreign taxes. The discussion reflects applicable tax laws of the United States as of the date of this SAI, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service (the "IRS") retroactively or prospectively.
GENERAL
The Fund has qualified as and intends to continue to qualify as a regulated investment company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If it so qualifies, the 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 on its net capital gain (i.e., the excess of its net realized long-term capital gain over its net realized short-term capital loss), if any, which it distributes to its stockholders in each taxable year, provided that an amount equal to at least 90% of the sum of its net investment income and any net tax-exempt income for the taxable year is distributed to its stockholders.
Qualification as a RIC requires, among other things, that the Fund: (a) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in stock, securities or currencies and (b) diversify its holdings so that, at the end of each quarter of each taxable year, subject to certain exceptions, (i) at least 50% of the market value of the Fund's assets is represented by cash, cash items, U.S. government securities, securities of other RICs and other securities with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or the securities of other RICs) of any one issuer or any two or more issuers that the Fund controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses.
TAXATION OF THE FUND
If the Fund were unable to satisfy the 90% distribution requirement or otherwise were to fail to qualify as a RIC in any year, it would be taxed in the same manner as an ordinary corporation and distributions to the Fund's stockholders would not be deductible by the Fund in computing its taxable income. To qualify again to be taxed as a RIC in a subsequent year, the Fund would be required to distribute to Preferred Stockholders and common stockholders 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) or, alternatively, to elect to be subject to taxation on such built-in gains recognized for a period of ten years, in order to qualify as a RIC in a subsequent year.
Under the Code, amounts not distributed by a RIC on a timely basis in accordance with a calendar year distribution requirement are subject to a 4% excise tax. To avoid the tax, the Fund must distribute during each calendar year, an amount at least equal to the sum of (1) 98% of its ordinary income for the calendar year, (2) 98% of its capital gain net income (both long-term and short-term) for the one year period ending on October 31 of such year, (unless, as in the case of the Fund, an election is made by a fund with a November or December year-end to use the fund's fiscal year), and (3) all ordinary income and capital gain net income for previous years that were not previously distributed or subject to tax under Subchapter M. A distribution will be treated as paid during the calendar year if it is paid during the calendar year or declared by the Fund in October, November or December of the year, payable to stockholders of record on a date during such a month and paid by the Fund during January of the following year. Any such distributions paid during January of the following year will be deemed to be received on December 31 of the year the distributions are declared, rather than when the distributions are received. While the Fund intends to distribute its ordinary income and capital gain net income in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's ordinary income and capital gain net income will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.
Gain or loss on the sales of securities by the Fund will be long-term capital gain or loss if the securities have been held by the Fund for more than one year. Gain or loss on the sale of securities held for one year or less will be short-term capital gain or loss.
Foreign currency gain or loss on non-U.S. dollar denominated bonds and other similar debt instruments and on any non-U.S. dollar denominated futures contracts, options and forward contracts that are not section 1256 contracts (as defined below) generally will be treated as net investment income and loss.
If the Fund invests in stock of a passive foreign investment company (a "PFIC"), the Fund may be subject to Federal income tax on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock even if such income is distributed as a taxable dividend by the Fund to its stockholders. The tax would be determined by allocating such distribution or gain ratably to each day of the Fund's holding period for the stock. The amount so allocated to any taxable year of the Fund prior to the taxable year in which the excess distribution or disposition occurs would be taxed to the Fund at the highest marginal Federal corporate income tax rate in effect for the year to which it was allocated, and the tax would be further increased by an interest charge. The amount allocated to the taxable year of the distribution or disposition would be included in the Fund's net investment income and, accordingly, would not be taxable to the Fund to the extent distributed by the Fund as a taxable dividend to stockholders.
If the Fund invests in stock of a PFIC, the Fund may be able to elect to treat the PFIC as a "qualified electing fund," in lieu of being taxable in the manner described in the above paragraph and to include annually in income its pro rata share of the ordinary earnings and net capital gain (whether or not distributed) of the PFIC. In order to make this election, the Fund would be required to obtain annual information from the PFICs in which it invests, which may be difficult to obtain. Alternatively, the Fund may elect to mark-to-market at the end of each taxable year all shares that it hold in PFICs. If it makes this election, the Fund would recognize as ordinary income any increase in the value of such shares over their adjusted basis and as ordinary loss any decrease in such value to the extent it does not exceed prior increases.
The Fund may invest in debt obligations purchased at a discount with the result that the Fund may be required to accrue income for Federal income tax purposes before amounts due under the obligations are paid. The Fund may also invest in securities rated in the medium to lower rating categories of nationally recognized rating organizations, and in unrated securities ("high yield securities"). A portion of the interest payments on such high yield securities may be treated as dividends for Federal income tax purposes.
As a result of investing in stock of PFICs or securities purchased at a discount or any other investment that produces income that is not matched by a corresponding cash distribution to the Fund, the Fund could be required to include in current income, income it has not yet received. Any such income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code. This might prevent the Fund from distributing 90% of its net investment income as is required in order to avoid Fund-level Federal income taxation, or might prevent the Fund from distributing enough ordinary income and capital gain net income to avoid completely the imposition of the excise tax. To avoid this result, the Fund may be required to borrow money or dispose of other securities to be able to make distributions to its stockholders.
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. Such a suspension of distributions might prevent the Fund from distributing 90% of its net investment income as is required in order to avoid Fund-level Federal income taxation, or might prevent the Fund from distributing enough income and capital gain net income to avoid completely imposition of the excise tax. Upon any failure to meet the asset coverage requirements of the 1940 Act or the Articles Supplementary, the Fund may, and in certain circumstances will, be required to partially redeem the shares of Preferred Stock in order to restore the requisite asset coverage and avoid the adverse consequences to the Fund and its stockholders of failing to qualify as a RIC. If asset coverage were restored, the Fund would again be able to pay dividends and would generally be able to avoid Fund-level Federal income taxation on the income that it distributes.
HEDGING TRANSACTIONS
Certain options, futures contracts and options on futures contracts are "section 1256 contracts." Any gains or losses on section 1256 contracts are generally considered 60% long- term and 40% short-term capital gains or losses ("60/40"). Also, section 1256 contracts held by the Fund at the end of each taxable year are "marked-to-market" with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as 60/40 gain or loss.
Hedging transactions undertaken by the Fund may result in "straddles" for Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund. In addition, losses realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which such losses are realized. Further, the Fund may be required to capitalize, rather than deduct currently, any interest expense on indebtedness incurred or continued to purchase or carry any positions that are part of a straddle.
The Fund may make one or more of the elections available under the Code which are applicable to straddles. If the Fund makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions may be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections accelerate the recognition of gain or loss from the affected straddle positions.
Because application of the straddle rules may affect the character and timing of the Fund's gains, losses and deductions, the amount which must be distributed to stockholders, and which will be taxed to stockholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not engage in such hedging transactions.
FOREIGN TAXES
Since the Fund may invest in foreign securities, its income from such securities may be subject to non-U.S. taxes. It is anticipated that the Fund will not invest more than 35% of its total assets in foreign securities. Accordingly, the Fund will not be eligible to elect to "pass- through" to stockholders of the Fund the ability to use the foreign tax deduction or foreign tax credit for foreign taxes paid with respect to qualifying taxes. In order to make such an election, at least 50% of the Fund's total assets would be required to be invested in foreign securities.
TAXATION OF STOCKHOLDERS
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 stockholders, each of whom (i) will be required to include in income for tax purposes as long-term capital gains its share of such undistributed amounts, (ii) 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 (iii) 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 stockholder's gross income.
Distributions of ordinary income are taxable to a U.S. stockholder 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 Fund expects to distribute a relatively small amount of income that would be eligible for the dividends received deduction. The amount of any dividend distribution eligible for the dividends received deduction will be designated by the Fund in a written notice to stockholders within 60 days of the close of the taxable year. Distributions of net capital gain designated as capital gain dividends ("Capital Gain Dividends"), if any, are taxable to shareholders at rates applicable to long-term capital gains, whether paid in cash or in shares, regardless of how long the stockholder has held the Fund's shares, and are not eligible fo the dividends received deduction. Both long-term and short-term capital gains of corporations are currently taxed at the rates applicable to ordinary income. For non-corporate taxpayers, however, short-term capital gains and ordinary income will currently be taxed at a maximum rate of 38.5% while long-term capital gains generally will be taxed at a maximum rate of 20%.
Stockholders 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 stockholder'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 stockholder will realize a taxable gain or loss depending upon his or her basis in the shares. Such gain or loss will be treated as long-term capital gain or loss if the shares have been held for more than one year. Any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced within a 61- day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a stockholder on the sale of Fund shares held by the stockholder 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 stockholder (or credited to the stockholder as an undistributed capital gain) with respect to such shares.
Ordinary income dividends and Capital Gain Dividends also may be subject to state and local taxes. Stockholders are urged to consult their own tax advisers regarding specific questions about the U.S. Federal (including the application of the alternative minimum tax rules), 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 on all taxable distributions and redemption proceeds payable to non-corporate stockholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against such stockholder's Federal income tax liability.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action, either prospectively or retroactively. Persons considering an investment in Series C Preferred shares should consult their own tax advisers regarding the purchase, ownership and disposition of Series C Preferred.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR SERIES C PREFERRED
GENERAL
The Articles Supplementary provide that the Applicable Rate for each Dividend Period of the Series C Preferred will be equal to the rate per annum that the Auction Agent advises has resulted on the Business Day preceding the first day of a Dividend Period (an "Auction Date") from implementation of the Auction Procedures set forth in the Articles Supplementary, and summarized below, in which persons determine to hold or offer to sell or, based on dividend rates bid by them, offer to purchase or sell shares of such Series. Each periodic implementation of the Auction Procedures is referred to herein as an "Auction." The following summary is qualified by reference to the Auction Procedures set forth in the Articles Supplementary.
Auction Agency Agreement. The Fund has entered into an Auction Agency Agreement (the "Auction Agency Agreement") with the Auction Agent (currently, The Bank of New York), which provides, among other things, that the Auction Agent will follow the Auction Procedures for purposes of determining the Applicable Rate for Series C Preferred so long as the Applicable Rate is to be based on the results of the Auction.
Broker-Dealer Agreements. Each Auction requires the participation of one or more Broker-Dealers. The Auction Agent has entered into agreements (collectively, the "Broker-Dealer Agreements") with several Broker-Dealers selected by the Fund, which provide for the participation of those Broker-Dealers in Auctions for Series C Preferred. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as the Securities Depository for the Agent Members with respect to the Series C Preferred. One certificate for all of the Series C Preferred shares will be registered in the name of Cede & Co., as nominee of the Securities Depository.
Such certificate will bear a legend to the effect that such certificate is issued subject to the provisions restricting transfers of Series C Preferred contained in the Articles Supplementary. The Fund will also issue stop-transfer instructions to the transfer agent for the Series C Preferred. Prior to the commencement of the right of Holders of the Preferred Stock to elect a majority of the Fund's directors, as described under "Description of the Series C Preferred - Voting Rights" in the Prospectus, Cede & Co. will be the Holder of all the Series C Preferred and owners of such shares will not be entitled to receive certificates representing their ownership interest in such shares.
DTC, a New York chartered limited purpose trust company, performs services for its participants (including Agent Members), some of whom (and/or their representatives) own DTC. DTC maintains lists of its participants and will maintain the positions (ownership interests) held by each such Agent Member in Series C Preferred, whether for its own account or as a nominee for another person.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to the Submission Deadline on each Auction Date for the Series C Preferred:
(i) each Beneficial Owner of Series C Preferred may submit to its Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding Series C Preferred shares, if any, that such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for such shares for the next succeeding Dividend Period of such shares;
(b) "Bid" - indicating the number of Outstanding Series C Preferred shares, if any, that such Beneficial Owner offers to sell if the Applicable Rate for such Series C Preferred for the next succeeding Dividend Period is less than the rate per annum specified by such Beneficial Owner in such Bid; and/or
(c) "Sell Order" - indicating the number of Outstanding Series C Preferred shares, if any, that such Beneficial Owner offers to sell without regard to the Applicable Rate for such Series C Preferred for the next succeeding Dividend Period; and
(ii) Broker-Dealers will contact customers who are Potential Beneficial Owners by telephone or otherwise to determine whether such customers desire to submit Bids, in which case they will indicate the number of Series C Preferred shares that they offer to purchase if the Applicable Rate for Series C Preferred for the next succeeding Dividend Period is not less than the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer is herein referred to as a "Bidder" and collectively as "Bidders." The submission by a Broker-Dealer of an Order to the Auction Agent is referred to herein as an "Order" and collectively as "Orders," and an Existing Holder or Potential Holder who places an Order with the Auction Agent or on whose behalf an Order is placed with the Auction Agent is referred to herein as a "Bidder" and collectively as "Bidders."
A Bid placed by a Beneficial Owner specifying a rate higher than the Applicable Rate determined in the Auction will constitute an irrevocable offer to sell the shares subject thereto. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date thereof will be treated as having submitted a Sell Order to its Broker-Dealer. A Sell Order will constitute an irrevocable offer to sell Series C Preferred subject thereto at a price per share equal to $25,000.
A Beneficial Owner that fails to submit to its Broker-Dealer prior to the Submission Deadline for the Series C Preferred an Order or Orders covering all the Outstanding Series C Preferred held by such Beneficial Owner will be deemed to have submitted a Hold Order to its Broker-Dealer covering the number of Outstanding Series C Preferred shares held by such Beneficial Owner and not subject to Orders submitted to its Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to its Broker-Dealer prior to the Submission Deadline for the Series C Preferred an Order or Orders covering all of the Outstanding Series C Preferred held by such Beneficial Owner for an Auction relating to a Special Dividend Period consisting of more than 28 Dividend Period days, such Beneficial Owner will be deemed to have submitted a Sell Order to its Broker-Dealer covering the number of Outstanding Series C Preferred shares held by such Beneficial Owner and not subject to Orders submitted to its Broker-Dealer.
A Potential Beneficial Owner of Series C Preferred may submit to its Broker-Dealer Bids in which it offers to purchase Series C Preferred if the Applicable Rate for the next Dividend Period is not less than the rate specified in such Bid. A Bid placed by a Potential Beneficial Owner specifying a rate not higher than the Maximum Rate will constitute an irrevocable offer to purchase the number of Series C Preferred shares specified in such Bid if the rate determined in the Auction is equal to or greater than the rate specified in such Bid. A Beneficial Owner of Series C Preferred that offers to become the Beneficial Owner of additional Series C Preferred is, for purposes of such offer, a Potential Beneficial Owner.
As described more fully below under " - Submission of Orders by Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves (unless otherwise permitted by the Fund) as Existing Holders in respect of Series C Preferred subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of Series C Preferred subject to Orders submitted to them by Potential Beneficial Owners. However, neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's failure to comply with the foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as described above. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any Series C Preferred held by it or its customers who are Beneficial Owners will be treated in the same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of Series C Preferred held by it, as described in the second preceding paragraph. For information concerning the priority given to different types of Orders placed by Existing Holders, see " - Submission of Orders by Broker-Dealers to Auction Agent" below.
Neither the Fund nor an affiliate may submit an Order in any Auction, except that any Broker-Dealer that is an affiliate of the Fund may submit Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase and sale, which may result in an Existing Holder continuing to hold or selling, or a Potential Holder purchasing, a number of Series C Preferred shares that is fewer than the number of Series C Preferred shares specified in its Order. See " - Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below. To the extent the allocation procedures have that result, Broker-Dealers that have designated themselves as Existing Holders or Potential Holders in respect of customer Orders will be required to make appropriate pro rata allocations among their respective customers. Each purchase or sale shall be made for settlement on the Business Day next succeeding the Auction Date at a price per share equal to $25,000. See " - Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate will (i) be treated as a Sell Order if submitted by a Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures establish a maximum rate per annum that can result from an Auction up to the Maximum Rate. See " - Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and " - Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with Auctions. In the absence of bad faith or negligence on its part, the Auction Agent will not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under the Auction Agency Agreement and will not be liable for any error of judgment made in good faith unless the Auction Agent will have been negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the Existing Holders of Series C Preferred, the Auction Agent's registry of Existing Holders, the results of Auctions and notices from any Broker-Dealer (or other person, if permitted by the Fund) with respect to transfers described under "The Auction - Secondary Market Trading and Transfer of Series C Preferred" in the Prospectus and notices from the Fund. The Auction Agent is not required to accept any such notice for an Auction unless it is received by the Auction Agent by 3:00 p.m., Eastern time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to the Fund on a date no earlier than 60 days after such notice. If the Auction Agent should resign, the Fund will use its best efforts to enter into an agreement with a successor Auction Agent containing substantially the same terms and conditions as the Auction Agency Agreement. The Fund may remove the Auction Agent, provided that prior to such removal, the Fund shall have entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for Series C Preferred will pay to each Broker-Dealer, from funds provided by the Fund, a service charge equal to, in the case of any Auction immediately preceding a Dividend Period of less than one year, the product of (a) a fraction, the numerator of which is the number of days in such Dividend Period and the denominator of which is 365, times (b) 1/4 of 1%, times (c) $25,000 times (d) the aggregate number of Series C Preferred shares placed by such Broker-Dealer at such Auction, or a percentage agreed to by the Fund and the Broker-Dealers in the case of any Auction immediately preceding a Dividend Period of one year or longer, of the purchase price of Series C Preferred placed by such Broker-Dealer at such Auction. For the purposes of the preceding sentence, Series C Preferred will be placed by a Broker-Dealer if such shares were (x) the subject of Hold Orders deemed to have been submitted to the Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its customers who are Beneficial Owners or (y) the subject of an Order submitted by such Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing Holder continuing to hold such shares as a result of the Auction, (ii) a Submitted Bid of a Potential Holder that resulted in such Potential Holder purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an affiliate of the Fund) may submit Orders in Auctions for its own account, unless the Fund notifies all Broker-Dealers that they may no longer do so, in which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit Orders in Auctions, but only if such Orders are not for its own account. If a Broker-Dealer submits an Order for its own account in any Auction, it might have an advantage over other Bidders because it would have knowledge of all Orders submitted by it in that Auction. Such Broker-Dealer, however, would not have knowledge of Orders submitted by other Broker-Dealers in that Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:00 p.m., New York City time, on each Auction Date, or such other time on the Auction Date specified by the Auction Agent (i.e., the Submission Deadline), each Broker-Dealer will submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date, designating itself (unless otherwise permitted by the Fund) as the Existing Holder or Potential Holder, as the case may be, in respect of Series C Preferred subject to such Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate to the next highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction Agent covering in the aggregate more than the number of Outstanding Series C Preferred shares subject to an Auction held by such Existing Holder, such Orders will be considered valid in the following order of priority:
(i) all Hold Orders for Series C Preferred will be considered valid, but only up to and including in the aggregate the number of Outstanding Series C Preferred shares held by such Existing Holder, and, if the number of Series C Preferred shares subject to such Hold Orders exceeds the number of Outstanding Series C Preferred shares held by such Existing Holder, the number of shares subject to each such Hold Order will be reduced pro rata to cover the number of Outstanding shares held by such Existing Holder;
(ii) (a) any Bid for Series C Preferred will be considered valid up to and including the excess of the number of shares of Outstanding Series C Preferred shares held by such Existing Holder over the number of Series C Preferred shares subject to any Hold Orders referred to in clause (i) above;
(b) subject to subclause (a), if more than one Bid of an Existing Holder for Series C Preferred is submitted to the Auction Agent with the same rate and the number of Outstanding shares subject to such Bids is greater than such excess, such Bids will be considered valid up to and including the amount of such excess, and the number of Series C Preferred shares subject to each Bid with the same rate will be reduced pro rata to cover the number of Series C Preferred shares equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid of an Existing Holder for Series C Preferred is submitted to the Auction Agent with different rates, such Bids shall be considered valid in the ascending order of their respective rates up to and including the amount of such excess; and
(d) in any such event, the number, if any, of such Outstanding Series C Preferred shares subject to any portion of Bids considered not valid in whole or in part under this clause (ii) will be treated as the subject of a Bid for Series C Preferred by or on behalf of a Potential Holder at the rate specified therein; and
(iii) all Sell Orders for Series C Preferred will be considered valid up to and including the excess of the number of Outstanding Series C Preferred shares held by such Existing Holder over the sum of shares subject to valid Hold Orders referred to in clause (i) above and valid Bids referred to in clause (ii) above.
If more than one Bid of a Potential Holder for Series C Preferred is submitted to the Auction Agent by or on behalf of any Potential Holder, each such Bid submitted will be a separate Bid with the rate and number of Series C Preferred shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for Series C Preferred, the Auction Agent will assemble all valid Orders submitted or deemed submitted to it by the Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer being herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and will determine the excess of the number of Outstanding Series C Preferred shares over the number of Outstanding Series C Preferred shares subject to Submitted Hold Orders (such excess being herein referred to as the "Available Series C Preferred") and whether Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will have been made if the number of Outstanding Series C Preferred shares that are the subject of Submitted Bids of Potential Holders specifying rates not higher than the Maximum Rate equals or exceeds the number of Outstanding Series C Preferred shares that are the subject of Submitted Sell Orders (including the number of Series C Preferred shares subject to Bids of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for Series C Preferred have been made, the Auction Agent will determine the lowest rate specified in such Submitted Bids (the Winning Bid Rate) which, taking into account the rates in the Submitted Bids of Existing Holders, would result in Existing Holders continuing to hold an aggregate number of Outstanding Series C Preferred shares which, when added to the number of Outstanding Series C Preferred shares to be purchased by Potential Holders, based on the rates in their Submitted Bids, would equal not less than the Available Series C Preferred. In such event, the Winning Bid Rate will be the Applicable Rate for the next Dividend Period for all shares of such Series.
If Sufficient Clearing Bids have not been made (other than because all of the Outstanding Series C Preferred is subject to Submitted Hold Orders), the Applicable Rate for the next Dividend Period for all Series C Preferred will be equal to the Maximum Rate. In such a case, Beneficial Owners that have submitted or that are deemed to have submitted Sell Orders may not be able to sell in the Auction all Series C Preferred subject to such Sell Orders but will continue to own Series C Preferred for the next Dividend Period. See " - Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below.
If all of the Outstanding Series C Preferred is subject to Submitted Hold Orders, the Applicable Rate for all Series C Preferred for the next succeeding Dividend Period will be the All Hold Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES
Based on the determinations made under " - Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the discretion of the Auction Agent to round and allocate certain shares as described below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in the order of priority set forth in the Auction Procedures, with the result that Existing Holders and Potential Holders of Series C Preferred will sell, continue to hold and/or purchase such shares as set forth below. Existing Holders that submitted or were deemed to have submitted Hold Orders (or on whose behalf Hold Orders were submitted or deemed to have been submitted) will continue to hold the Series C Preferred subject to such Hold Orders.
If Sufficient Clearing Bids for Series C Preferred shares have been made:
(i) Each Existing Holder that placed or on whose behalf was placed a Submitted Sell Order or Submitted Bid specifying any rate higher than the Winning Bid Rate will sell the Outstanding Series C Preferred subject to such Submitted Sell Order or Submitted Bid;
(ii) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate lower than the Winning Bid Rate will continue to hold the Outstanding Series C Preferred subject to such Submitted Bid;
(iii) Each Potential Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate lower than the Winning Bid Rate will purchase the number of Outstanding Series C Preferred shares subject to such Submitted Bid;
(iv) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to the Winning Bid Rate will continue to hold Series C Preferred subject to such Submitted Bid, unless the number of Outstanding Series C Preferred shares subject to all such Submitted Bids is greater than the number of Series C Preferred shares ("remaining shares") in excess of the Available Series C Preferred over the number of Series C Preferred shares accounted for in clauses (ii) and (iii) above, in which event each Existing Holder with such a Submitted Bid will continue to hold Series C Preferred subject to such Submitted Bid determined on a pro rata basis based on the number of Outstanding Series C Preferred shares subject to all such Submitted Bids of such Existing Holders; and
(v) Each Potential Holder that placed or on whose behalf was
placed a Submitted Bid specifying a rate equal to the
Winning Bid Rate for Series C Preferred will purchase any
Available Series C Preferred not accounted for in clauses
(ii) through (iv) above on a pro rata basis based on the
Outstanding Series C Preferred shares subject to all such
Submitted Bids.
If Sufficient Clearing Bids for Series C Preferred shares have not been made (unless this results because all Outstanding Series C Preferred shares are subject to Submitted Hold Orders):
(i) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to or lower than the Maximum Rate will continue to hold the Series C Preferred subject to such Submitted Bid;
(ii) Each Potential Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to or lower than the Maximum Rate will purchase the number of Series C Preferred shares subject to such Submitted Bid; and
(iii) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted Sell Order will sell a number of Series C Preferred shares subject to such Submitted Bid or Submitted Sell Order determined on a pro rata basis based on the number of Outstanding Series C Preferred shares subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses
(iv) or (v) of the second preceding paragraph or clause (iii) of the next
preceding paragraph, any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a Series C Preferred share, the Auction Agent will, in such
manner as, in its sole discretion, it determines, round up or down to the
nearest whole share the number of Series C Preferred shares being sold or
purchased on such Auction Date so that the number of Series C Preferred
shares sold or purchased by each Existing Holder or Potential Holder will
be whole shares of such Series. If as a result of the pro rata allocation
described in clause (v) of the second preceding paragraph, any Potential
Holder would be entitled or required to purchase less than a whole Series C
Preferred share, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, allocate Series C Preferred for purchase
among Potential Holders so that only whole Series C Preferred shares are
purchased by any such Potential Holder, even if such allocation results in
one or more of such Potential Holders not purchasing shares of such Series.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that submitted an Order of the Applicable Rate for the next Dividend Period and, if the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or in part, by telephone by approximately 3:00 p.m., New York City time, on each Auction Date. Each Broker-Dealer that submitted an Order for the account of a customer will then be required to advise such customer of the Applicable Rate for the next Dividend Period and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or in part, will be required to confirm purchases and sales with each customer purchasing or selling Series C Preferred as a result of the Auction and will be required to advise each customer purchasing or selling Series C Preferred as a result of the Auction to give instructions to its Agent Member of the Securities Depository to pay the purchase price against delivery of such shares or to deliver such shares against payment therefor, as appropriate. The Auction Agent will be required to record each transfer of Series C Preferred shares on the registry of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the Business Day after the Auction Date, the transactions described above will be executed through the Securities Depository and the accounts of the respective Agent Members at the Securities Depository will be debited and credited and shares delivered as necessary to effect the purchases and sales of Series C Preferred as determined in the Auction. Purchasers will make payment through their Agent Members in same-day funds to the Securities Depository against delivery through their Agent Members; the Securities Depository will make payment in accordance with its normal procedures, which now provide for payment against delivery by their Agent Members in same-day funds.
If any Existing Holder selling Series C Preferred in an Auction fails to deliver such shares, the Broker-Dealer of any person that was to have purchased such shares in such Auction may deliver to such person a number of whole Series C Preferred shares that is less than the number of Series C Preferred shares that otherwise was to be purchased by such person. In such event, the number of Series C Preferred shares to be so delivered shall be determined by the Broker-Dealer. Delivery of such lesser number of Series C Preferred shares shall constitute good delivery.
DESCRIPTION OF THE SERIES C PREFERRED
The description of the Series C Preferred contained in this SAI does not purport to be complete and is subject to and qualified in its entirety by reference to the Fund's Charter, including the provisions of the Articles Supplementary establishing the Series C Preferred. A copy of the Articles Supplementary is filed as an exhibit to the registration statement of which the Prospectus and this SAI are a part and may be inspected, and a copy thereof may be obtained, as described under "Additional Information" in the Prospectus.
GENERAL
The Series C Preferred will rank on a parity and with shares of any other series of Preferred Stock of the Fund as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund.
DIVIDENDS AND DIVIDEND PERIODS
Holders of Series C Preferred will be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cumulative cash dividends on their shares, at the Applicable Rate determined as described under " - Determination of Dividend Rate," payable as and when set forth below. Dividends so declared and payable will be paid to the extent permitted under the Code, and to the extent available and in preference to and priority over any dividend declared and payable on shares of the Fund's Common Shares.
By 12:00 noon, New York City time, on the Business Day next preceding each Dividend Payment Date, the Fund is required to deposit with the Paying Agent sufficient same-day funds for the payment of declared dividends. The Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid by the Paying Agent to the Holder, which Holder is expected to be the nominee of the Securities Depository. The Securities Depository will credit the accounts of the Agent Members of the beneficial owners in accordance with the Securities Depository's normal procedures. The Securities Depository's current procedures provide for it to distribute dividends in same-day funds to Agent Members who are in turn expected to distribute such dividends to the persons for whom they are acting as agents. The Agent Member of a beneficial owner will be responsible for holding or disbursing such payments on the applicable Dividend Payment Date to such beneficial owner in accordance with the instructions of such beneficial owner.
Holders of Series C Preferred will not be entitled to any dividends, whether payable in cash, property or shares, in excess of full cumulative dividends. No interest will be payable in respect of any dividend payment or payments that may be in arrears. See " - Default Period."
The amount of dividends per Outstanding Series C Preferred share payable (if declared) on each Dividend Payment Date of each Dividend Period of less than one year (or in respect of dividends on another date in connection with a redemption during such Dividend Period) shall be computed by multiplying the Applicable Rate (or the Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the numerator of which will be the number of days in such Dividend Period (or portion thereof) such share was Outstanding and for which the Applicable Rate or the Default Rate was applicable (but in no event shall the numerator exceed 360) and the denominator of which will be 360, multiplying the amount so obtained by the $25,000, and rounding the amount so obtained to the nearest cent. During any Dividend Period of one year or more, the amount of dividends per Series C Preferred share payable on any Dividend Payment Date (or in respect of dividends on another date in connection with a redemption during such Dividend Period) will be computed as described in the preceding sentence except that the numerator, with respect to any full twelve month period, will be determined on the basis of twelve 30-day months.
Determination of Dividend Rate. The dividend rate for the initial Dividend Period (i.e., the period from and including the Date of Original Issue to and including the initial Auction Date) and the initial Auction Date for the Series C Preferred is set forth in the Prospectus. See "The Auction - Summary of Auction Procedures" in the Prospectus. For each subsequent Dividend Period, subject to certain exceptions, the dividend rate will be the Applicable Rate that the Auction Agent advises the Fund has resulted from an Auction.
Dividend Periods after the initial Dividend Period will either be Standard Dividend Periods (generally seven days) or, subject to certain conditions and with notice to Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless Sufficient Clearing Bids exist at the Auction in respect of such Special Dividend Period (that is, in general, the number of shares subject to Bids by Potential Beneficial Owners is at least equal to the number of shares subject to Sell Orders by Existing Holders). If Sufficient Clearing Bids do not exist at any Auction in respect of a Special Dividend Period, the Dividend Period commencing on the Business Day succeeding such Auction will be the Standard Dividend Period, and the Holders of the Series C Preferred will be required to continue to hold such shares for such Standard Dividend Period. The designation of a Special Dividend Period is also subject to additional conditions. See " - Notification of Dividend Period" below.
Dividends will accumulate at the Applicable Rate from the Date of Original Issue and will be payable on each Dividend Payment Date thereafter. Dividends will be paid through the Securities Depository on each Dividend Payment Date. The Applicable Rate resulting from an Auction will not be greater than the Maximum Rate. The Maximum Rate is subject to upward, but not downward, adjustment in the discretion of the Board of Directors after consultation with the Broker-Dealers, provided that immediately following any such increase the Fund would be in compliance with the Series C Preferred Basic Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for Series C Preferred in which Sufficient Clearing Bids have not been made (other than because all Series C Preferred were subject to Submitted Hold Orders) or following the failure to hold an Auction for any reason on the Auction Date scheduled to occur (except for circumstances in which the Dividend Rate is the Default Rate, as described below). The All Hold Rate will apply automatically following an Auction in which all of the Outstanding Series C Preferred shares are subject (or are deemed to be subject) to Hold Orders.
Prior to each Auction, Broker-Dealers will notify Holders of the term of the next succeeding Dividend Period as soon as practicable after the Broker-Dealers have been so advised by the Fund. After each Auction, on the Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the next succeeding Dividend Period and of the Auction Date of the next succeeding Auction.
Notification of Dividend Period. The Fund will designate the
duration of Dividend Periods of the Series C Preferred; provided, however,
that no such designation is necessary for a Standard Dividend Period and
that any designation of a Special Dividend Period will be effective only if
(i) notice thereof has been given as provided herein, (ii) any failure to
pay in the timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the Series C Preferred has been
cured as set forth under " - Default Period," (iii) Sufficient Clearing
Bids existed in an Auction held on the Auction Date immediately preceding
the first day of such proposed Special Dividend Period, (iv) if the Fund
mailed a notice of redemption with respect to any shares, as described
under " - Redemption," the Redemption Price with respect to such shares has
been deposited with the Paying Agent, and (v) the Fund has confirmed that,
as of the Auction Date next preceding the first day of such Special
Dividend Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the Series C Preferred Basic Maintenance Amount and has
consulted with the Broker-Dealers and has provided notice and a Series C
Preferred Basic Maintenance Report to each Rating Agency which is then
rating the Series C Preferred and so requires.
If the Fund proposes to designate any Special Dividend Period, not fewer than seven Business Days (or two Business Days in the event the duration of the Special Dividend Period is fewer than eight days) nor more than 30 Business Days prior to the first day of such Special Dividend Period, notice will be made by press release and communicated by the Fund by telephonic or other means to the Auction Agent and confirmed in writing promptly thereafter. Each such notice will state (x) that the Fund proposes to exercise its option to designate a succeeding Special Dividend Period, specifying the first and last days thereof and (y) that the Fund will, by 3:00 p.m., New York City time, on the second Business Day next preceding the first day of such Special Dividend Period, notify the Auction Agent, who will promptly notify the Broker-Dealers, of either its determination, subject to certain conditions, to proceed with such Special Dividend Period, in which case the Fund may specify the terms of any Specific Redemption Provisions, or its determination not to proceed with such Special Dividend Period, in which case the succeeding Dividend Period will be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day next preceding the first day of any proposed Special Dividend Period, the Fund will deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers and Existing Holders, either:
(a) a notice stating (1) that the Fund has determined to designate the next succeeding Dividend Period as a Special Dividend Period, specifying the first and last days thereof and (2) the terms of the Specific Redemption Provisions, if any; or
(b) a notice stating that the Fund has determined not to exercise its option to designate a Special Dividend Period.
If the Fund fails to deliver either such notice with respect to any designation of any proposed Special Dividend Period to the Auction Agent or is unable to make the confirmation described above by 3:00 p.m., New York City time, on the second Business Day next preceding the first day of such proposed Special Dividend Period, the Fund will be deemed to have delivered a notice to the Auction Agent with respect to such Dividend Period to the effect set forth in clause (b) above, thereby resulting in a Standard Dividend Period.
Default Period. A "Default Period" with respect to Series C
Preferred will commence on any date upon which the Fund fails to deposit
irrevocably in trust in same-day funds with the Paying Agent by 12:00 noon,
New York City time, on the Business Day next preceding relevant Dividend
Payment Date or date fixed for such redemption (the "Redemption Date"), as
the case may be, (i) the full amount of any declared dividend on the Series
C Preferred payable on such Dividend Payment Date (a "Dividend Default") or
(ii) the full amount of any redemption price (the "Redemption Price")
payable on the Series C Preferred being redeemed on such Redemption Date
(such default a "Redemption Default" and, together with a Dividend Default,
a "Default").
A Default Period with respect to a Dividend Default or a Redemption Default will end by 12:00 noon, New York City time, on the Business Day on which all unpaid dividends and any unpaid Redemption Price will have been deposited irrevocably in trust in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a Default Period applicable to the Series C Preferred, and the Applicable Rate for each Dividend Period commencing during a Default Period will be equal to the Default Rate.
Each subsequent Dividend Period commencing after the beginning of a Default Period will be a Standard Dividend Period; provided, however, that the commencement of a Default Period will not by itself cause the commencement of a new Dividend Period. No Auction will be held during a Default Period.
No Default Period with respect to a Dividend Default or Redemption Default will be deemed to commence if the amount of any dividend or any Redemption Price due (if such Default is not solely due to the willful failure of the Fund) is deposited irrevocably in trust, in same-day funds with the Paying Agent by 12:00 noon, New York City time, within three Business Days after the applicable Dividend Payment Date or Redemption Date, together with an amount equal to the Default Rate applied to the amount of such non-payment based on the actual number of days comprising such period divided by 360. The Default Rate will be equal to the Reference Rate multiplied by three.
RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect to the Series C Preferred if, at the time of such declaration (and after giving effect thereto), asset coverage with respect to the Fund's senior securities representing indebtedness, including all outstanding senior indebtedness of the Fund, would be less than 200% (or such other percentage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities representing stock of a closed-end investment company as a condition of declaring dividends on its Preferred Stock) or (ii) declare any other distribution on the Series C Preferred or purchase or redeem Series C Preferred if, at the time of the declaration (and after giving effect thereto), asset coverage with respect to the Fund's senior securities representing indebtedness would be less than 300% (or such higher percentage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities representing indebtedness of a closed-end investment company as a condition of declaring distributions, purchases or redemptions of its capital stock). A declaration of a dividend or other distribution on or purchase or redemption of Series C Preferred is prohibited, unless there is no event of default under indebtedness senior to the Series C Preferred and, immediately after such transaction, the Fund would have Eligible Assets with an aggregated Discounted Value at least equal to the asset coverage requirements under indebtedness senior to its Preferred Stock (including the Series C Preferred).
For so long as the Series C Preferred is Outstanding, except as otherwise provided in the Articles Supplementary, the Fund shall 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 Shares or other shares, if any, ranking junior to the Series C Preferred as to dividends or upon liquidation) with respect to shares of Common Shares or any other shares of the Fund ranking junior to the Series C Preferred as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of Common Shares or other shares ranking junior to the Series C Preferred (except by conversion into or exchange for shares of the Fund ranking junior to the Series C Preferred as to dividends and upon liquidation), unless, in each case, (x) immediately after such transaction, the Fund would have Eligible Assets with an aggregate Discounted Value at least equal to the Series C Preferred Basic Maintenance Amount and the 1940 Act Series C Preferred Asset Coverage would be achieved, (y) all cumulative and unpaid dividends due on or prior to the date of the transaction have been declared and paid in full with respect to the Preferred Stock, including the Series C Preferred (or shall have been declared and sufficient funds for the full payment thereof shall have been deposited with the Paying Agent, in the case of the Series C Preferred, and the applicable dividend-disbursement agent, with respect to other series of Preferred Stock), and (z) the Fund has redeemed the full number of shares of Preferred Stock required to be redeemed by any mandatory provision for redemption including Series C Preferred required or determined to be redeemed by any provision for mandatory redemption contained in the Articles Supplementary.
No full dividend shall be declared or paid or set apart for payment on the Series C Preferred for any Dividend Period or part thereof, unless full cumulative dividends due through the most recent Dividend Payment Date in the case of the Series C Preferred and due through the most recent dividend payment dates therefor in the case of all other series of Preferred Stock have been or contemporaneously are declared and paid on all Outstanding shares of Preferred Stock. If full cumulative dividends due have not been paid on all shares of Preferred Stock, any dividends being paid on the shares of Preferred Stock (including the Series C Preferred) shall be paid as nearly pro rata as possible on all Outstanding shares of Preferred Stock on the dividend payment dates therefor (the Dividend Payment Date in the case of the Series C Preferred) in proportion to the respective amounts of dividends accumulated but unpaid on each series of Preferred Stock.
REDEMPTION
Optional Redemption. After the initial Dividend Period, subject to any Non-Call Period and the provisions of the Articles Supplementary, and to the extent permitted under the 1940 Act and Maryland law, the Fund may, at its option, redeem in whole or in part out of funds legally available therefor, the Series C Preferred by delivering a notice of redemption not less than 15 calendar days and not more than 40 calendar days prior to the Redemption Date, in the case of Series C Preferred designated as (a) having a Dividend Period of one year or less, on the next Business Day after the last day of such Dividend Period, at a redemption price per share equal to $25,000, plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to the Redemption Date ("Redemption Price") or (b) having a Dividend Period of more than one year, on any Business Day prior to the end of the relevant Dividend Period, at the Redemption Price subject to any applicable Specific Redemption Provisions. Notwithstanding the foregoing, the Fund will not effect any optional redemption unless on the date on which the Fund gives notice of such redemption and on the applicable Redemption Date (x) the Fund has available Deposit Securities with maturity or tender dates not later than the day preceding the applicable Redemption Date and having a value not less than the amount (including any applicable premium) due to Holders of the Series C Preferred on such Redemption Date and (y) the Fund would have Eligible Assets with an aggregate Discounted Value at least equal to the Series C Preferred Basic Maintenance Amount and the 1940 Act Series C Preferred Asset Coverage immediately subsequent to such redemption, if such redemption were to have occurred on each such date.
Mandatory Redemption. The redemption price per Series C Preferred
share in the event of any mandatory redemption will be $25,000 per share,
plus an amount equal to accumulated but unpaid dividends (whether or not
earned or declared) to the date fixed for redemption, plus (in the case of
a Dividend Period of more than one year) any redemption premium, if any,
determined by the Board of Directors after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions (the "Mandatory Redemption Price"). In the event of a mandatory
redemption, the series and number of shares of Preferred Stock to be
redeemed will be determined by the Fund from among all series of Preferred
Stock then Outstanding. The amount of Preferred Stock to be mandatorily
redeemed under such circumstances shall, in the aggregate, equal the lesser
of (a) the minimum amount of Preferred Stock (including the Series C
Preferred if so determined by the Fund) the redemption of which, if deemed
to have occurred immediately prior to the opening of business on the
relevant cure date (any such cure date, together with any Series C
Preferred Basic Maintenance Amount Cure Date or 1940 Act Asset Coverage
Cure Date, a "Cure Date"), would result in the Fund meeting, as the case
may be, the Series C Preferred Basic Maintenance Amount Test, the 1940 Act
Asset Coverage and any other then applicable maintenance amount test, in
each case as of the relevant Cure Date (provided that, if there is no such
minimum amount of Preferred Stock the redemption of which would have such
result, all the Series C Preferred then Outstanding will be redeemed) and
(b) the maximum amount of Preferred Stock that can be redeemed out of funds
expected to be available therefor on such redemption date at the Mandatory
Redemption Price; provided, that in the event that Preferred Stock is
redeemed mandatorily, the Fund may, but is not required to, redeem a
sufficient additional amount of Preferred Stock in order that immediately
following such redemption the Fund has (x) Eligible Assets with an adjusted
value with respect to the Preferred Stock remaining Outstanding of as great
as 110% of the Series C Preferred Basic Maintenance Amount and (y) 1940 Act
Asset Coverage with respect to the Preferred Stock remaining Outstanding of
as great as 220%.
Redemption Procedure. A notice of redemption will be given to the holders of record of Preferred Stock selected for redemption not less than 15 or more than 40 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 Preferred Stock to be redeemed, (iii) the CUSIP number(s) of such shares, (iv) the redemption price (specifying the amount of accumulated dividends to be included therein), (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. If fewer than all the shares of Preferred Stock held by any holder are to be redeemed, the notice of redemption shall specify the number of such shares to be redeemed from such holder.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements in respect of the Series C Preferred: (i) the Fund must maintain assets in its portfolio that have a value, discounted in accordance with the Rating Agency Guidelines, at least equal to the aggregate liquidation preference of the Series C Preferred plus specified liabilities, payment obligations and other amounts; and (ii) the Fund must maintain asset coverage for the Series C Preferred of at least 200%.
Series C Preferred Basic Maintenance Amount. The Fund is required to maintain, as of each Valuation Date, Eligible Assets having in the aggregate a Discounted Value at least equal to the Series C Preferred Basic Maintenance Amount, calculated separately for Moody's (if Moody's is then rating the Series C Preferred at the request of the Fund) and S&P (if S&P is then rating the Series C Preferred at the request of the Fund). For this purpose, the value of the Fund's portfolio securities will be the Market Value. If the Fund fails to meet such requirement on any Valuation Date and such failure is not cured by the related Cure Date, the Fund will be required under certain circumstances to redeem certain Series C Preferred shares.
The "Series C Preferred Basic Maintenance Amount" means, as of any Valuation Date, the dollar amount equal to (a) the sum of (i) the product of the number of shares of each class or series of Preferred Stock Outstanding on such Valuation Date multiplied, in the case of each series or class, by the per-share Liquidation Preference applicable to each series or class; (ii) to the extent not included in (i) the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each Outstanding share of Preferred Stock from the most recent Dividend Payment Date to which dividends have been paid or duly provided for (or, in the event the Series C Preferred Basic Maintenance Amount is calculated on a date prior to the initial Dividend Payment Date with respect to a class or series of the 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; (iii) the Fund's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Fund on Common Stock shall not be included as a liability) and such liabilities projected to become due and payable by the Fund during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date); and (iv) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (a)(i) through (a)(iii) (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 (b) (i) the adjusted value of any of the Fund's assets or (ii) the face value of any of the Fund's assets if, in the case of both (b)(i) and (b)(ii), 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 or Paying Agent, as the case may be, for the payment of the amounts needed to redeem or repurchase Preferred Stock subject to redemption or repurchase or any of (a)(ii) through (a)(iv); and provided that in the event the Fund has repurchased Preferred Stock and irrevocably segregated or deposited assets as described above with its custodian bank or the dividend-disbursing agent or Paying Agent for the payment of the repurchase price the Fund may deduct 100% of the Liquidation Preference of such Preferred Stock to be repurchased from (a) above.
The Discount Factors, the criteria used to determine whether the assets held in the Fund's portfolio are Eligible Assets, and guidelines for determining the market value of the Fund's portfolio holdings for purposes of determining compliance with the Series C Preferred Basic Maintenance Amount are based on the criteria established in connection with rating the Series C Preferred. These factors include, but are not limited to, the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a debt obligation, the higher the related discount factor) and the frequency with which the relevant asset is marked to market. In no event will the Discounted Value of any asset of the Fund exceed its unpaid principal balance or face amount as of the date of calculation.
The Discount Factor relating to any asset of the Fund, the Series C Preferred Basic Maintenance Amount, the assets eligible for inclusion in the calculation of the Discounted Value of the Fund's portfolio and certain definitions and methods of calculation relating thereto may be changed from time to time by the Fund, without stockholder approval, but only in the event that the Fund receives written confirmation from each Rating Agency which is then rating the Series C Preferred and which so requires that any such changes would not impair the Aaa credit rating from Moody's or the AAA rating from S&P.
A Rating Agency's Guidelines will apply to the Series C Preferred only so long as such Rating Agency is rating such shares at the request of the Fund. The Fund will pay certain fees to Moody's and S&P for rating the Series C Preferred. The ratings assigned to the Series C Preferred are not recommendations to buy, sell or hold Series C Preferred. Such ratings may be subject to revision or withdrawal by the assigning Rating Agency at any time. Any rating of the Series C Preferred should be evaluated independently of any other rating.
Upon any failure to maintain the required Discounted Value of the Fund's Eligible Assets, the Fund will seek to alter the composition of its portfolio to re-attain the Series C Preferred Basic Maintenance Amount on or prior to the Series C Preferred Basic Maintenance Cure Date, thereby incurring additional transaction costs and possible losses and/or gains on dispositions of portfolio securities.
Under certain circumstances, as described in the Articles Supplementary, the Board of Directors without further action by the stockholders may modify the calculation of Adjusted Value (as defined in the Articles Supplementary), Series C Preferred Basic Maintenance Amount and the elements of each of them and the definitions of such terms and elements if the Board of Directors determines that such modification is necessary to prevent a reduction in rating of the shares of Preferred Stock by a rating agency rating such shares at the request of the Fund or is in the best interests of the holders of common shares and is not adverse to the holders of Preferred Stock in view of advice to the Fund by the relevant rating agency that such modification would not adversely affect the then-current rating of the affected Preferred Shares. In addition, subject to compliance with applicable law, the Board of Directors may amend the definition of Maximum Rate to increase the percentage amount by which the Reference Rate is multiplied to determine the Maximum Rate shown therein without the vote or consent of the Holders of shares of Preferred Stock, including the Series C Preferred Shares, or any other stockholder of the Fund, after consultation with the Broker-Dealers, and with confirmation from each Rating Agency that immediately following any such increase the Fund would meet the Series C Preferred Basic Maintenance Amount Test.
1940 Act Series C Preferred Asset Coverage. As of each Valuation Date, the Fund shall determine whether the 1940 Act Asset Coverage is met as of that date. The Fund shall deliver to the Auction Agent and each Rating Agency a 1940 Act Asset Coverage Certificate which sets forth the determination of the preceding sentence (i) as of the Date of Original Issue and, thereafter, (ii) as of (x) the last Business Day of each March, June, September and December and (y) a Business Day on or before any 1940 Act Asset Coverage Cure Date following a failure to meet 1940 Act Asset Coverage. Such 1940 Act Asset Coverage Certificate shall be delivered in the case of clause (i) on the Date of Original Issue and in the case of clause (ii) on or before the seventh Business Day after the last Business Day of such March, June, September and December, as the case may be, or the relevant Cure Date.
Notices. The Fund must deliver to the Auction Agent and each Rating Agency a Series C Preferred Basic Maintenance Report which sets forth, as of the related Valuation Date, the Fund's Eligible Assets, the Market Value and Discounted Value thereof (seriatim and in the aggregate), the Series C Preferred Basic Maintenance Amount, and the remainder obtained by subtracting the Series C Preferred Basic Maintenance Amount from the Discounted Value of such Eligble Assets. Such Series C Preferred Basic Maintenance Report shall be delivered as of the Date of Original Issue and thereafter upon the occurrence of specified events on or before the seventh Business Day after the relevant Valuation Date or Cure Date.
VOTING RIGHTS
None of the voting rights (as described in the Prospectus under "Description of the Series C Preferred - Voting Rights") will apply to the Series C Preferred if, at or prior to the time when a vote is required, such shares have been (i) redeemed or (ii) called for redemption and sufficient funds have been deposited in trust to effect such redemption.
LIQUIDATION
In the event of a liquidation, dissolution or winding up of the Fund, whether voluntary or involuntary, the holders of shares of Preferred Stock, including the Series C Preferred, in preference to the holders of Common Shares, will be entitled to payment, out of the assets of the Fund or the proceeds thereof available for distribution to stockholders after satisfaction of claims of creditors of the Fund, of a liquidation distribution in an amount equal to the per share liquidation preference for such Preferred Stock, plus an amount equal to accumulated dividends (whether or not earned or declared by the Fund, but without interest thereon) to the date payment of such distribution is made in full or a sum sufficient for the payment thereof is set apart with the Paying Agent or dividend disbursing agent, as the case may be. However, Holders of Series C Preferred will not be entitled to any premium to which such Holders would be entitled upon redemption of the Series C Preferred. After payment of the full amount of such liquidation distribution, the owners of Preferred Stock, including the Series C Preferred, will not be entitled to any further participation in any distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether voluntary or involuntary, the assets of the Fund or proceeds thereof available for distribution to stockholders after satisfaction of claims of creditors of the Fund is insufficient to pay in full the liquidation distribution to which owners of Preferred Stock are entitled, such assets or the proceeds thereof will be distributed among the owners of such shares of Preferred Stock, including the Series C Preferred, ratably.
In the event of any such liquidation, dissolution or winding up of the Fund, whether voluntary or involuntary, until payment in full is made to the owners of Series C Preferred of the liquidation distribution to which they are entitled, no dividend or other distribution will be made to the holders of Common Shares and no purchase, redemption or other acquisition for any consideration by the Fund will be made in respect of the Common Shares.
DEPOSIT SECURITIES REQUIREMENTS
The Fund is obligated to deposit in a segregated custodial account a specified amount of Deposit Securities constituting same-day Funds not later than 12:00 noon, New York City time, on the Business Day next preceding the relevant Dividend Payment Date or Redemption Date relating to the Series C Preferred. These Deposit Securities, in all cases, will have an initial combined value greater than or equal to the cash amounts payable on the applicable Dividend Payment Date or Redemption Date, and will mature prior to such date.
RESTRICTIONS ON TRANSFER
Series C Preferred may be transferred only (i) pursuant to an Order placed in an Auction, (ii) to or through a Broker-Dealer, or (iii) to the Fund or any affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an Auction will not be effective unless the selling Existing Holder or the Agent Member of such Existing Holder, in the case of an Existing Holder whose shares are listed in its own name on the books of the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer between persons holding Series C Preferred through different Broker-Dealers, advises the Auction Agent of such transfer. The certificates representing the Series C Preferred shares issued to the Securities Depository will bear legends with respect to the restrictions described above and stop-transfer instructions will be issued to the Transfer Agent and/or Registrar.
MOODY'S AND S&P GUIDELINES
The descriptions of the Moody's and S&P Guidelines contained in this SAI do not purport to be complete and are subject to and qualified in their entireties by reference to the Articles Supplementary. A copy of the Articles Supplementary is filed as an exhibit to the registration statement of which the Prospectus and this SAI are a part and may be inspected, and copies thereof may be obtained, as described under "Additional Information" in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to herein as the "Rating Agency Guidelines") established by Moody's and S&P in connection with the Fund's receipt of a rating of Aaa and AAA from Moody's and S&P, respectively, for the Series C Preferred. These Rating Agency Guidelines relate, among other things, to industry and credit quality characteristics of issuers and diversification requirements and specify various Discount Factors for different types of securities (with the level of discount greater as the rating of a security becomes lower). Under the Rating Agency Guidelines, certain types of securities in which the Fund may otherwise invest consistent with its investment strategy are not eligible for inclusion in the calculation of the Discounted Value of the Fund's portfolio. Such instruments include, for example, private placements (other than Rule 144A Securities) and other securities not within the investment guidelines. Accordingly, although the Fund reserves the right to invest in such securities to the extent set forth herein, they have not and it is anticipated that they will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an aggregate Discounted Value, determined on the basis of the Guidelines, greater than the aggregate liquidation preference of the Series C Preferred plus specified liabilities, payment obligations and other amounts, as of periodic Valuation Dates. The Rating Agency Guidelines also require the Fund to maintain asset coverage for the Series C Preferred on a non-discounted basis of at least 200% as of the end of each month, and the 1940 Act requires this asset coverage as a condition to paying dividends or other distributions on Common Shares. See "Description of the Series C Preferred - Asset Maintenance." The effect of compliance with the Rating Agency Guidelines may be to cause the Fund to invest in higher quality assets and/or to maintain relatively substantial balances of highly liquid assets or to restrict the Fund's ability to make certain investments that would otherwise be deemed potentially desirable by the Investment Adviser, including private placements of other than Rule 144A Securities (as defined herein). The Rating Agency Guidelines are subject to change from time to time with the consent of the relevant rating agency and would not apply if the Fund in the future elected not to use investment leverage consisting of senior securities rated by one or more rating agencies, although other similar arrangements might apply with respect to other senior securities that the Fund may issue.
The Fund intends to maintain, at specified times, a Discounted Value for its portfolio at least equal to the amount specified by each rating agency (the "Series C Preferred Basic Maintenance Amount"), the determination of which is as set forth under "Description of the Series C Preferred - Asset Maintenance." Moody's and S&P have each established separate guidelines for determining Discounted Value. To the extent any particular portfolio holding does not satisfy the applicable Rating Agency's Guidelines, all or a portion of such holding's value will not be included in the calculation of Discounted Value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the percentage of Fund assets that may be invested in holdings not eligible for inclusion in the calculation of the Discounted Value of the Fund's portfolio. The amount of such assets included in the portfolio at any time may vary depending upon the rating, diversification and other characteristics of the assets included in the portfolio which are eligible for inclusion in the Discounted Value of the portfolio under the Rating Agency Guidelines.
A rating of preferred stock as Aaa (as described by Moody's) or AAA (as described by S&P) indicates strong asset protection, conservative balance sheet ratios and positive indications of continued protection of preferred dividend requirements. A Moody's or S&P credit rating of preferred stock does not address the likelihood that a resale mechanism (e.g., the Auction) will be successful. As described respectively by Moody's and S&P, an issue of preferred stock which is rated Aaa or AAA is considered to be top-quality preferred stock with good asset protection and the least risk of dividend impairment within the universe of preferred stocks.
Ratings are not recommendations to purchase, hold or sell Series C Preferred, inasmuch as the rating does not comment as to market price or suitability for a particular investor. The rating is based on current information furnished to Moody's and S&P by the Fund and obtained by Moody's and S&P from other sources. The rating may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information.
MOODY'S GUIDELINES
Under the Moody's guidelines, the Fund is required to maintain specified discounted asset values for its portfolio representing the Series C Preferred Basic Maintenance Amount. To the extent any particular portfolio holding does not meet the applicable guidelines, it is not included for purposes of calculating the Discounted Value of the Fund's portfolio, and, among the requirements, the amount of such assets included in the portfolio at any time, if any, may vary depending upon the credit quality (and related Discounted Value) of the Fund's eligible assets at such time.
Upon any failure to maintain the required Discounted Value, the Fund may seek to alter the composition of its portfolio to reestablish required asset coverage within the specified ten Business Day cure period, thereby incurring additional transaction costs and possible losses and/or gains on dispositions of portfolio securities. To the extent any such failure is not cured in a timely manner, the holders of the Series C Preferred will acquire certain rights. See "Description of the Series C Preferred - Asset Maintenance."
The following Discount Factors apply to portfolio holdings as described below, subject to diversification, issuer size and other requirements, in order to constitute Moody's Eligible Assets includable within the calculation of Discounted Value:
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------- ---------------
Short Term Money Market Instruments (other than U.S. Government Obligations set forth
below) and other commercial paper:
U.S. Treasury Securities with final maturities that are less than or equal to 60 days..... 1.00
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.............................................................. **
U.S. Common Stock and Common Stock of foreign issuers for which ADRs are Traded................ 3.00
Common Stock of foreign issuers (in existence for at least five years) for which no ADRs
are traded..................................................................................... 4.00
Convertible preferred stocks................................................................... 3.00
Preferred stocks:
Auction rate preferred stocks............................................................. 3.50
Other preferred stocks issued by issuers in the financial and industrial industries....... 1.62
Other preferred stocks issued by issuers in the utilities industry........................ 1.40
U.S. Government Obligations (other than U.S. Treasury Securities set forth above or U.S.
Treasury Securities Strips set forth below) 1.04-1.26
U.S. Treasury Securities Strips 1.04-1.66
Corporate evidences of indebtedness:
Corporate evidences of indebtedness rated Aaa3 1.10-1.33
Corporate evidences of indebtedness rated at least Aa3 1.15-1.39
Corporate evidences of indebtedness rated at least A3 1.20-1.45
Corporate evidences of indebtedness rated at least Baa3 1.25-1.52
Corporate evidences of indebtedness rated at least Ba3 1.36-1.64
Corporate evidences of indebtedness rated at least B1and B2 1.46-1.77
Convertible corporate evidences of indebtedness with senior debt securities rated at least
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 at least
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 at least
Baa3 issued by the following type of issuers:
Utility................................................................................... 1.48
Industrial................................................................................ 1.95
Financial................................................................................. 1.73
Transportation............................................................................ 2.33
Convertible corporate evidences of indebtedness with senior debt securities rated at least
Ba3 issued by the following type of issuers:
Utility................................................................................... 1.49
Industrial................................................................................ 1.96
Financial................................................................................. 1.74
Transportation............................................................................ 2.34
Convertible corporate evidences of indebtedness with senior debt securities rated at least
B2 issued by the following type of issuers:
Utility................................................................................... 1.59
Industrial................................................................................ 2.06
Financial................................................................................. 1.84
Transportation............................................................................ 2.44
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** Discount factor applicable to the underlying assets.
"Moody's Eligible Assets" means:
(a) 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);
(b) Short-Term Money Market Instruments;
(c) 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;
(d) preferred stocks (i) which either (A) are issued by issuers whose senior debt securities are rated at least Baa1 by Moody's or (B) are rated at least Baa3 by Moody's or (C) 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, (ii) of issuers which have (or, in the case of issuers which are special purpose corporations, whose parent companies have) common stock listed on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market System, (iii) which have a minimum issue size (when taken together with other of the issuer's issues of similar tenor) of $50,000,000, (iv) 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), (v) which pay cumulative cash dividends in U.S. dollars, (vi) which are not convertible into any other class of stock and do not have warrants attached, (vii) which are not issued by issuers in the transportation industry and (viii) 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 Value of the Fund's holdings of any single issue of auction rate preferred stock shall not be more than 1% of the Fund's total assets.
(e) common stocks (i) (A) which are traded on a nationally recognized stock exchange or in the over-the-counter market, (B) if cash dividend paying, pay cash dividends in U.S. dollars and (C) which may be sold without restriction by the Fund; provided, however, that (y) common stock which, while a Moody's Eligible Asset owned by the Fund, ceases paying any regular cash dividend will no longer be considered a Moody's Eligible Asset until 71 days after the date of the announcement of such cessation, unless the issuer of the common stock has senior debt securities rated at least A3 by Moody's and (z) the aggregate Market Value of the Fund's holdings of the common stock of any issuer in excess of 4% in the case of utility common stock and 6% in the case of non-utility common stock of the aggregate Market Value of the Fund's holdings shall not be Moody's Eligible Assets, (ii) which are securities denominated in any currency other than the U.S. dollar or securities of issuers formed under the laws of jurisdictions other than the United States, its states and the District of Columbia for which there are dollar- denominated American Depository Receipts ("ADRs") or their equivalents which are traded in the United States on exchanges or over-the-counter and are issued by banks formed under the laws of the United States, its states or the District of Columbia or (iii) which are securities of issuers formed under the laws of jurisdictions other than the United States (and in existence for at least five years) for which no ADRs are traded; provided, however, that the aggregate Market Value of the Fund's holdings of securities denominated in currencies other than the U.S. dollar and ADRs in excess of (A) 6% of the aggregate Market Value of the outstanding shares of common stock of such issuer thereof or (B) in excess of 10% of the Market Value of the Fund's Moody's Eligible Assets with respect to issuers formed under the laws of any single such non- U.S. jurisdiction other than Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom, shall not be a Moody's Eligible Asset;
(f) ADR securities, based on the following guidelines: (i) Sponsored ADR program or (ii) Level II or Level III ADRs. Private placement Rule 144A ADRs are not eligible for collateral consideration. Global GDR programs will be evaluated on a case by case basis;
(g) U.S. Government Obligations;
(h) corporate evidences of indebtedness (i) which may be sold without restriction by the Fund 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, (ii) which have a minimum issue size of at least (A) $100,000,000 if rated at least Baa3 or (B) $50,000,000 if rated B or Ba3, (iii) which are not convertible or exchangeable into equity of the issuing corporation and have a maturity of not more than 30 years and (iv) for which, if rated below Baa3 or not rated, 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; and
(i) convertible corporate evidences of indebtedness (i)
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), (ii) which
are convertible into common stocks which are traded on the New York Stock
Exchange or the American Stock Exchange or are quoted on the Nasdaq
National Market System and (iii) 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 (e) 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
(d) 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 (a) through (g) above less the aggregate
Market Value of those investments excluded from Moody's Eligible Assets
pursuant to the proviso appearing after clause (i) below; and
(j) no assets which are subject to any lien or irrevocably deposited by the Fund for the payment of amounts needed to meet the following obligations may be includible in Moody's Eligible Assets:
(i) the sum of (A) the product of the number of shares of each class or series of Preferred Stock Outstanding on such Valuation Date multiplied by the liquidation preference per share; (B) to the extent not included in (A) the aggregate amount of cash dividends (whether or not earned or declared) that will have accumulated for each Outstanding share of Preferred Stock from the most recent dividend payment date to which dividends have been paid or duly provided for (or, in the event the asset coverage in respect of such shares is calculated on a date prior to the initial dividend payment date with respect to a class or series of the Preferred Stock, then from the date of original issue) through the Valuation Date plus all dividends to accumulate on the Preferred Stock then Outstanding during the 70 days following such Valuation Date or, if less, during the number of days following such Valuation Date that shares of Preferred Stock called for redemption are scheduled to remain Outstanding; (C) the Fund's other liabilities due and payable as of such Valuation Date (except that dividends and other distributions payable by the Fund on Common Shares shall not be included as a liability) and such liabilities projected to become due and payable by the Fund during the 90 days following such Valuation Date (excluding liabilities for investments to be purchased and for dividends and other distributions not declared as of such Valuation Date); and (D) any current liabilities of the Fund as of such Valuation Date to the extent not reflected in any of (i)(i)(A) through (i)(i)(C) (including, without limitation, and immediately upon determination, any amounts due and payable by the Fund pursuant to reverse repurchase agreements and any payables for assets purchased as of such Valuation Date) less
(ii) (A) the adjusted value of any of the Fund's assets or (B) the face value of any of the Fund's assets if, in the case of both (ii)(A) and (ii)(B), such assets are either cash or evidences of indebtedness which mature prior to or on the date of redemption or repurchase of shares of preferred stock or payment of another liability and are either U.S. Government Obligations or evidences of indebtedness which have a rating assigned by Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+ or A-1+, and are irrevocably held by the Fund's custodian bank in a segregated account or deposited by the Fund with the dividend-disbursing agent or Paying 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 preferred stock and irrevocably segregated or deposited assets as described above with its custodian bank, the dividend-disbursing agent or Paying Agent for the payment of the repurchase price the Fund may deduct 100% of the liquidation preference of such preferred stock to be repurchased from (i) above.
Notwithstanding anything to the contrary in the preceding clauses
(a)-(i), the Fund's investment in preferred stock, common stock, corporate
evidences of indebtedness and convertible corporate evidences of
indebtedness shall not be treated as Moody's Eligible Assets except to the
extent they satisfy the following diversification requirements (utilizing
Moody's Industry and Sub-industry Categories) with respect to the Market
Value of the Fund's holdings:
Issuer:
Non-Utility Utility
Maximum Single Maximum Single
Moody's Rating(1)(2) Issuer(3)(4) Issuer(3)(4)
-------------- ------------- -------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, "Baa", Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 (Caa subordinate) 2% 2%
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Industry and State:
Utility Utility
Non-Utility Maximum Maximum
Maximum Single Single Sub- Single
Moody's Rating(1) Industry(3) Industry(3)(6) State(3)
----------------- ------------- -------------- ---------
Aaa 100% 100% 100%
Aa 60% 60% 20%
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%
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(1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate evidences of indebtedness and convertible corporate evidences of indebtedness rated by S&P but not by Moody's.
(2) Corporate evidences of indebtedness from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one name.
(5) CS/CB refers to common stock and convertible corporate evidences of indebtedness, which are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility evidences of indebtedness and utility convertible evidences of indebtedness, the definition of industry refers to sub-industries (electric, water, hydro power, gas, diversified). Investments in other sub-industries are eligible only to the extent that the combined sum represents a percentage position of the Moody's Eligible Assets less than or equal to the percentage limits in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities regulated by California, New York and Texas.
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified discounted asset values for its portfolio representing the Series C Preferred Basic Maintenance Amount (as defined below). To the extent any particular portfolio holding does not meet the applicable guidelines, it is not included for purposes of calculating the Discounted Value of the Fund's portfolio, and, among the requirements, the amount of such assets included in the portfolio at any time, if any, may vary depending upon the credit quality (and related Discounted Value) of the Fund's eligible assets at such time.
The Series C Preferred Basic Maintenance Amount includes the sum of (i) $25,000 times the number of Series C Preferred shares then Outstanding, (ii) the liquidation preference of each additional series of Preferred Stock of the Fund times the number of shares of such series then outstanding and (iii) certain accrued and projected payment obligations of the Fund. Upon any failure to maintain the required Discounted Value, the Fund may seek to alter the composition of its portfolio to reestablish required asset coverage within the specified ten Business Day cure period, thereby incurring additional transaction costs and possible losses and/or gains on dispositions of portfolio securities. To the extent any such failure is not cured in a timely manner, the holders of the Series C Preferred will acquire certain rights. See "Description of the Series C Preferred."
The following Discount Factors apply to portfolio holdings as described below in order to constitute S&P Eligible Assets includable within the calculation of Discounted Value:
Asset Class Obligor Overcollateralization (Collateral) Advance Rates (1) Factors (1) ------------ ----------------- ----------- Public Equity Small-Cap 46.0% 217.4% Public Equity Mid-Cap 53.6% 186.6% Public Equity Large-Cap 59.7% 167.6% Preferred Stocks % % Deposit Securities 100.0% 100.0% ______________ |
(1) For an S&P rating of AAA.
"S&P Eligible Assets" means:
(a) Deposit Securities; and
(b) common stocks that satisfy all of the following conditions:
(i) such common stock (including the common stock of any predecessor or constituent issuer) has been traded on a recognized national securities exchange or quoted on the National Market System (or any equivalent or successor thereto) of Nasdaq for at least 450 days,
(ii) the Market Capitalization of such issuer of common stock exceeds $100 million,
(iii) the issuer of such common stock is not an entity that is treated as a partnership for federal income tax purposes,
(iv) if such issuer is organized under the laws of any jurisdiction other than the United States, any state thereof, any possession or territory thereof or the District of Columbia, the common stock of such issuer held by the Fund is traded on a recognized national securities exchange or quoted on the National Market System of Nasdaq either directly or in the form of depository receipts, and
(v) if such issuer is registered as an investment company under the 1940 Act, such issuer does not invest more than 25% of the value of its gross assets in securities that are not S&P Eligible Assets by reason of clause (iv) above;
provided, however, that the Fund's holdings of the common stock of any
single issuer that satisfies the conditions set forth in clauses (i) through
(v) above shall be included in S&P Eligible Assets only to the extent
that:
(1) such holdings may be sold publicly by the Fund at any time without registration,
(2) to the extent remaining eligible after the operation of item (1) above, such holdings do not exceed a number of shares representing the average weekly trading volume of such common stock during the preceding 30 day period,
(3) to the extent remaining eligible after the operation of items (1) and (2) above, the aggregate Market Value of such holdings, when added to the aggregate Market Value of the Fund's holdings of all other similarly eligible shares of common stock of issuers in the same Industry Classification, does not exceed 25% of the aggregate Market Value of the Fund's S&P Eligible Assets, and
(4) to the extent remaining eligible after the operation of items (1) through (3) above, the aggregate Market Value of the Fund's holdings of each of the three largest issuers is not in excess of 5% of the aggregate Market Value of the Company's S&P Eligible Assets, when added to the aggregate Market Value of the Fund's S&P Eligible Assets, and of the remaining issuers, is not in excess of 2% of the aggregate Market Value of the Fund's S&P Eligible Assets.
(c) Preferred Stocks, on such basis as S&P may determine in response to a request from the Corporation.
Notwithstanding the foregoing, an asset will not be considered an S&P Eligible Asset if it is held in a margin account, is subject to any material lien, mortgage, pledge, security interest or security agreement of any kind or has been deposited irrevocably for the payment of dividends, redemption payments or any other payment or obligation under the Fund's Articles Supplementary.
In addition, so long as any Series C Preferred is Outstanding and S&P is rating such Series C Preferred at the Fund's request, the Fund will not, unless it has received written confirmation that any such transaction would not impair the rating then assigned by S&P to the Series C Preferred, engage in any one or more of the following transactions:
(a) purchase or sell futures contracts; write, purchase or sell options on futures contracts; or write put options (except covered put options) or call options (except covered call options) on securities owned by the Fund (collectively, "S&P Hedging Transactions"), except subject to the following limitations:
(i) for each net long or short position in S&P Hedging Transactions, the Fund will maintain in a segregated account with the Fund's custodian an amount of cash or readily marketable securities having a value, when added to any amounts on deposit with the Fund's futures commission merchants or brokers as margin or premium for such position, at least equal to the market value of the Fund's potential obligations on such position, marked-to-market on a daily basis, in each case as and to the extent required by the applicable rules or orders of the Commission or by interpretations of the Commission's staff;
(ii) the Fund will not engage in any S&P Hedging Transaction which would cause the Fund at the time of such transaction to own or have sold the lesser of (A) outstanding futures contracts, in aggregate, based on the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the Russell 2000 Index, the Wilshire 5000 Index, the Nasdaq Composite Index and the New York Stock Exchange Composite Index (or any component of any of the forgoing) exceeding in number 50% of the market value of the Fund's total assets or (B) outstanding futures contracts based on any of the aforementioned indices exceeding in number 10% of the average number of daily traded futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal;
(iii) the Fund will engage in closing transactions to close out any outstanding futures contract which the Fund owns or has sold or any outstanding option thereon owned by the Fund in the event (A) the Fund does not have S&P Eligible Assets with an aggregate Discounted Value equal to or greater than the Series C Preferred Basic Maintenance Amount on two consecutive Valuation Dates and (B) the Fund is required to pay variation margin on the second such Valuation Date;
(iv) the Fund will engage in a closing transaction to close out any outstanding futures contract or option thereon at least one week prior to the delivery date under the terms of the futures contract or option thereon unless the corporation holds the securities deliverable under such terms; and
(v) when the Fund writes a futures contract or option thereon, either the amount of margin posted by the Fund (in the case of a futures contract) or the marked-to-market value of the Fund's obligation (in the case of a put option written by the Fund) shall be treated as a liability of the Fund for purposes of calculating the Series C Preferred Basic Maintenance Amount, or, in the event the Fund writes a futures contract or option thereon which requires delivery of an underlying security and the Fund does not wish to treat its obligations with respect thereto as a liability for purposes of calculating the Series C Preferred Basic Maintenance Amount, it shall hold such underlying security in its portfolio and shall not include such security to the extent of such contract or option as an S&P Eligible Asset.
(b) borrow money, except for the purpose of clearing securities transactions if (i) the Series C Preferred Basic Maintenance Amount would continue to be satisfied after giving effect to such borrowing and (ii) such borrowing (A) is privately arranged with a bank or other person and is not intended to be publicly distributed or (B) is for "temporary purposes," and is in an amount not exceeding 5 percent of the market value of the total assets of the Fund at the time of the borrowing; for purposes of the foregoing, "temporary purposes" means that the borrowing is to be repaid within sixty days and is not to be extended or renewed;
(c) engage in any short sales of equity securities (other than short sales against the box) unless the Fund maintains in a segregated account with the Fund's custodian an amount of cash or other readily marketable securities having a market value, when added to any amounts on deposit with the Fund's broker as collateral for its obligation to replace the securities borrowed and sold short, at least equal to the current market value of securities sold short, marked-to-market on a daily basis;
(d) utilize any pricing service other than FT Interactive Data, Reuters, Telekurs, Bloomberg Financial Markets, J.J. Kenney Pricing Service, Merrill Lynch Securities Pricing Service or Bridge Data Corp, and any pricing service then permitted by S&P; or
(e) enter into any reverse repurchase agreement, other than with a counterparty that is rated at least A-1+ by S&P.
NET ASSET VALUE
The net asset value of the Fund's shares will be 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.
Portfolio instruments of the Fund which are traded in a market subject to government regulation on which trades are reported contemporaneously generally will be valued at the last sale price on the principal market for such instruments as of the close of regular trading on the day the instruments are being valued, or lacking any sales, at the average of the bid and asked price on the principal market for such instruments on the most recent date on which bid and asked prices are available. Initial public offering securities are initially valued at cost, and thereafter as any other equity security. Other readily marketable assets will be valued at the average of quotations provided by dealers maintaining an active market in such instruments. Short-term debt instruments that are credit impaired or mature in more than 60 days for which market quotations are available are valued at the latest average of the bid and asked prices obtained from a dealer maintaining an active market in that security. Short-term investments that are not credit impaired or mature in 60 days or fewer are valued at amortized cost from purchase price or value on the 61st day prior to maturity. Securities and other assets for which market quotations are not readily available will be valued at fair value as determined in good faith by or under the direction of the Investment Adviser in accordance with guidelines adopted by the Fund. The Fund may employ recognized pricing services from time to time for the purpose of pricing portfolio instruments (including non-U.S. denominated assets and futures and options).
Trading takes place in various foreign markets on days which are not Business Days and therefore the Fund's respective net asset value per share is not calculated. The calculation of the Fund's net asset value may not take place contemporaneously with the determination of the prices of portfolio securities held by the Fund. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of the NYSE will not be reflected in the Fund's calculation of net asset value unless the Board of Trustees deems that the particular event would materially affect the net asset value, in which case the fair value of those securities will be determined by consideration of other factors by or under the direction of the Board of Directors.
Net asset value per share is calculated by dividing the value of the securities held plus any cash or other assets minus all liabilities, including accrued expenses, by the total number of shares outstanding at such time.
BENEFICIAL OWNERS
Name and Address of
Beneficial/Record Owner Amount of Shares and
as of May 31, 2002 Title of Class Nature of Ownership Percent of Class
------------------- -------------- ------------------- ----------------
Cede & Co.* Common 111,174,879 (record) 84.98%
P.O. Box 20
Bowling Green Station Series A 5,318,600 (record) 99.08%
New York, NY 10274 Preferred
Series B 6,585,130 (record) 99.77%
Preferred
Salomon Smith Barney Inc.** Common 17,197,364 (record) 13.14%
333 W. 34th Street
New York, NY 10001 Series A 1,378,413 (record) 25.68%
Preferred
Series B 2,060,264 (record) 31.22%
Preferred
Charles Schwab & Co., Inc.** Common 8,055,385 (record) 6.16%
c/o ADP Proxy Services
51 Mercedes Way
Edgewood, NY 11717 Series B
Preferred 272,247 (record) 5.07%
A.G. Edwards & Sons, Inc.** Common 14,538,560 (record) 11.11%
125 Broad Street, 40th Fl.
New York, NY 10004 Series B 425,147 (record) 6.44%
Preferred
First Clearing Corp. Series B 878,627 (record) 13.31%
Riverfront Plaza Preferred
901 East Byrd Street
Richmond, VA 23219
Prudential Securities Inc.** Series A 331,001 (record) 6.20%
c/o ADP Proxy Services Preferred
51 Mercedes Way
Edgewood, NY 11717 Series B 346,066 (record) 5.24%
Preferred
Merrill Lynch** Common 6,761,709 (record) 5.17%
4 Corporate Place
Corporate Park 287 Series A 650,709 (record) 12.12%
Piscataway, NJ 08855 Preferred
Series B 1,828,067 (record) 27.70%
Preferred
Paine Webber Inc.** Series A 743,237 (record) 13.85%
1000 Harbor Blvd. Preferred
Weehawken, NJ 07087
National Financial Services Corp.** Series A 562,845 (record) 10.49%
200 Liberty Street Preferred
New York, NY 10281
|
* A nominee partnership of The Depository Trust Company. ** Shares held at The Depository Trust Company.
As of May 31, 2002, the Directors and Officers of the Fund as a group beneficially owned approximately 1.22% of the outstanding shares of the Fund's common stock.
GENERAL INFORMATION
BOOK-ENTRY-ONLY ISSUANCE
DTC will act as securities depository for the shares of Series C Preferred offered pursuant to the Prospectus. 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 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 DTC participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. 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 through other entities.
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, a beneficial owner, is in turn to be recorded on the direct or indirect participants' records. Beneficial owners will not receive written confirmation from DTC of their purchases, but beneficial owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the direct or indirect participants through which the beneficial owners purchased securities. Transfers of ownership interests in securities are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in securities, except as provided herein.
DTC has no knowledge of the actual beneficial owners of the securities being offered pursuant to this Prospectus; 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.
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.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York 10036, has been selected as independent accountants for the Fund. As the Fund's independent accountants PricewaterhouseCoopers LLP is responsible for auditing the Fund's financial statements in accordance with Generally Accepted Accounting Principles. PricewaterhouseCoopers LLP also prepares a report of its findings thereon and presents its findings to the Fund's Board of Directors. PricewaterhouseCoopers LLP also reviews the Fund's state and Federal income tax returns prepared by the Fund's Administrator. For its services, PricewaterhouseCoopers LLP charges fees which are paid by the Fund.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report to the Fund's Shareholders for the fiscal year ended December 31, 2001, are also incorporated herein by reference from the Fund's Annual Report to Shareholders filed with the Securities and Exchange Commission on March 8, 2002. The report of PricewaterhouseCoopers LLP in respect of those financial statements is incorporated by reference. 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 10580-1422 or by calling the Fund toll-free at 800-GABELLI (422-3554).
APPENDIX A: GLOSSARY
"AA Financial Composite Commercial Paper Rate" on any date means (i) the interest equivalent of the 7-day rate, in the case of a Dividend Period of 7 days or shorter; for Dividend Periods greater than 7 days but fewer than or equal to 31 days, the 30-day rate; for Dividend Periods greater than 31 days but fewer than or equal to 61 days, the 60-day rate; for Dividend Periods greater than 61 days but fewer than or equal to 91 days, the 90 day rate; for Dividend Periods greater than 91 days but fewer than or equal to 270 days, the rate described in (ii) below; for Dividend Periods greater than 270 days, the Treasury Index Rate; on commercial paper on behalf of issuers whose corporate bonds are rated "AA" by S&P, or the equivalent of such rating by another nationally recognized rating agency, as announced by the Federal Reserve Bank of New York for the close of business on the Business Day immediately preceding such date; or (ii) if the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the interest equivalent of such rates on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day immediately preceding such date (rounded to the next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Financial Composite Commercial Paper Rate, such rate shall be determined on the basis of the quotations (or quotation) furnished by the remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers, by the Auction Agent pursuant to instructions from the Fund. For purposes of this definition, (A) "Commercial Paper Dealers" shall mean (1) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any thereof, its respective affiliate or successor; and (3) in the event that any of the foregoing shall cease to quote rates for commercial paper of issuers of the sort described above, in substitution therefor, a nationally recognized dealer in commercial paper of such issuers then making such quotations selected by the Fund, and (B) "interest equivalent" of a rate stated on a discount basis for commercial paper of a given number of days maturity shall mean a number equal to the quotient (rounded upward to the next higher one-thousandth of 1%) of (1) such rate expressed as a decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction, the numerator of which shall be the product of such rate expressed as a decimal, multiplied by the number of days in which such commercial paper shall mature and the denominator of which shall be 360.
"Advance Rate" means (a) so long as S&P is rating the Series C Preferred shares at the Fund's request the Advance Rates set forth in "Moody's and S&P Guidelines - S&P Guidelines," or (b) any applicable advance rate established by any Other Rating Agency, whichever is applicable.
"Affiliate" means, with respect to the Auction Agent, any person known to the Auction Agent to be controlled by, in control of or under common control with the Fund; provided, however, that no Broker-Dealer controlled by, in control of or under common control with the Fund shall be deemed to be an Affiliate nor shall any corporation or any Person controlled by, in control of or under common control with such corporation one of the directors or executive officers of which is director of the Fund be deemed to be an Affiliate solely because such director or executive officer is also a director of the Fund.
"Agent Member" means a member of or a participant in the Securities Depository that will act on behalf of a Bidder.
"All Hold Rate" means 80% of the "AA" Financial Composite Commercial Paper Rate.
"Applicable Rate" means with respect to the Series C Preferred shares for
each Dividend Period (i) if Sufficient Clearing Bids exist for the Auction
in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders
do not exist for the Auction in respect thereof, the Maximum Rate, and
(iii) if all Series C Preferred shares are the subject of Submitted Hold
Orders for the Auction in respect thereof, the All Hold Rate.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another commercial bank, trust company, or other financial institution appointed by a resolution of the Board of Directors enters into an agreement with the Fund to follow the Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" means the last day of the initial Dividend Period and each seventh day after the immediately preceding Auction Date; provided, however, that if any such seventh day is not a Business Day, such Auction Date shall be the first preceding day that is a Business Day and the next Auction Date, if for a Standard Dividend Period, shall (subject to the same advancement procedure) be the seventh day after the date such preceding Auction Date would have been if it had been a Business Day; provided further, however, that the Auction Date for the Auction at the conclusion of any Special Dividend Period shall be the last Business Day in such Special Dividend Period and that no more than one Auction shall be held during any Dividend Period.
"Auction Procedures" means the procedures for conducting Auctions described in "Additional Information Concerning the Auction for Series C Preferred."
"Available Series C Preferred" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate."
"Beneficial Owner" with respect to Series C Preferred, means a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of such shares of such series.
"Bid" has the meaning set forth in "Additional Information Concerning the Auction for the Series C Preferred - Submission of Orders by Broker-Dealers to Auction Agent."
"Bidder" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Submission of Orders by Broker-Dealers to Auction Agent."
"Board of Directors" or "Board" means the Board of Directors of the Fund or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity permitted by law to perform the functions required of a Broker-Dealer by the Auction Procedures, that has been selected by the Fund and has entered into a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which banks in The City of New York, New York are authorized or obligated by law to close.
"Charter" means the Fund's Articles of Incorporation, as amended, restated and supplemented, including the Articles Supplementary.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the shares of the Fund's Common Shares, par value $.001 per share.
"Cure Date" has the meaning set forth in "Description of the Series C Preferred - Redemption."
"Date of Original Issue" means the date on which the Series C Preferred is originally issued by the Fund.
"Default Period" has the meaning set forth in "Description of the Series C Preferred - Dividends and Dividend Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities, including Short Term Money Market Instruments that are Eligible Assets, rated at least AAA or A-1+ by S&P, except that, for purposes of optional redemption, such obligations or securities will be considered "Deposit Securities" only if they also are rated at least P-1 by Moody's.
"Discount Factor" means (a) so long as Moody's is rating the Series C Preferred shares at the Fund's request, the Moody's Discount Factor or (b) any applicable discount factor established by any Other Rating Agency, whichever is applicable.
"Discounted Value" means, as applicable, (a) the quotient of the Market Value of an Eligible Asset divided by the applicable Discount Factor or (b) the product of the Market Value of an Eligible Asset multiplied by the applicable Advance Rate, provided, in either case, that with respect to an Eligible Asset that is currently callable, Discounted Value will be equal to the applicable quotient or product as calculated above or the call price, whichever is lower, and that with respect to an Eligible Asset that is prepayable, Discounted Value will be equal to the applicable quotient or product as calculated above or the par value, whichever is lower.
"Dividend Default" has the meaning set forth in "Description of the Series C Preferred - Dividends and Dividend Period."
"Dividend Payment Date" means (i) with respect to any Dividend Period of one year or less, the Business Day next succeeding the last day thereof and, if any, the 91st, 181st and 271st days thereof, and (ii) with respect to any Dividend Period of more than one year, on a quarterly basis on each March 26th, June 26th, September 26th, and December 26th and on the Business Day following the last day of such Dividend Period.
"Dividend Period" means, with respect to Series C Preferred, the initial period as specified in the Prospectus, and thereafter the period commencing on the day following each Dividend Period for the Series C Preferred and ending on the next Auction Date or, if such next Auction Date is not immediately followed by a Business Day, on the latest calendar day prior to the next succeeding Business Day.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the Series C Preferred at the request of the Fund), S&P Eligible Assets (if S&P is then rating the Series C Preferred at the request of the Fund), and/or Other Rating Agency Eligible Assets if any Other Rating Agency is then rating the Series C Preferred, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those Series C Preferred shares listed in that person's name in the records of the Fund or the Auction Agent or (ii) the beneficial owner of those Series C Preferred shares which are listed under such person's Broker-Dealer's name in the records of the Auction Agent, which Broker-Dealer shall have signed a master purchaser's letter.
"Hedging Transactions" means transactions in which the Fund will purchase or sell futures contracts; write, putchase or sell options on futures contracats; or write put options (except covered put options) or call options (except covered call options) on securities owned by the Fund.
"Hold Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Orders By Existing Holders and Potential Holders."
"Holder" means, with respect to the Series C Preferred, the registered holder of Series C Preferred shares as the same appears on the stock ledger or stock records of the Fund or records of the Auction Agent, as the case may be.
"Industry Classification" means a six-digit industry classification in the Standard Industry Classification system published by the United States.
"Liquidation Preference" means $25,000 per Series C Preferred share and shall have a correlative meaning with respect to shares of any other class or series of Preferred Stock.
"Market Capitalization" means, with respect to any issue of common stock, as of any date, the product of (a) the number of shares of such common stock issued and outstanding as of the close of business on the date of determination thereof and (b) the Market Value per share of such common stock as of the close of business on the date of determination thereof.
"Market Value" means the amount determined by the Fund with respect to specific Eligible Assets in accordance with valuation policies adopted from time to time by the Board of Directors as being in compliance with the requirements of the 1940 Act.
Notwithstanding the foregoing, "Market Value" may, at the option of the Fund with respect to any of its assets, mean the amount determined with respect to specific Eligible Assets of the Fund in the manner set forth below:
(a) as to any common or preferred stock which is an Eligible Asset, (i) if the stock is traded on a national securities exchange or quoted on the Nasdaq System, the last sales price reported on the Valuation Date or (ii) if there was no reported sales price on the Valuation Date, the lower of two bid prices for such stock provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P then-current rating of the Series C Preferred) to the administrator of the Fund's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Fund by any such means by such administrator, or, if two bid prices cannot be obtained, such Eligible Asset shall have a Market Value of zero;
(b) as to any U.S. Government Obligation, Short-Term Money Market Instrument (other than demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements) and commercial paper, with maturities greater than 60 days, the product of (i) the principal amount (accreted principal to the extent such instrument accretes interest) of such instrument, and (ii) the lower of the bid prices for the same kind of instruments having, as nearly as practicable, comparable interest rates and maturities provided by two recognized dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P then-current rating of the Series C Preferred) to the administrator, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Fund by any such means by such administrator, or, if two bid prices cannot be obtained, such Eligible Asset will have a Market Value of zero;
(c) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements included in Short-Term Money Market Instruments, the face value thereof;
(d) as to any U.S. Government Obligation, Short-Term Money Market Instrument or commercial paper with a maturity of 60 days or fewer, amortized cost unless the board of directors determines that such value does not constitute fair value;
(e) as to any other evidence of indebtedness which is an Eligible Asset, (i) the product of (A) the unpaid principal balance of such indebtedness as of the Valuation Date and (B)(1) if such indebtedness is traded on a national securities exchange or quoted on the Nasdaq System, the last sales price reported on the Valuation Date or (2) if there was no reported sales price on the Valuation Date or if such indebtedness is not traded on a national securities exchange or quoted on the Nasdaq System, the lower of two bid prices for such indebtedness provided by two recognized dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P then- current rating of the Series C Preferred) to the administrator of the Fund's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Fund by any such means by such administrator, plus (ii) accrued interest on such indebtedness.
"Maximum Rate" means, on any date on which the Applicable Rate is determined, (i) in the case of dividend period of 184 days or less, the applicable percentage of the "AA" Financial Composite Commercial Paper Rate on the date of such Auction determined as set forth below based on the lower of the credit ratings assigned to the Series C Preferred by Moody's and S&P subject to upward but not downward adjustment in the discretion of the Board of Directors after consultation with the Broker-Dealers; provided that immediately following any such increase the Fund would be in compliance with the Series C Preferred Basic Maintenance Amount or (ii) in the case of a dividend period of longer than 184 days, the Treasury Index Rate.
MOODY'S CREDIT RATING S&P CREDIT RATING APPLICABLE PERCENTAGE ------------------------ ------------------- ---------------------- Aa3 or higher AA- or higher 150% A3 or A1 A- to A+ 175% Baa3 to Baa1 BBB- to BBB+ 250% Below Baa3 Below BBB- 275% |
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" has the meaning set forth in "Moody's and S&P Guidelines - Moody's Guidelines."
"Moody's Eligible Assets" has the meaning set forth in "Moody's and S&P Guidelines - Moody's Guidelines."
"Moody's Industry and Sub-Industry Categories" means:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Broadcasting: Radio, T.V.
Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting, Engineering, Construction, Hardware, Forest Products (building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land Development
Cable: Distribution, Equipment, Programming
Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating
Communications (excluding companies primarily engaged in offering Telephone services): Satellite, Wireless, Equipment
Containers, Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste Disposal
Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology
Entertainment: Recording Industry, Motion Exhibition Theaters, Motion Picture Production and Distribution
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agricultural Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy Manufacturing
Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
Personal, Food and Miscellaneous Services
Printing and Publishing: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks
Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Equipment, Research
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes
Personal Transportation: Air, Bus, Rail, Car, Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra- national agencies
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Series C Preferred Asset Coverage" means asset coverage, as determined in accordance with Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior securities of the Fund which are stock, including all Outstanding Series C Preferred shares (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are stock of a closed-end investment company as a condition of declaring dividends on its common shares), determined on the basis of values calculated as of a time within 48 hours (not including Saturdays, Sundays or holidays) next preceding the time of such determination.
"Non-Call Period" means a period determined by the Board of Directors after consultation with the Broker-Dealers, during which the Series C Preferred subject to such Special Dividend Period are not subject to redemption at the option of the Fund but only to mandatory redemption.
"Notice of Redemption" has the meaning set forth in "Description of the Series C Preferred - Redemption."
"Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Orders By Existing Holders and Potential Holders."
"Other Rating Agency" means any rating agency other than Moody's or S&P then providing a rating for the Series C Preferred pursuant to the request of the Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated by any Other Rating Agency as eligible for inclusion in calculating the discounted value of the Fund's assets in connection with such Other Rating Agency's rating of the Series C Preferred.
"Outstanding" means, as of any date, Preferred Stock theretofore issued by the Fund except:
(a) any such share of Preferred Stock theretofore cancelled by the Fund or delivered to the Fund for cancellation;
(b) any such share of Preferred Stock other than the Series C Preferred shares as to which a notice of redemption shall have been given and for whose payment at the redemption thereof deposit assets in the necessary amount are held by the Fund on in trust for or were paid by the Fund to the holder of such share pursuant to the Articles Supplementary with respect thereto;
(c) in the case of the Series C Preferred shares, any such shares theretofore delivered to the Auction Agent for cancellation or with respect to which the Fund has given notice of redemption and irrevocably deposited with the Paying Agent sufficient funds to redeem such shares; and
(d) any such share in exchange for or in lieu of which other shares have been issued and delivered.
Notwithstanding the foregoing, (i) for purposes of voting rights (including the determination of the number of shares required to constitute a quorum), any Preferred Stock as to which the Fund or any Affiliate is the Existing Holder will be disregarded and deemed not Outstanding; (ii) in connection with any Auction, any Series C Preferred shares as to which the Fund or any Person known to the Auction Agent to be an Affiliate is the Existing Holder will be disregarded and not deemed Outstanding; and (iii) for purposes of determining the Series C Preferred Basic Maintenance Amount, Series C Preferred shares held by the Fund will be disregarded and deemed not Outstanding, but shares held by any Affiliate (other than any controlled Affiliates) will be deemed Outstanding.
"Paying Agent" means The Bank of New York unless and until another entity appointed by a resolution of the Board of Directors enters into an agreement with the Fund to serve as paying agent, which paying agent may be the same as the Auction Agent.
"Potential Beneficial Owner or Holder" means (i) any Existing Holder who may be interested in acquiring additional Series C Preferred shares or (ii) any other person who may be interested in acquiring Series C Preferred shares and who has signed a master purchaser's letter or whose shares will be listed under such person's Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer shall have executed a master purchaser's letter.
"Preferred Stock" means the preferred stock, par value $.001 per share, of the Fund, and includes the Series C Preferred shares.
"Premium Call Period" means a period consisting of a number of whole years as determined by the Board of Directors after consultation with the Broker-Dealers, during each year of which the shares subject to such Special Dividend Period will be redeemable at the Fund's option at a price per share equal to the Liquidation Preference plus accumulated but unpaid dividends (whether or not earned or declared) plus a premium expressed as a percentage or percentages of the Liquidation Preference or expressed as a formula using specified variables as determined by the Board of Directors after consultation with the Broker-Dealers.
"Pricing Service" means any of the following: Bloomberg, Bridge Information Services, Data Resources Inc., FT Interactive, International Securities Market Association, Merrill Lynch Securities Pricing Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Telerate, Trepp Pricing and Wood Gundy.
"Public Equity Large-Cap" means any equity issuer with a market capitalization in excess of $10 billion.
"Public Equity Mid-Cap" means any equity issuer with a market capitalization in excess of $1 billion but less than or equal to $10 billion.
"Public Equity Small-Cap" means any equity issuer with a market capitalization of less than or equal to $1 billion.
"Rating Agency" means Moody's and S&P as long as such rating agency is then rating the Series C Preferred at the request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's and S&P Guidelines."
"Redemption Date" has the meaning set forth in "Description of the Series C Preferred - Dividends and Dividend Period - Default Period."
"Redemption Default" has the meaning set forth in "Description of the Series C Preferred - Dividends and Dividend Period."
"Redemption Price" has the meaning set forth in "Description of the Series C Preferred - Dividends and Dividend Period."
"Reference Rate" means, with respect to the determination of the Default Rate, the applicable "AA" Financial Composite Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate (for a Dividend Period of 184 days or more).
"S&P" means Standards & Poors Rating Services or its successors at law.
"S&P Eligible Assets" has the meaning set forth in "Moody's and S&P Guidelines - S&P Guidelines.".
"S&P Hedging Transactions" has the meaning set forth in "Moody's and S&P Guidelines - S&P Guidelines."
"S&P Rating Factors" has the meaning set forth in "Moody's and S&P Guidelines - S&P Guidelines."
"Securities Depository" means The Depository Trust Company and its successors and assigns or any successor securities depository selected by the Fund that agrees to follow the procedures required to be followed by such securities depository in connection with the shares of Series C Preferred.
"Sell Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Submission of Orders by Broker-Dealers to Auction Agent."
"Series C Preferred" means the Fund's Series C Auction Rate Cumulative Preferred Stock, $.001 par value per share and liquidation preference $25,000 per share.
"Series C Preferred Basic Maintenance Report" has the meaning set forth in "Description of the Series C Preferred - Asset Maintenance."
"Series C Preferred Basic Maintenance Amount" has the meaning set forth under "Description of the Series C Preferred - Asset Maintenance."
"Series C Preferred Basic Maintenance Amount Test" means a test which is met if the lower of the aggregate Discounted Values of the Moody's Eligible Assets or the S&P Eligible Assets if both Moody's and S&P are then rating the Series C Preferred at the request of the Fund, or the Eligible Assets of whichever of Moody's or S&P is then doing so if only one of Moody's or S&P is then rating the Series C Preferred at the request of the Fund, meets or exceeds the Series C Preferred Basic Maintenance Amount.
"Short-Term Money Market Instrument" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Fund, the remaining term to maturity thereof is not in excess of 180 days:
A. commercial paper rated A-1 if such commercial paper matures in 30 days or A-1+ if such commercial paper matures in over 30 days;
B. demand or time deposits in, and banker's acceptances and certificates of deposit of (i) 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 (ii) 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);
C. overnight funds; and
D. U.S. Government Obligations.
"Special Dividend Period" means a Dividend Period that is not a Standard Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special Dividend Period of more than one year, either, or any combination of (i) a Non-Call Period and (ii) a Premium Call Period.
"Standard Dividend Period" means a Dividend Period of seven days, subject to increase or decrease to the extent necessary for the next Auction Date and Dividend Payment Date to each be Business Days.
"Submission Deadline" means 1:00 p.m., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time.
"Submitted Bid" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Bid Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Hold Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Submitted Sell Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Sufficient Clearing Bids" has the meaning set forth in "Additional Information Concerning the Auction for Series C Preferred - Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Treasury Index Rate" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities having the same number of 30-day periods to maturity as the length of the applicable Dividend Period, determined, to the extent necessary, by linear interpolation based upon the yield for such securities having the next shorter and next longer number of 30-day periods to maturity treating all Dividend Periods with a length greater than the longest maturity for such securities as having a length equal to such longest maturity, in all cases based upon data set forth in the most recent weekly statistical release published by the Board of Governors of the Federal Reserve System (currently in H.15 (519)); provided, however, if the most recent such statistical release shall not have been published during the 15 days preceding the date of computation, the foregoing computations shall be based upon the average of comparable data as quoted to the Fund by at least three recognized dealers in U.S. Government Obligations selected by the Fund.
"U.S. Government Obligations" means direct obligations of the United States or by its agencies or instrumentalities that are entitled to the full faith and credit of the United States and that, other than United States Treasury Bills, provide for the periodic payment of interest and the full payment of principal at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other date as the Fund and Rating Agencies may agree to for purposes of determining the Series C Preferred Basic Maintenance Amount.
"Winning Bid Rate" means the lowest rate specified in the Submitted Bids which if:
(a) (i) each such Submitted Bid of Existing Holders specifying such lowest rate and
(ii) all other such Submitted Bids of Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of such series that are subject to such Submitted Bids; and
(b) (i) each such Submitted Bid of Potential Holders specifying such lowest rate and
(ii) all other such Submitted Bids of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (a) above continuing to hold an aggregate number of Outstanding Series C Preferred shares which, when added to the number of Outstanding Series C Preferred shares to be purchased by such Potential Holders described in subclause (b) above, would equal not less than the Available Series C Preferred shares.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Financial Statements included in Part A (Prospectus) of this Registration Statement and Amendment:
(a) Financial Highlights for each of the years ended December 31, 1992-2001.
Financial Statements included in Part B (Statement of Additional Information) of this Registration Statement and Amendment:
(b) Portfolio of Investments, December 31, 2001(1)
(c) Statement of Assets and Liabilities, December 31, 2001(1)
(d) Statement of Operations for the year ended December 31,
2001(1)
(e) Statement of Changes in Net Assets(1)
(f) Notes to Financial Statements(1)
(g) Report of Independent Accountants(1)
(2) (a) (1) Articles of Incorporation(2)
(2)(A) Articles Supplementary relating to 7.25%
Tax Advantaged Cumulative Preferred Stock(2)
(B) Form of Articles of Amendment of
The Gabelli Equity Trust Inc. relating to the
7.25% Tax Advantaged Cumulative Preferred
Stock (3)
(3) Articles Supplementary relating to 7.20% Tax
Advantaged Series B Cumulative Preferred Stock(3)
(4) Articles Supplementary relating to Series C Auction
Rate Cumulative Preferred Stock(8)
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(b) Amended and Restated By-Laws as of May 16, 2001(3)
(c) Not Applicable
(d) Form of Specimen Stock Certificate:
Series C Auction Rate Cumulative Preferred Stock(7)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan(2)
(f) Not Applicable
(g) Investment Advisory Agreement between the Fund and Gabelli Funds
LLC(4)
(h) Form of Underwriting Agreement(8)
(i) Not Applicable
(j) Custodial Contract between the Fund and Boston Safe Deposit and
Trust Company(2)
(k) (1) Registrar, Transfer Agency and Service Agreement
between the Fund and State Street Bank and Trust
Company(4)
(2) Transfer Agent and Registrar Services Fee Agreement
between the Fund and State Street Bank and Trust
Company(4)
(3) Form of Auction Agency Agreement(8)
(4) Form of Broker-Dealer Agreement(8)
(5) Form of DTC Agreement(7)
(l) Opinion and Consent of Counsel(8)
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(m) Not Applicable
(n) Consent of PricewaterhouseCoopers LLP(8)
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Code of Ethics(5)
(s) Power of Attorney(6)
(2) Incorporated by reference from the Registrant's Pre-Effective Amendment No. 2 to the Fund's Registration Statement on Form N-2 Nos. 333-45951 and 811-4700; as filed with the Securities and Exchange Commission on February 10, 1998 (EDGAR Accession No. 0000950123-99-003497).
(3) Incorporated by reference from the Registrant's Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2 Nos. 333-47012 and 811-4700; as filed with the Securities and Exchange Commission on June 11, 2001 (EDGAR Accession No. 0000950172-01-500365).
(4) Incorporated by reference from the Registrant's Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2, File Nos. 333-62323 and 811-4700, as filed with the Securities and Exchange Commission on October 13, 1995 (EDGAR Accession No. 0000950123-95-002829).
(5) Incorporated by reference from Registrant's Pre-Effective Amendment No. 2 to the Fund's Registration Statement on Form N-2, File Nos. 333-47012 and 811-4700; as filed with the Securities and Exchange Commission on December 12, 2000 (EDGAR Accession No. 0000950123-00-011158).
(6) Incorporated by reference from Registrant's Pre-Effective Amendment No. 1 to the Fund's Registration Statement on Form N-2, File Nos. 333-86554 and 811-4700; as filed with the Securities and Exchange Commission on June 4, 2002 (EDGAR Accession No. 0000950172-02-001205).
(7) Incorporated by reference from Registrant's Pre-Effective Amendment No. 2 to the Fund's Registration Statement on Form N-2, File Nos. 333-47012 and 811-4700; as filed with the Securities and Exchange Commission of June 18, 2002 (EDGAR Accession No. 0000950172-02-001331).
(8) Filed herewith.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this registration statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
Securities and Exchange Commission Registration fees.... $ 31,070
Rating Agency fees...................................... $ 91,000
Auction Agent fees...................................... $ 7,000
Printing and engraving expenses......................... $100,000
Auditing fees and expenses.............................. $ 50,000
Legal fees and expenses................................. $150,000
Miscellaneous........................................... $ 70,930
Total.......................................... $500,000
========
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Item 27. Persons Controlled by or Under Common Control with Registrant
One or more of the directors of Registrant are also directors or
trustees of one or more of the following registered investment companies:
The Gabelli Asset Fund, The Gabelli Growth Fund and The Gabelli Westwood
Funds, each a Massachusetts Business Trust, The Gabelli Money Market Funds
and The Gabelli Utility Trust, each a Delaware Business Trust, The Gabelli
Global Multimedia Trust Inc., The Gabelli Value Fund Inc., The Gabelli
Investor Funds, Inc., Gabelli Capital Series Funds, Inc., The Gabelli
Global Series Funds, Inc., The Gabelli Convertible Securities Fund, Inc.,
Gabelli International Growth Fund, Inc., Gabelli Gold Fund, Inc. and
Gabelli Equity Series Funds, Inc., each a Maryland corporation. Registrant
disclaims that it is under common control with any of such other entities.
Item 28. Number of Holders of Securities as of May 31, 2002
Number of
Title of Class Record Holders
Common Stock, par value $.001 per share........... 12,841
7.25% Tax Advantaged Cumulative
Preferred Stock, par value $.001 per share..... 65
7.20% Tax Advantaged Series B Cumulative
Preferred Stock, par value $.001 per share..... 28
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Item 29. Indemnification
The response of this Item is incorporated by reference to the caption "Capital Stock - Limitation of Officers' and Directors' Liability" set forth in the Prospectus.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to the directors, officers and controlling persons of the Fund, pursuant to the foregoing provisions or otherwise, the Fund has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities under the Securities Act (other than payment by the Fund of expenses incurred or paid by a director, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 30. Business and Other Connections of the Investment Adviser
Registrant is fulfilling the requirement of this Item 30 to provide a list of the officers and directors of its investment adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by that entity or those of its officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV filed with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 by Gabelli Funds, LLC (SEC File No. 333-42780).
Item 31. Location of Accounts and Records
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580-1422
(with respect to its services as Investment Adviser and
administrator)
Equiserve Trust Company
150 Royall Street
Canton, Massachusetts 02021
(with respect to its services as transfer agent and registrar)
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(with respect to its services as custodian)
PFPC, Inc.
101 Federal Street
Boston, Massachusetts 02110
(with respect to its services as sub-Administrator)
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until the Prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value, as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the Prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective.
Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two Business Days of receipt of a written or oral request, any SAI constituting Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and Investment Company Act of 1940, the Registrant has duly caused this amendment to its Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Rye, State of New York on the 25th day of June, 2002.
THE GABELLI EQUITY TRUST INC.
By: /s/ Bruce N. Alpert
-------------------------------
Bruce N. Alpert
Principal Executive Officer
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Pursuant to the requirements of the Securities Act of 1933 this amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date
* Chairman of the Board, June 25, 2002
-------------------------------------- President & Chief
Mario J. Gabelli Investment Officer
* Director June 25, 2002
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Dr. Thomas E. Bratter
* Director June 25, 2002
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Anthony J. Colavita
* Director June 25, 2002
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James P. Conn
* Director June 25, 2002
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Frank J. Fahrenkopf, Jr.
* Director June 25, 2002
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Arthur V. Ferrara
* Director June __, 2002
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Karl Otto Pohl
* Director June 25, 2002
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Anthony R. Pustorino
* Director June 25, 2002
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Salvatore J. Zizza
/s/ Bruce N. Alpert Vice President & June 25, 2002
------------------------------------ Treasurer
Bruce N. Alpert
/s/ Bruce N. Alpert June 25, 2002
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Bruce N. Alpert
as attorney in fact
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* Pursuant to a Power of Attorney incorporated by reference as Exhibit S hereto
SCHEDULE OF EXHIBITS TO FORM N-2
Exhibit
Number Exhibit
------ -------
Exhibit A (1) Articles of Incorporation*
(2)(A) Articles Supplementary relating to 7.25% Tax
Advantaged Cumulative Preferred Stock*
(B) Form of Articles of Amendment
of The Gabelli Equity Trust Inc. relating to the
7.25% Tax Advantaged Cumulative Preferred Stock*
(3) Articles Supplementary relating to 7.20% Tax
Advantaged Series B Cumulative Preferred Stock*
(4) Articles Supplementary relating to Series C Auction
Rate Cumulative Preferred Stock
Exhibit B Amended and Restated By-Laws as of May 16, 2001*
Exhibit C Not Applicable
Exhibit D Form of Specimen Stock Certificate, Series C Auction Rate
Cumulative Preferred Stock
Exhibit E Automatic Dividend Reinvestment and Voluntary Cash Purchase
Plan*
Exhibit F Not Applicable
Exhibit G Investment Advisory Agreement*
Exhibit H Form of Underwriting Agreement
Exhibit I Not Applicable
Exhibit J Custodian Agreement*
Exhibit K (1) Registrar, Transfer Agency and Service Agreement between
the Fund and State Street Bank and Trust Company*
(2) Transfer Agent and Registrar Services Fee Agreement
between the Fund and State Street Bank and Trust Company*
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(3) Form of Auction Agency Agreement
(4) Form of Broker-Dealer Agreement
(5) Form of DTC Agreement*
Exhibit L Opinion and Consent of Counsel Exhibit M Not Applicable Exhibit N Consent of PricewaterhouseCoopers LLP Exhibit O Not Applicable Exhibit P Not Applicable Exhibit Q Not Applicable Exhibit R Code of Ethics* Exhibit S Power of Attorney* --------------------------- |
* Previously filed and incorporated by reference.
Articles Supplementary Creating And Fixing The Rights of Series C Auction Rate Cumulative Preferred Stock
THE GABELLI EQUITY TRUST INC., a Maryland corporation having its principal office in Baltimore City, Maryland (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of the State of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting duly convened and held on May 22, 2002, pursuant to authority expressly vested in the Board of Directors of the Corporation by Article FIFTH of the Charter of the corporation, adopted a resolution designating 6000 shares of authorized but unissued preferred stock of the Corporation, par value $.001 per share, as "Series C Auction Rate Cumulative Preferred Stock," par value $.001 per share, liquidation preference $25,000 per share. Pursuant to authority expressly vested in the Board of Directors of the Corporation by Article SIXTH of the Charter of the Corporation, the Board of Directors has authorized the issuance of up to 6,000 shares of the so designated Series C Auction Rate Cumulative Preferred Stock, par value $.001 per share.
SECOND: The preferences, rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the Series C Auction Rate Cumulative Preferred Stock, par value $.001 per share, as set by the Board of Directors are as follows:
DESIGNATION
Series C Preferred Shares: A series of 6,000 preferred shares, par value $0.001 per share, liquidation preference $25,000 per share, is hereby designated "Series C Auction Rate Cumulative Preferred Stock" (the "Series C Preferred Shares" and each such share a "Series C Preferred Share"). Each Series C Preferred Share may be issued on a date to be determined by the Board of Directors of the Corporation; have an initial dividend rate per annum, an initial Dividend Period and an initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Directors of the Corporation; and have such other preferences, rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption, in addition to those required by applicable law or set forth in the Charter applicable to preferred shares of the Corporation, as are set forth in these Articles Supplementary. The Series C Preferred Shares shall constitute a separate series of Preferred Stock.
As used in these Articles Supplementary, capitalized terms shall have the meanings provided in paragraph 13 of Article I and paragraph 1 of Article II of these Articles Supplementary. Paragraph references that do not reference a specific Article shall refer to the Article in which the reference occurs, unless the context otherwise requires.
Article I: Series C Preferred Share Terms
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series C Preferred Shares is 6,000. No fractional Series C Preferred Shares shall be issued.
(b) Series C Preferred Shares which at any time have been redeemed or purchased by the Corporation shall, after such redemption or purchase, have the status of authorized but unissued shares of Preferred Stock.
(c) Series C Preferred Shares shall rank on a parity with shares of any other series of Preferred Stock as to the payment of dividends to which such shares are entitled.
(d) No Holder of Series C Preferred Shares shall have, solely by reason of being such a holder, any preemptive or other right to acquire, purchase or subscribe for any shares of any Preferred Stock or Common Shares or other securities of the Corporation which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of Series C Preferred Shares shall be
entitled to receive, when, as and if declared by the Board of Directors,
out of funds legally available therefor, cumulative cash dividends on their
Series C Preferred Shares at the dividend rate determined by the Board of
Directors in the manner described under "Designation" above during the
period from and after the date on which such shares are originally issued
and including the last day of the initial Dividend Period and, thereafter,
at the Applicable Rate, determined as set forth in paragraph 2(c), and no
more, payable on the respective dates determined as set forth in paragraph
2(b). Dividends on the Outstanding Series C Preferred Shares shall
accumulate from the date on which such shares are originally issued.
(b) (i) Dividends shall be payable when, as and if declared by the Board of Directors following the initial Dividend Payment Date, subject to paragraph 2(b)(ii), on the Series C Preferred Shares as follows:
(A) with respect to any Dividend Period of one year or less, on the first Business Day following the last day of such Dividend Period; provided, however, if the Dividend Period is more than 91 days then on the 91st, 181st and 271st days within such period, if applicable, and on the first Business Day following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on a quarterly basis on each March 26th, June 26th, September 26th, and December 26th within such Dividend Period and on the first Business Day following the last day of such Dividend Period.
(ii) If a day for payment of dividends resulting from the application of paragraph 2(b)(i) above is not a Business Day, then the Dividend Payment Date shall be the first Business Day following such day for payment of dividends.
(iii) The Corporation shall pay to the Paying Agent not later than 12:00 noon, New York City time, on the Business Day next preceding each Dividend Payment Date for Series C Preferred Shares, an aggregate amount of immediately available funds equal to the dividends to be paid to all Holders of such Series C Preferred Shares on such Dividend Payment Date. The Corporation shall not be required to establish any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends shall be held in trust for the payment of such dividends by the Paying Agent for the benefit of the Holders specified in paragraph 2(b)(v). Unless instructed by the Corporation in writing the Paying Agent will hold such moneys uninvested. Any moneys paid to the Paying Agent in accordance with the foregoing but not applied by the Paying Agent to the payment of dividends, including interest earned, if any, on such moneys, will, to the extent permitted by law, be repaid to the Corporation at the end of 90 days from the date on which such moneys were to have been so applied.
(v) Each dividend on Series C Preferred Shares shall be paid on the Dividend Payment Date therefor to the Holders of Series C Preferred Shares as their names appear on the stock ledger or stock records of the Corporation on the Business Day next preceding such Dividend Payment Date; provided, however, if dividends are in arrears, they may be declared and paid at any time to Holders as their names appear on the stock ledger or stock records of the Corporation on such date not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Directors. No interest will be payable in respect of any dividend payment or payments which may be in arrears.
(c) (i) For each Dividend Period after the initial Dividend Period for each Outstanding Series C Preferred Share, the dividend rate shall be equal to the rate per annum that results from an Auction (but the rate set at the Auction will not exceed the Maximum Rate); provided, however, that if an Auction for any subsequent Dividend Period of Series C Preferred Shares is not held for any reason or if Sufficient Clearing Bids have not been made in an Auction (other than as a result of all Series C Preferred Shares being the subject of Submitted Hold Orders), then the dividend rate on each Outstanding Series C Preferred Share for any such Dividend Period shall be the Maximum Rate (except (A) during a Default Period, when the dividend rate shall be the Default Rate as set forth in paragraph 2(c)(ii) below, or (B) after a Default Period and prior to the beginning of the next Dividend Period, when the dividend rate shall be the Maximum Rate at the close of business on the last day of such Default Period). If an Auction is not held because an unforeseen event or unforeseen events cause a day that otherwise would have been an Auction Date not to be a Business Day, then the length of the then current Dividend Period shall be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events), the Applicable Rate for such period shall be the Applicable Rate for the Dividend Period so extended and the Dividend Payment Date for such Dividend Period shall be the first Business Day next succeeding the end of such period.
(ii) Subject to the cure provisions in paragraph 2(c)(iii) below, a "Default Period" with respect to the Series C Preferred Shares will commence if the Corporation fails to deposit irrevocably in trust in same-day funds, with the Paying Agent by 12:00 noon, New York City time on the Business Day next preceding the relevant (A) Dividend Payment Date, the full amount of any declared dividend on the Series C Preferred Shares payable on the Dividend Payment Date, then on such Dividend Payment Date (a "Dividend Default") or (B) date fixed for such redemption (the "Redemption Date"), the full amount of any Redemption Price payable on such Redemption Date, then on such Redemption Date (a "Redemption Default" and together with a Dividend Default, hereinafter referred to as a "Default").
Subject to the cure provisions of paragraph 2(c)(iii) below, a Default Period with respect to a Dividend Default or a Redemption Default shall end on the Business Day on which, by 12:00 noon, New York City time, all unpaid dividends and any unpaid Redemption Price in respect of such Series C Preferred Shares shall have been deposited irrevocably in trust in same-day funds with the Paying Agent. In the case of a Dividend Default, the Applicable Rate for each Dividend Period commencing during a Default Period will be equal to the Default Rate, and each Dividend Period commencing during a Default Period shall be a Standard Dividend Period; provided, however, that the commencement of a Default Period will not by itself cause the commencement of a new Dividend Period. No Auction shall be held during an applicable Default Period.
(iii) No Default Period with respect to a Dividend Default or Redemption Default shall be deemed to have commenced if the amount of any dividend or any Redemption Price due (if such default is not solely due to the willful failure of the Corporation) is deposited irrevocably in trust in same-day funds with the Paying Agent by 12:00 noon, New York City time within three Business Days after the applicable Dividend Payment Date or Redemption Date, together with an amount in respect of such Series C Preferred Shares equal to the Default Rate applied to the amount of such non-payment based on the actual number of days that would otherwise have comprised the Default Period divided by 360. The "Default Rate" shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of dividends per Series C Preferred Share payable (if declared) on each Dividend Payment Date of each Dividend Period of less than one year (or in respect of dividends on another date in connection with a redemption during such Dividend Period) shall be computed by multiplying the Applicable Rate (or the Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the numerator of which will be the number of days in such Dividend Period (or portion thereof) that such Series C Preferred Share was Outstanding and for which the Applicable Rate or the Default Rate was applicable (but in no event shall the numerator exceed 360) and the denominator of which will be 360, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent. During any Dividend Period of one year or more, the amount of dividends per Series C Preferred Share payable on any Dividend Payment Date (or in respect of dividends on another date in connection with a redemption during such Dividend Period) will be computed as described in the preceding sentence except that the numerator, with respect to any full twelve month period, will be determined on the basis of twelve 30-day months.
(d) Any dividend payment made on Series C Preferred Shares shall first be credited against the earliest accumulated but unpaid dividends due with respect to such shares.
(e) For so long as the Series C Preferred Shares are Outstanding, except as otherwise contemplated by Article I of these Articles Supplementary, the Corporation shall 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, Common Shares or other shares, if any, ranking junior to the Series C Preferred Shares as to dividends or upon liquidation) with respect to Common Shares or any other capital stock of the Corporation ranking junior to the Series C Preferred Shares as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or other capital stock ranking junior to the Series C Preferred Shares (except by conversion into or exchange for shares of the Corporation ranking junior to the Series C Preferred Shares as to dividends and upon liquidation), unless, in each case, (i) immediately after such transaction, the Corporation would have Eligible Assets with an aggregate Discounted Value at least equal to the Series C Preferred Basic Maintenance Amount and the 1940 Act Asset Coverage would be achieved, (ii) all cumulative and unpaid dividends due on or prior to the date of the transaction have been declared and paid in full with respect to the Corporation's Preferred Stock, including the Series C Preferred Shares (or shall have been declared and have had sufficient funds for the payment thereof deposited with the Paying Agent, in the case of the Series C Preferred Shares, and the applicable dividend-disbursement agent, with respect to other series of Preferred Stock) and (iii) the Corporation has redeemed the full number of shares of Preferred Stock required to be redeemed by any mandatory provision for redemption, including any Series C Preferred Shares required to be redeemed mandatorily by any provision contained in paragraph 3(a)(ii).
(f) No full dividend shall be declared or paid or set apart for payment on the Series C Preferred Shares for any Dividend Period or part thereof, unless full cumulative dividends due through the most recent Dividend Payment Date in the case of the Series C Preferred Shares and due through the most recent dividend payment dates therefor in the case of all other classes or series of Preferred Stock ranking on a parity with the Series C Preferred Shares with respect to the payment of dividends have been or contemporaneously are declared and paid on all such Outstanding shares of Preferred Stock. If full cumulative dividends due have not been paid on the Series C Preferred Shares and all shares of Preferred Stock ranking on a parity with the Series C Preferred Shares as to the payment of dividends, any dividends being paid on such shares of Preferred Stock (including the Series C Preferred Shares) shall be paid as nearly pro rata as possible on all such Outstanding shares of Preferred Stock on the dividend payment dates therefor (the Dividend Payment Date in the case of the Series C Preferred Shares) in proportion to the respective amounts of dividends accumulated but unpaid on each such series of Preferred Stock.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to any
Non-Call Period and the provisions of this paragraph 3 and to the extent
permitted under the 1940 Act and Maryland law, the Corporation may, at its
option, redeem in whole or in part out of funds legally available therefor,
Series C Preferred Shares by delivering a notice of redemption not less
than 15 calendar days and not more than 40 calendar days prior to the
Redemption Date, in the case of shares herein designated as (A) having a
Dividend Period of one year or less, on the next Business Day after the
last day of such Dividend Period, at a redemption price per share equal to
$25,000, plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to the Redemption Date ("Redemption
Price"), or (B) having a Dividend Period of more than one year, on any
Business Day prior to the end of the relevant Dividend Period, at the
Redemption Price subject to any applicable Specific Redemption Provisions.
Notwithstanding the foregoing, the Corporation shall not give a notice of
or effect any redemption pursuant to this paragraph 3(a)(i) unless, on the
date on which the Corporation gives such notice and on the Redemption Date,
(x) the Corporation has available Deposit Securities with maturity or
tender dates not later than the day preceding the applicable Redemption
Date and having a value not less than the amount (including any applicable
premium) due to Holders of the Series C Preferred Shares to be redeemed on
the Redemption Date and (y) the Corporation would have Eligible Assets with
an aggregate Discounted Value at least equal to the Series C Preferred
Basic Maintenance Amount and the 1940 Act Asset Coverage immediately
subsequent to such redemption, if such redemption were to occur on such
date, it being understood that the provisions of paragraph 3(d) of this
Article I shall be applicable in such circumstances in the event the
Corporation makes the deposit and takes the other action required thereby.
(ii) So long as Series C Preferred Shares are Outstanding, if the Corporation fails (A) as of any Valuation Date to meet the Series C Preferred Basic Maintenance Amount Test and such failure is not cured by the Series C Preferred Basic Maintenance Amount Cure Date or (B) as of any Valuation Date to meet the 1940 Act Asset Coverage and such failure is not cured by the 1940 Act Asset Coverage Cure Date or (C) as of any valuation or measuring date applicable to any other series of Preferred Stock to meet any applicable maintenance amount test and such failure is not cured by the relevant cure date (any such cure date, together with any Series C Preferred Basic Maintenance Amount Cure Date or 1940 Act Asset Coverage Cure Date, a "Cure Date"), Preferred Stock, which at the Corporation's determination may include Series C Preferred Shares, will be subject to mandatory redemption out of funds legally available therefor. The series and number of shares of Preferred Stock to be redeemed in such circumstances will be determined by the Corporation from among all series of Preferred Stock then Outstanding. The amount of Preferred Stock to be mandatorily redeemed under such circumstances shall, in the aggregate, equal the lesser of (1) the minimum amount of Preferred Stock (including the Series C Preferred Shares if so determined by the Corporation) the redemption of which, if deemed to have occurred immediately prior to the opening of business on the relevant Cure Date, would result in the Corporation meeting, as the case may be, the Series C Preferred Basic Maintenance Amount Test, the 1940 Act Asset Coverage and any other then applicable maintenance amount test, in each case as of the relevant Cure Date (provided that, if there is no such minimum amount of Preferred Stock the redemption of which would have such result, all Series C Preferred Shares then Outstanding will be redeemed) and (2) the maximum amount of Preferred Stock that can be redeemed out of funds expected to be available therefor on the Mandatory Redemption Date at the Mandatory Redemption Price set forth in paragraph 3(a)(iii) hereof; provided, that in the event that Preferred Stock is redeemed mandatorily pursuant to this paragraph 3, the Corporation may, but is not required to, redeem a sufficient amount of additional Preferred Stock in order that immediately following such redemption the Corporation has (x) Eligible Assets with Adjusted Value with respect to the Preferred Stock remaining Outstanding of as great as 110% of the Series C Preferred Basic Maintenance Amount and (y) 1940 Act Asset Coverage with respect to the Preferred Stock remaining Outstanding of as great as 220%.
(iii) Subject to the Articles Supplementary establishing each series of Preferred Stock, the Corporation may determine the shares and series of Preferred Stock to be redeemed in accordance with the paragraph 3(a)(ii) above, subject to the further provisions of this paragraph 3(a)(iii). Subject to the immediately preceding sentence, the Corporation shall effect any mandatory redemption of Series C Preferred Shares relating to: (A) a failure to meet the Series C Preferred Basic Maintenance Amount Test, no later than 30 days after the Corporation last met the Series C Preferred Basic Maintenance Amount Test, (B) a failure to meet the 1940 Act Asset Coverage, no later than 30 days after the 1940 Act Asset Coverage Cure Date or (C) a failure to meet any other then applicable maintenance amount test in accordance with the requirements of such test (in each case the "Mandatory Redemption Date"), except that if the Corporation does not have funds legally available for the redemption of, or is not otherwise legally permitted to redeem, the amount of Preferred Stock which would be required to be redeemed by the Corporation under subparagraph 3(a)(ii) if sufficient funds were available, or the Corporation otherwise is unable to effect such redemption on or prior to the applicable Mandatory Redemption Date, the Corporation shall redeem those Series C Preferred Shares and shares of other Preferred Stock which it was unable to redeem on the earliest practicable date on which the Corporation will have such funds available upon notice, in the case of Series C Preferred Shares pursuant to paragraph 3(b) to Holders of Series C Preferred Shares to be redeemed. The Corporation will deposit with the Paying Agent funds sufficient to redeem the specified number of Series C Preferred Shares subject to a redemption required under paragraph 3(a)(ii), by 1:00 P.M., New York City time, of the Business Day immediately preceding the Mandatory Redemption Date. If fewer than all of the Outstanding Series C Preferred Shares are to be redeemed pursuant to this 3(a)(iii), the number of Series C Preferred Shares to be redeemed shall be redeemed pro rata from the Holders of such shares in proportion to the number of the Series C Preferred Shares held by such Holders, by lot or by such other method as the Corporation shall deem fair and equitable, subject, however, to the terms of any applicable Specific Redemption Provisions.
(b) In the event of a redemption of Series C Preferred Shares pursuant to paragraph 3(a) above, the Corporation will have filed or will file a notice of its intention to redeem with the Commission, in either case so as to provide at least the minimum notice required under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the Corporation shall deliver a notice of redemption to the Auction Agent (the "Notice of Redemption") containing the information set forth below (i) in the case of an optional redemption pursuant to paragraph 3(a)(i) above, one Business Day prior to the giving of notice to the Holders and (ii) in the case of a mandatory redemption pursuant to paragraph 3(a)(ii) above, on or prior to the 10th day preceding the Mandatory Redemption Date. The Auction Agent will use its reasonable efforts to provide telephonic, electronic or written notice to each Holder of any Series C Preferred Shares called for redemption not later than the close of business on the Business Day immediately following the day on which the Corporation determines the shares to be redeemed (or, during a Default Period with respect to such shares, not later than the close of business on the Business Day immediately following the day on which the Auction Agent receives Notice of Redemption from the Corporation). The Auction Agent shall confirm a telephonic notice in writing not later than the close of business on the third Business Day preceding the date fixed for redemption by providing the Notice of Redemption to each Holder of shares called for redemption, the Paying Agent (if different from the Auction Agent) and the Securities Depository. Notice of Redemption will be addressed to the Holders of Series C Preferred Shares at their addresses appearing on the share records of the Corporation. Such Notice of Redemption will set forth (t) the date fixed for redemption, (u) the number and identity of Series C Preferred Shares to be redeemed, (v) the CUSIP number(s) of such shares, (w) the Redemption Price (specifying the amount of accumulated dividends to be included therein), (x) the place or places where such shares are to be redeemed, (y) that dividends on the shares to be redeemed will cease to accumulate on such date fixed for redemption, and (z) the provision under which redemption shall be made. No defect in the Notice of Redemption or in the transmittal or mailing thereof will affect the validity of the redemption proceedings, except as required by applicable law. If fewer than all Series C Preferred Shares held by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall also specify the number of Series C Preferred Shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph 3(a), no Preferred Stock, including the Series C Preferred Shares, may be redeemed at the option of the Corporation unless all dividends in arrears on the Outstanding Series C Preferred Shares and any other Preferred Stock have been or are being contemporaneously paid or set aside for payment; provided, however, that the foregoing shall not prevent the purchase or acquisition of outstanding shares of Preferred Stock pursuant to the successful completion of an otherwise lawful purchase or exchange offer made on the same terms to holders of all Outstanding shares of Preferred Stock.
(d) Upon the deposit of funds sufficient to redeem Series
C Preferred Shares with the Paying Agent and the giving of the Notice of
Redemption to the Auction Agent under paragraph 3(b) above, dividends on
such shares shall cease to accumulate and such shares shall no longer be
deemed to be Outstanding for any purpose (including, without limitation,
for purposes of calculating whether the Corporation has met the Series C
Preferred Basic Maintenance Amount Test or the 1940 Act Asset Coverage),
and all rights of the Holders of the Series C Preferred Shares so called
for redemption shall cease and terminate, except the right of such Holder
to receive the Redemption Price specified herein, but without any interest
or other additional amount. Such Redemption Price shall be paid by the
Paying Agent to the nominee of the Securities Depository. The Corporation
shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of
(i) the aggregate Redemption Price of the Series C Preferred Shares called
for redemption on such date and (ii) such other amounts, if any, to which
Holders of the Series C Preferred Shares called for redemption may be
entitled. Any funds so deposited that are unclaimed at the end of two years
from such redemption date shall, to the extent permitted by law, be paid to
the Corporation, after which time the Holders of Series C Preferred Shares
so called for redemption may look only to the Corporation for payment of
the Redemption Price and all other amounts, if any, to which they may be
entitled; provided, however, that the Paying Agent shall notify all Holders
whose funds are unclaimed by placing a notice in The Wall Street Journal
concerning the availability of such funds for three consecutive weeks. The
Corporation shall be entitled to receive, from time to time after the date
fixed for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has been given is not made by reason of the absence of legally available funds therefor, or is otherwise prohibited, such redemption shall be made as soon as practicable to the extent such funds become legally available or such redemption is no longer otherwise prohibited. Failure to redeem Series C Preferred Shares shall be deemed to exist at any time after the date specified for redemption in a Notice of Redemption when the Corporation shall have failed, for any reason whatsoever, to deposit in trust with the Paying Agent the Redemption Price with respect to any shares for which such Notice of Redemption has been given. Notwithstanding the fact that the Corporation may not have redeemed Series C Preferred Shares for which a Notice of Redemption has been given, dividends may be declared and paid on Series C Preferred Shares, which shall include those Series C Preferred Shares for which Notice of Redemption has been given but for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the Redemption Price of Series C Preferred Shares called for redemption shall be held in trust by the Paying Agent for the benefit of Holders of the Series C Preferred Shares so to be redeemed. A Redemption Default will occur on account of the Corporation's failure to timely deposit any required Redemption Price with the Paying Agent and any resulting Default Period will end in accordance with paragraph 2(c) of this Article I.
(g) So long as any Series C Preferred Shares are held of record by the nominee of the Securities Depository, the Redemption Price for such shares will be paid on the date fixed for redemption to the nominee of the Securities Depository for distribution to Agent Members for distribution to the Persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in these Articles Supplementary limits any right of the Corporation to purchase or otherwise acquire Series C Preferred Shares outside of an Auction at any price, whether higher or lower than the price that would be paid in connection with an optional or mandatory redemption, so long as, at the time of any such purchase, there is no arrearage in the payment of dividends on, or the mandatory or optional Redemption Price with respect to, any Series C Preferred Shares for which Notice of Redemption has been given and the Corporation meets the 1940 Act Asset Coverage and the Series C Preferred Basic Maintenance Amount Test after giving effect to such purchase or acquisition on the date thereof. Any Series C Preferred Shares which are purchased, redeemed or otherwise acquired by the Corporation shall have no voting rights. If fewer than all the Outstanding Series C Preferred Shares are redeemed or otherwise acquired by the Corporation, the Corporation shall give notice of such transaction to the Auction Agent, in accordance with the procedures agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this paragraph 3, only whole shares of Series C Preferred shall be redeemed, and in the event that any provision of the Charter would require redemption of a fractional share, the Auction Agent shall be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, the Board of Directors may authorize, create or issue other series of Preferred Stock ranking on a parity with the Series C Preferred Shares with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Corporation, to the extent permitted by the 1940 Act, if upon issuance of any such series, either (A) the net proceeds from the sale of such stock (or such portion thereof needed to redeem or repurchase the Outstanding Series C Preferred Shares) are deposited with the Auction Agent in accordance with paragraph 3(d) of this Article I, Notice of Redemption as contemplated by paragraph 3(b) of this Article I has been delivered prior thereto or is sent promptly thereafter, and such proceeds are used to redeem all Outstanding Series C Preferred Shares or (B) the Corporation would meet the 1940 Act Asset Coverage, the Series C Preferred Basic Maintenance Amount Test and the requirements of paragraph 9 of this Article I.
4. Designation of Dividend Period.
(a) The initial Dividend Period for the Series C
Preferred shall be as determined in the manner under "Designation" above.
The Corporation shall designate the duration of subsequent Dividend Periods
of the Series C Preferred Shares; provided, however, that no such
designation shall be necessary for a Standard Dividend Period and, provided
further, that any designation of a Special Dividend Period for the Series C
Preferred shall be effective only if (i) notice thereof shall have been
given as provided herein, (ii) any failure to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or the Redemption Price
of, the Series C Preferred Shares shall have been cured as provided above,
(iii) Sufficient Clearing Orders shall have existed in an Auction held for
the Series C Preferred Shares on the Auction Date immediately preceding the
first day of such proposed Special Dividend Period, (iv) if the Corporation
shall have mailed a Notice ofRedemption with respect to any Series C
Preferred Shares, the Redemption Price with respect to such shares shall
have been deposited with the Paying Agent and (v) in the case of the
designation of a Special Dividend Period, the Corporation has confirmed
that as of the Auction Date next preceding the first day of such Special
Dividend Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the Series C Preferred Basic Maintenance Amount, and the
Corporation has consulted with the Broker-Dealers and has provided notice
of such designation and a Series C Preferred Basic Maintenance Report to
each Rating Agency.
(b) If the Corporation proposes to designate any Special Dividend Period, not fewer than seven Business Days (or two Business Days in the event the duration of the Dividend Period prior to such Special Dividend Period is fewer than eight days) nor more than 30 Business Days prior to the first day of such Special Dividend Period, notice shall be (i) made by press release and (ii) communicated by the Corporation by telephonic or other means to the Auction Agent and confirmed in writing promptly thereafter. Each such notice shall state (x) that the Corporation proposes to exercise its option to designate a succeeding Special Dividend Period, specifying the first and last days thereof and (y) that the Corporation will by 3:00 P.M., New York City time, on the second Business Day next preceding the first day of such Special Dividend Period, notify the Auction Agent, who will promptly notify the Broker-Dealers, of either (A) its determination, subject to certain conditions, to proceed with such Special Dividend Period, subject to the terms of any Specific Redemption Provisions, or (B) its determination not to proceed with such Special Dividend Period, in which latter event the succeeding Dividend Period shall be a Standard Dividend Period. No later than 3:00 P.M., New York City time, on the second Business Day next preceding the first day of any proposed Special Dividend Period, the Corporation shall deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers and Existing Holders, either:
(1) a notice stating (a) that the Corporation has determined to designate the next succeeding Dividend Period as a Special Dividend Period, (b) the first and last days thereof and (c) the terms of any Specific Redemption Provisions; or
(2) a notice stating that the Corporation has determined not to exercise its option to designate a Special Dividend Period.
If the Corporation fails to deliver either such notice with respect to the designation of any proposed Special Dividend Period to the Auction Agent or is unable to make the confirmation provided in paragraph 4(a)(v) by 3:00 P.M., New York City time, on the second Business Day next preceding the first day of such proposed Special Dividend Period, the Corporation shall be deemed to have delivered a notice to the Auction Agent with respect to such Dividend Period to the effect set forth in clause (2) above, thereby resulting in a Standard Dividend Period.
5. Restrictions on Transfer.
Series C Preferred Shares may be transferred only (a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an Auction will not be effective unless the selling Existing Holder or the Agent Member of such Existing Holder (in the case of an Existing Holder whose shares are listed in its own name on the books of the Auction Agent), or the Broker-Dealer or Agent Member of such Broker-Dealer (in the case of a transfer between persons holding shares of any Series through different Broker-Dealers), advises the Auction Agent of such transfer. Any certificates representing the Series C Preferred Shares issued to the Securities Depository will bear legends with respect to the restrictions described above and stop-transfer instructions will be issued to the Transfer Agent and/or Registrar.
6. Voting Rights.
(a) Except as otherwise provided by law or as specified in the Charter, each Holder of Series C Preferred Shares and any other Preferred Stock shall be entitled to one vote for each share held on each matter submitted to a vote of stockholders of the Corporation, and the Holders of Outstanding shares of Preferred Stock and of Common Shares shall vote together as a single class; provided, however, that at any meeting of the stockholders of the Corporation held for the election of directors, the Holders of Outstanding shares of Preferred Stock, including the Series C Preferred Shares, shall be entitled, as a class, to the exclusion of the Holders of all other securities and classes of capital stock of the Corporation, to elect a number of Corporation's directors, such that following the election of directors at the meeting of the stockholders, the Corporation's Board of Directors shall contain two directors elected by the Holders of the Outstanding shares of Preferred Stock. Subject to paragraph 6(b) of this Article I, the Holders of Outstanding shares of capital stock of the Corporation, including the Holders of Outstanding shares of Preferred Stock, including Series C Preferred Shares, voting as a single class, shall elect the balance of the directors.
(b) During any period in which any one or more of the conditions described below shall exist (such period being referred to herein as a "Voting Period"), the number of directors constituting the Board of Directors shall be automatically increased by the smallest number of additional directors that, when added to the two directors elected exclusively by the Holders of shares of Preferred Stock pursuant to paragraph 6(a) above, would constitute a majority of the Board of Directors as so increased by such smallest number; and the Holders of shares of Preferred Stock shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of capital stock of the Corporation), to elect such smallest number of additional directors, together with the two directors that such Holders are in any event entitled to elect pursuant to paragraph 6(a) above. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the Outstanding Series C Preferred Shares equal to at least two full years' dividends shall have become due and unpaid and sufficient cash or specified securities shall not have been deposited with the Paying Agent for the payment in full of such accumulated dividends; or
(ii) if at any time holders of any other shares of Preferred Stock are entitled to elect a majority of the directors of the Corporation under the 1940 Act or the Articles Supplementary creating such shares.
Upon the termination of a Voting Period, the voting rights described in this paragraph 6(b) shall cease, subject always, however, to the reverting of such voting rights in the holders of Preferred Stock upon the further occurrence of any of the events described in this paragraph 6(b).
(c) So long as any Series C Preferred Shares are Outstanding, the Corporation shall 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 Series C Preferred Shares 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 Corporation shall 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 the Holders of at least a majority of the shares of Preferred Stock of each series materially adversely affected and Outstanding at such time (each such materially adversely affected series voting separately as a class to the extent its rights are affected differently). The Corporation shall notify each Rating Agency ten Business Days prior to any such vote described above. Unless a higher percentage is provided for under the Charter or applicable provisions of the Maryland General Corporation Law, the affirmative vote of the Holders of a majority of the Outstanding shares of Preferred Stock, including the Series C Preferred Shares, voting together as a single class, will be required to approve any plan of reorganization adversely affecting such shares or any action requiring a vote of security holders under Paragraph 13(a) of the 1940 Act. For purposes of this paragraph 6(c), the phrase "vote of the Holders of a majority of the Outstanding shares of Preferred Stock" shall mean, in accordance with Section 2(a)(42) of the 1940 Act, the vote, at the annual or a special meeting of the stockholders of the Corporation duly called (A) of 67 percent or more of the shares of Preferred Stock present at such meeting, if the Holders of more than 50 percent of the Outstanding shares of Preferred Stock are present or represented by proxy; or (B) of more than 50 percent of the Outstanding shares of Preferred Stock, whichever is less. The class vote of Holders of shares of Preferred Stock described above will in each case be in addition to a separate vote of the requisite percentage of shares of Common Stock and shares of Preferred Stock, including the Series C Preferred Shares, voting together as a single class, necessary to authorize the action in question. An increase in the number of authorized shares of Preferred Stock pursuant to the Charter or the issuance of additional shares of any series of Preferred Stock (including the Series C Preferred Shares) pursuant to the Charter shall not in and of itself be considered to adversely affect the contract rights of the Holders of Preferred Stock. The provisions of this paragraph 6(c) are subject to the provisions of paragraph 10.
(d) As soon as practicable after the accrual of any right
of the Holders of shares of Preferred Stock, including the Series C
Preferred Shares, to elect additional directors as described in paragraph
6(b), the Corporation shall call a special meeting of such Holders and
instruct the Auction Agent to mail a notice of such special meeting to the
Holders of Series C Preferred Shares, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the
Corporation fails to send such notice to the Auction Agent or if the
Corporation does not call such a special meeting, it may be called by any
such Holder on like notice. The record date for determining the Holders
entitled to notice of and to vote at such special meeting shall be the
close of business on the day on which such notice is mailed or such other
day as the Board of Directors shall determine. At any such special meeting
and at each meeting held during a Voting Period, such Holders of Preferred
Stock, voting together as a class (to the exclusion of the holders of all
other securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of directors prescribed in paragraph 6(b) on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the Holders of shares of Preferred
Stock, including the Series C Preferred Shares, present in person or by
proxy shall have the power to adjourn the meeting without notice, other
than an announcement at the meeting, until a date not more than 90 days
after the original record date.
(e) For purposes of determining any rights of the Holders of the shares of Preferred Stock, including the Series C Preferred Shares, to vote on any matter, whether such right is created by these Articles Supplementary, by the other provisions of the Charter, by statute or otherwise, a Series C Preferred Share which is not Outstanding shall not be counted.
(f) The terms of office of all persons who are directors of the Corporation at the time of a special meeting of Holders of Preferred Stock, including the Series C Preferred Shares, to elect directors shall continue, notwithstanding the election at such meeting by such Holders of the number of directors that they are entitled to elect, and the persons so elected by such Holders, together with the two incumbent directors elected by the Holders of Preferred Stock, including the Series C Preferred Shares, and the remaining incumbent directors elected by the holders of the Common Stock and Preferred Stock, shall constitute the duly elected directors of the Corporation.
(g) Upon the expiration of a Voting Period, the terms of office of the additional directors elected by the Holders of Preferred Stock, including the Series C Preferred Shares, pursuant to paragraph 6(b) above shall terminate at the earliest time permitted by law, and the remaining directors shall constitute the directors of the Corporation and the voting rights of such Holders of Preferred Stock, including Series C Preferred Shares, to elect additional directors pursuant to paragraph 6(b) above shall cease, subject to the provisions of the last sentence of paragraph 6(b).
(h) Unless otherwise required by law, the Holders of Series C Preferred Shares shall not have any rights or preferences other than those specifically set forth herein. The Holders of Series C Preferred Shares shall have no preemptive rights or rights to cumulative voting. In the event that the Corporation fails to pay any dividends on the Series C Preferred Shares, the exclusive remedy of the Holders shall be the right to vote for directors pursuant to the provisions of this paragraph 6.
(i) In the event a vote of Holders of Preferred Stock is required pursuant to the provisions of Section 13(a) of the 1940 Act, as long as the Series C Preferred Shares are rated by a Rating Agency at the request of the Corporation, the Corporation shall, not later than ten Business Days prior to the date on which such vote is to be taken, notify each Rating Agency that such vote is to be taken and the nature of the action with respect to which such vote is to be taken and, not later than ten Business Days after the date on which such vote is taken, notify each Rating Agency of the result of such vote.
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the Holders of Series C Preferred Shares shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, after claims of creditors but before any distribution or payment shall be made in respect of the Common Shares or any other stock of the Corporation ranking junior to the Series C Preferred Shares as to liquidation payments, a liquidation distribution in the amount of $25,000.00 per share (the "Liquidation Preference"), plus an amount equal to all unpaid dividends accumulated to and including the date fixed for such distribution or payment (whether or not earned or declared by the Corporation, but excluding interest thereon), and such Holders shall be entitled to no further participation in any distribution or payment in connection with any such liquidation, dissolution or winding up.
(b) If, upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the assets of the Corporation available for distribution among the Holders of all Outstanding Series C Preferred Shares, and any other Outstanding class or series of Preferred Stock ranking on a parity with the Series C Preferred Shares as to payment upon liquidation, shall be insufficient to permit the payment in full to such Holders of Series C Preferred Shares of the Liquidation Preference plus accumulated and unpaid dividends and the amounts due upon liquidation with respect to such other Preferred Stock, then such available assets shall be distributed among the Holders of Series C Preferred Shares and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference plus accumulated and unpaid dividends has been paid in full to the Holders of Series C Preferred Shares, no dividends or distributions will be made to holders of the Common Stock or any other stock of the Corporation ranking junior to the Series C Preferred Shares as to liquidation.
8. Auction Agent.
For so long as any Series C Preferred Shares are Outstanding, the Auction Agent, duly appointed by the Corporation to so act, shall be in each case a commercial bank, trust company or other financial institution independent of the Corporation and its Affiliates (which, however, may engage or have engaged in business transactions with the Corporation or its Affiliates) and at no time shall the Corporation or any of its Affiliates act as the Auction Agent in connection with the Auction Procedures. If the Auction Agent resigns or for any reason its appointment is terminated during any period that any Series C Preferred Shares are Outstanding, the Corporation shall use its best efforts promptly thereafter to appoint another qualified commercial bank, trust company or financial institution to act as the Auction Agent.
9. Coverage Tests.
(a) Determination of Compliance.
For so long as any Series C Preferred Shares are Outstanding, the Corporation shall make the following determinations:
(i) 1940 Act Asset Coverage as follows:
(A) As of each Valuation Date, the Corporation shall determine whether the 1940 Act Asset Coverage is met as of that date.
(B) The Corporation shall deliver to the Auction Agent and each Rating Agency a 1940 Act Asset Coverage Certificate which sets forth the determination of paragraph 9(a)(i)(A) above (1) as of the Date of Original Issue and, thereafter, (2) as of (x) the last Business Day of each March, June, September and December and (y) a Business Day on or before any 1940 Act Asset Coverage Cure Date following a failure to meet 1940 Act Asset Coverage. Such 1940 Act Asset Coverage Certificate shall be delivered in the case of clause (1) on the Date of Original Issue and in the case of clause (2) on or before the seventh Business Day after the last Business Day of such March, June, September and December, as the case may be, or the relevant Cure Date.
(ii) Series C Preferred Basic Maintenance Amount as follows:
(A) For so long as Series C Preferred Shares are rated by Moody's and/or S&P at the Corporation's request, the Corporation shall maintain, on each Valuation Date, Eligible Assets having an Adjusted Value at least equal to the Series C Preferred Basic Maintenance Amount, as of such Valuation Date. Upon any failure to maintain Eligible Assets having an Adjusted Value at least equal to the Series C Preferred Basic Maintenance Amount, the Corporation shall use all commercially reasonable efforts to re-attain Eligible Assets having an Adjusted Value at least equal to the Series C Preferred Basic Maintenance Amount on or prior to the Series C Preferred Basic Maintenance Amount Cure Date, by altering the composition of its portfolio or otherwise.
(B) On or before 5:00 P.M., New York City time, on the fifth Business Day after a Valuation Date on which the Corporation fails to satisfy the Series C Preferred Basic Maintenance Amount, and on the fifth Business Day after the Series C Preferred Basic Maintenance Cure Date with respect to such Valuation Date, the Corporation shall complete and deliver to each Rating Agency and the Auction Agent (if either S&P or Moody's is then rating the Series C Preferred Shares at the Corporation's request) a Series C Preferred Basic Maintenance Report as of the date of such failure or such Series C Preferred Basic Maintenance Cure Date, as the case may be, which will be deemed to have been delivered to such Rating Agency or the Auction Agent, as the case may be, if such Rating Agency or the Auction Agent receives a copy or telecopy, telex or other electronic transcription thereof and on the same day the Corporation mails or sends to such Rating Agency or the Auction Agent for delivery on the next Business Day the full Series C Preferred Basic Maintenance Report. The Corporation shall also deliver a Series C Preferred Basic Maintenance Report to (1) S&P, during each of the first twelve months the Series C Preferred Shares are Outstanding, and the Auction Agent (if either Moody's or S&P is then rating the Series C Preferred Shares at the Corporation's request) as of (a) thefifteenth day of each month (or, if such day is not a Business Day, the next succeeding Business Day) and (b) the last Business Day of each month and (2) each Rating Agency as of any Quarterly Valuation Date, in each case on or before the fifth Business Day after such day. A failure by the Corporation to deliver a Series C Preferred Basic Maintenance Report pursuant to the preceding sentence shall be deemed to be delivery of a Series C Preferred Basic Maintenance Report indicating the Discounted Value for all assets of the Corporation is less than the Series C Preferred Basic Maintenance Amount, as of the relevant Valuation Date.
(C) Within ten Business Days after the date of delivery of a Series C Preferred Basic Maintenance Report in accordance with paragraph (B) of this Section 9(a)(ii) relating to any Quarterly Valuation Date, the Corporation shall cause the Independent Accountant to send an Accountant's Confirmation to each Rating Agency and the Auction Agent (if either S&P or Moody's is then rating the Series C Preferred Shares at the Corporation's request) with respect to such Series C Preferred Basic Maintenance Report. The Corporation also shall cause the Independent Accountant to provide an Accountant's Confirmation to S&P if and when requested by S&P for any Valuation Date, on or before the fifth Business Day after such request.
(D) Within ten Business Days after the date of delivery of a Series C Preferred Basic Maintenance Report in accordance with paragraph (B) of this Section 9(a)(ii) relating to each, if any, Valuation Date on which the Corporation failed to satisfy the Series C Preferred Basic Maintenance Amount and the Series C Preferred Basic Maintenance Cure Date with respect to such failure to satisfy the Series C Preferred Basic Maintenance Amount, the Corporation shall cause the Independent Accountant to provide to each Rating Agency and the Auction Agent (if either S&P or Moody's is then rating the Series C Preferred Shares at the Corporation's request) an Accountant's Confirmation as to such Series C Preferred Basic Maintenance Report.
(E) If any Accountant's Confirmation delivered pursuant to paragraph (C) or (D) of this Section 9(a)(ii) does not agree with the Corporation's calculation of the Series C Preferred Basic Maintenance Report for a particular Valuation Date for which such Accountant's Confirmation was required to be delivered, or shows that a lower aggregate Discounted Value for the aggregate Eligible Assets in respect of any Rating Agency than was determined by the Corporation, the calculation or determination made by such Independent Accountant shall be final and conclusive and shall be binding on the Corporation, and the Corporation shall accordingly amend and deliver the Series C Preferred Basic Maintenance Report to the relevant Rating Agency and the Auction Agent (if either S&P or Moody's is then rating the Series C Preferred Shares) promptly following receipt by the Corporation of such Accountant's Confirmation.
(F) On or before 5:00 p.m., New York City time, on the fifth Business Day after the Date of Original Issue of Series C Preferred Shares, the Corporation shall complete and deliver to each Rating Agency a Series C Preferred Basic Maintenance Report as of the close of business on such Date of Original Issue.
(G) On or before 5:00 p.m., New York City time, on the fifth Business Day after either (1) the Corporation shall have redeemed Series C Preferred Shares or (2) the ratio of the Discounted Value of Eligible Assets in respect of any Rating Agency to the Series C Preferred Basic Maintenance Amount is less than or equal to 110%, the Corporation shall complete and deliver to, in the case of clause (1), each Rating Agency, or, in the case of clause (2), any relevant Rating Agency, a Series C Preferred Basic Maintenance Report as of the date of either such event.
(b) Failure to Meet Asset Coverage Requirements.
If the Corporation fails to have 1940 Act Asset Coverage as provided in paragraph 9(a)(i) of this Article I or to have Eligible Assets having an Adjusted Value at least equal to the Series C Preferred Basic Maintenance Amount as provided in paragraph 9(a)(ii)(A) of this Article I and such failure is not cured by the applicable Cure Date, Preferred Stock, which at the Corporation's determination may include Series C Preferred Shares, will be subject to mandatory redemption as set forth in paragraph 3 of this Article I.
(c) Status of Series C Preferred Shares Called for Redemption.
For purposes of determining whether the requirements of paragraphs 9(a)(i) and 9(a)(ii)(A) hereof are satisfied, (i) no Series C Preferred Share shall be deemed to be Outstanding for purposes of any computation if, prior to or concurrently with such determination, sufficient Deposit Assets to pay the full Redemption Price for such share shall have been deposited in trust with the Paying Agent and the requisite Notice of Redemption shall have been given, and (ii) such Deposit Assets deposited with the Paying Agent shall not be included.
10. Certain Other Restrictions.
(a) For so long as the Series C Preferred is rated by a Rating Agency at the Corporation's request, the Corporation will not, and will cause the Adviser not to, (i) knowingly and willfully purchase or sell any asset for the specific purpose of causing, and with the actual knowledge that the effect of such purchase or sale will be to cause, the Corporation to have Eligible Assets having an Adjusted Value as of the date of such purchase or sale to be less than the Series C Preferred Basic Maintenance Amount as of such date, (ii) in the event that, as of the immediately preceding Valuation Date, the Adjusted Value of the Corporation's Eligible Assets exceeded the Series C Preferred Basic Maintenance Amount by 5% or less, alter the composition of the Corporation's assets in a manner reasonably expected to reduce the Adjusted Value of the Corporation's Eligible Assets, unless the Corporation shall have confirmed that, after giving effect to such alteration, the Adjusted Value of the Corporation's Eligible Assets exceeded the Series C Preferred Basic Maintenance Amount or (iii) declare or pay any dividend or other distribution on any Common Shares or repurchase any Common Shares, unless the Corporation shall have confirmed that, after giving effect to such declaration, other distribution or repurchase, the Corporation continued to satisfy the requirements of paragraphs 9(a)(i) and 9(a)(ii) of this Article I.
(b) For so long as any the Series C Preferred Shares are rated by any Rating Agency at the Corporation's request, unless the Corporation shall have received written confirmation from each such Rating Agency, the Corporation may engage in the lending of its portfolio securities only in an amount of up to 5% of the Corporation's total assets, provided that the Corporation receives cash collateral for such loaned securities which is maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities and, if invested, is invested only in Short-Term Money Market Instruments or in money market mutual funds meeting the requirements of Rule 2a-7 under the 1940 Act that maintain a constant $1.00 per share net asset value and treat the loaned securities rather than the collateral as the assets of the Corporation for purposes of determining compliance with paragraph 9 hereof.
(c) For so long as the Series C Preferred Shares are rated by Rating Agency at the Corporation's request, the Corporation shall not consolidate with, merge into, sell or otherwise transfer all or substantially all of its assets to another entity or adopt a plan of liquidation of the Corporation, in each case without providing prior written notification to each Rating Agency.
11. Limitation on Incurrence of Additional Indebtedness, Certain Transactions and Issuance of Additional Preferred Stock
(a) So long as any Series C Preferred Shares are Outstanding, the Corporation may issue and sell one or more series of a class of senior securities of the Corporation representing indebtedness under Section 18 of the 1940 Act and/or otherwise create or incur indebtedness, provided that immediately after giving effect to the incurrence of such indebtedness and to its receipt and application of the proceeds thereof, the Corporation shall have an "asset coverage" for all senior securities representing indebtedness, as defined in Section 18(h) of the 1940 Act, of at least 300% of the amount of all indebtedness of the Corporation then Outstanding and no such additional indebtedness shall have any preference or priority over any other indebtedness of the Corporation upon the distribution of the assets of the Corporation 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 Corporation then in effect, shall not be considered to be indebtedness limited by this paragraph 11(a).
(b) So long as any Series C Preferred Shares are Outstanding and S&P is rating such Series C Preferred Shares at the Corporation's request, the Corporation will not, unless it has received written confirmation that any such transaction would not impair the rating then assigned by S&P to such Series C Preferred Shares, engage in any one or more of the following transactions:
(i) purchase or sell futures contracts; write, purchase or sell options on futures contracts; or write put options (except covered put options) or call options (except covered call options) on securities owned by the Corporation (collectively, "Hedging Transactions"), except subject to the following limitations:
(A) for each net long or short position in Hedging Transactions, the Corporation will maintain in a segregated account with the Corporation's custodian an amount of cash or readily marketable securities having a value, when added to any amounts on deposit with the Corporation's futures commission merchants or brokers as margin or premium for such position, at least equal to the market value of the Corporation's potential obligations on such position, marked-to-market on a daily basis, in each case as and to the extent required by the applicable rules or orders of the Commission or by interpretations of the Commission's staff;
(B) the Corporation will not engage in any Hedging Transaction which would cause the Corporation at the time of such transaction to own or have sold the lesser of (1) outstanding futures contracts, in aggregate, based on the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the Russell 2000 Index, the Wilshire 5000 Index, the Nasdaq Composite Index and the New York Stock Exchange Composite Index (or any component of any of the forgoing) exceeding in number 50% of the market value of the Corporation's total assets or (2) outstanding futures contracts based on any of the aforementioned indices exceeding in number 10% of the average number of daily traded futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal;
(C) the Corporation will engage in closing transactions to close out any outstanding futures contract which the Corporation owns or has sold or any outstanding option thereon owned by the Corporation in the event (1) the Corporation does not have S&P Eligible Assets with an aggregate Discounted Value equal to or greater than the Series C Preferred Basic Maintenance Amount on two consecutive Valuation Dates and (2) the Corporation is required to pay variation margin on the second such Valuation Date;
(D) the Corporation will engage in a closing transaction to close out any outstanding futures contract or option thereon at least one week prior to the delivery date under the terms of the futures contract or option thereon unless the corporation holds the securities deliverable under such terms; and
(E) when the Corporation writes a futures contract or option thereon, either the amount of margin posted by the Corporation (in the case of a futures contract) or the marked-to-market value of the Corporation's obligation (in the case of a put option written by the Corporation) shall be treated as a liability of the Corporation for purposes of calculating the Series C Preferred Basic Maintenance Amount, or, in the event the Corporation writes a futures contract or option thereon which requires delivery of an underlying security and the Corporation does not wish to treat its obligations with respect thereto as a liability for purposes of calculating the Series C Preferred Basic Maintenance Amount, it shall hold such underlying security in its portfolio and shall not include such security to the extent of such contract or option as an S&P Eligible Asset.
(ii) borrow money, except for the purpose of clearing securities transactions if (A) the Series C Preferred Basic Maintenance Amount would continue to be satisfied after giving effect to such borrowing and (B) such borrowing (1) is privately arranged with a bank or other person and is not intended to be publicly distributed or (2) is for "temporary purposes," and is in an amount not exceeding 5 percent of the market value of the total assets of the Corporation at the time of the borrowing; for purposes of the foregoing, "temporary purposes" means that the borrowing is to be repaid within sixty days and is not to be extended or renewed;
(iii) engage in any short sales of equity securities (other than short sales against the box) unless the Corporation maintains in a segregated account with the Corporation's custodian an amount of cash or other readily marketable securities having a market value, when added to any amounts on deposit with the Corporation's broker as collateral for its obligation to replace the securities borrowed and sold short, at least equal to the current market value of securities sold short, marked-to-market on a daily basis;
(iv) utilize any pricing service other than FT Interactive Data, Reuters, Telekurs, Bloomberg Financial Markets, J.J. Kenney Pricing Service, Merrill Lynch Securities Pricing Service or Bridge Data Corp, and any pricing service then permitted by S&P.
(v) enter into any reverse repurchase agreement, other than with a counterparty that is rated at least A-1+ by S&P.
(c) So long as any Series C Preferred Shares are Outstanding, the Corporation may issue and sell shares of one or more other series of Preferred Stock constituting a series of a class of senior securities of the Corporation representing stock under Section 18 of the 1940 Act in addition to the Series C Preferred Shares and other Preferred Stock then Outstanding, provided that (i) the Corporation shall, 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 which are stock, as defined in Section 18(h) of the 1940 Act, of at least 200% of the Series C Preferred Shares and all other Preferred Stock of the Corporation then Outstanding, and (ii) no such additional Preferred Stock (including any additional Series C Preferred Shares) shall have any preference or priority over any other Preferred Stock of the Corporation upon the distribution of the assets of the Corporation or in respect of the payment of dividends.
12. Termination.
In the event that no Series C Preferred Shares are Outstanding, all rights and preferences of such shares established and designated hereunder shall cease and terminate, and all obligations of the Corporation under these Articles Supplementary shall terminate.
13. Definitions.
As used in these Articles Supplementary, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires:
"'AA' Financial Composite Commercial Paper Rate" on any date means
(i) the interest equivalent of the 7-day rate,
in the case of a Dividend Period of 7 days or shorter;
for Dividend Periods greater than 7 days but fewer than
or equal to 31 days, the 30-day rate; for Dividend
Periods greater than 31 days but fewer than or equal to
61 days, the 60-day rate; for Dividend Periods greater
than 61 days but fewer than or equal to 91 days, the 90
day rate; for Dividend Periods greater than 91 days but
fewer than or equal to 270 days, the rate described in
(ii) below; for Dividend Periods greater than 270 days,
the Treasury Index Rate; on commercial paper on behalf of
issuers whose corporate bonds are rated "AA" by S&P, or
the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal
Reserve Bank of New York for the close of business on the
Business Day immediately preceding such date; or (ii) if
the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the
interest equivalent of such rates on commercial paper
placed on behalf of such issuers, as quoted on a discount
basis or otherwise by the Commercial Paper Dealers to the
Auction Agent for the close of business on the Business
Day immediately preceding such date (rounded to the next
highest .001 of 1%). If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Financial
Composite Commercial Paper Rate, such rate shall be
determined on the basis of the quotations (or quotation)
furnished by the remaining Commercial Paper Dealers (or
Dealer), if any, or, if there are no such Commercial
Paper Dealers, by the Auction Agent pursuant to
instructions from the Corporation. For purposes of this
definition, (A) "Commercial Paper Dealers" shall mean (1)
Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Goldman
Sachs & Co.; (2) in lieu of any thereof, its respective
Affiliate or successor; and (3) in the event that any of
the foregoing shall cease to quote rates for commercial
paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in
commercial paper of such issuers then making such
quotations selected by the Corporation, and (B) "interest
equivalent" of a rate stated on a discount basis for
commercial paper of a given number of days' maturity
shall mean a number equal to the quotient (rounded upward
to the next higher one-thousandth of 1%) of (1) such rate
expressed as a decimal, divided by (2) the difference
between (x) 1.00 and (y) a fraction, the numerator of
which shall be the product of such rate expressed as a
decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of
which shall be 360.
"Accountant's Confirmation" means a letter from an Independent Accountant delivered to each Rating Agency with respect to certain Series C Preferred Basic Maintenance Reports substantially to the effect that:
(a) the Independent Accountant has read the Series C Preferred Basic Maintenance Report or Reports prepared by the Administrator during the referenced calendar year that are referred to in such letter (the "Reports");
(b) with respect to the issue size compliance, issuer diversification and industry diversification calculations, such calculations and the resulting Market Value of the relevant Eligible Assets included in the Reports and the Adjusted Value of the such Eligible Assets included in the Reports are numerically correct;
(c) with respect to the excess or deficiency of the Adjusted Value of the relevant Eligible Assets included in the Reports when compared to the Basic Maintenance Amount calculated for such Rating Agency the results of the calculation set forth in the Reports have been recalculated and are numerically correct;
(d) with respect to the Rating Agency ratings on corporate evidences of indebtedness, convertible corporate evidences of indebtedness and preferred stock listed in the Reports, that information has been traced and agrees with the information provided directly or indirectly by the respective Rating Agencies (in the event such information does not agree or such information is not listed in the accounting records of the Corporation, the Independent Accountants will inquire of the Rating Agencies what such information is, and provide a listing in their letter of such differences, if any);
(e) with respect to issuer name and coupon or dividend rate listed in the Reports, that information has been traced and agrees with information listed in the accounting records of the Corporation;
(f) with respect to issue size listed in the Reports, that information has been traced and agrees with information provided by Bloomberg Financial Service or such other services as the relevant Rating Agency may authorize from time to time;
(g) with respect to the prices (or alternative permissible factors used in calculating the Market Value as provided by these Articles Supplementary) provided by the Administrator of the Corporation's assets for purposes of valuing securities in the portfolio, the Independent Accountant has traced the price used in the Reports to the price provided by such Administrator (in accordance with the procedures provided in these Articles Supplementary) and verified that such information agrees (in the event such information does not agree, the Independent Accountants will provide a listing in their letter of such differences); and
(h) with respect to the description of each security included in the Reports, the description of the relevant Eligible Assets has been compared to the definition of such Rating Agency's Eligible Assets contained in these Articles Supplementary, and the description as appearing in the Reports agrees with the definition of such Rating Agency's Eligible Assets as described in these Articles Supplementary.
Each such letter may state that: (i) such Independent Accountant has made no independent verification of the accuracy of the description of the investment securities listed in the Reports or the Market Value of those securities nor have they performed any procedures other than those specifically outlined above for the purposes of issuing such letter; (ii) unless otherwise stated in the letter, the procedures specified therein were limited to a comparison of numbers or a verification of specified computations applicable to numbers appearing in the Reports and the schedule(s) thereto; (iii) the foregoing procedures do not constitute an examination in accordance with generally accepted auditing standards and the Reports contained in the letter do not extend to any of the Corporation's financial statements taken as a whole; (iv) such Independent Accountant does not express an opinion as to whether such procedures would enable such Independent Accountant to determine that the methods followed in the preparation of the Reports would correctly determine the Market Value or Discounted Value of the investment portfolio; (v) accordingly, such Independent Accountant expresses no opinion as to the information set forth in the Reports or in the schedule(s) thereto and makes no representation as to the sufficiency of the procedures performed for the purposes of these Articles Supplementary; and such other statements as are acceptable to the Rating Agencies.
Such letter shall also state that the Independent Accountant is an "independent accountant" with respect to the Corporation within the meaning of the 1933 Act and the related published rules and regulations thereunder.
"Adjusted Value" of each Eligible Asset shall be computed as follows:
(a) Cash shall be valued at 100% of the face value thereof; and
(b) all other Eligible Assets shall be valued at the a pplicable Discounted Value thereof; and
(c) each asset that is not an Eligible Asset shall be valued at zero.
"Administrator" means the other party to the Administration Agreement with the Corporation which shall initially be Gabelli Funds, LLC.
"Advance Rate" means (a) so long as S&P is rating the Series C Preferred Shares at the Corporation's request, the Advance Rates set forth in the definition of S&P Rating Factor or (b) any applicable advance rate established by any Other Rating Agency, whichever is applicable.
"Adviser" means Gabelli Funds LLC or such other entity that is then serving as the investment adviser to the Corporation.
"Affiliate" means, with respect to the Auction Agent, any person known to the Auction Agent to be controlled by, in control of or under common control with the Corporation; provided, however, that no Broker-Dealer controlled by, in control of or under common control with the Corporation shall be deemed to be an Affiliate nor shall any corporation or any Person controlled by, in control of or under common control with such corporation, one of the directors or executive officers of which is a director of the Corporation be deemed to be an Affiliate solely because such director or executive officer is also a director of the Corporation.
"All Hold Rate" means 80% of the "AA" Financial Composite Commercial Paper Rate.
"Applicable Rate" means, with respect to the Series C Preferred, for each Dividend Period (i) if Sufficient Clearing Bids exist for the Auction in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist for the Auction in respect thereof, the Maximum Rate and (iii) if all Series C Preferred Shares are the subject of Submitted Hold Orders for the Auction in respect thereof, the All Hold Rate.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another commercial bank, trust company, or other financial institution appointed by a resolution of the Board of Directors enters into an agreement with the Corporation to follow the Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" the last day of the initial Dividend Period and each seventh day after the immediately preceding Auction Date; provided, however, that if any such seventh day is not a Business Day, such Auction Date shall be the first preceding day that is a Business Day and the next Auction Date, if for a Standard Dividend Period, shall (subject to the same advancement procedure) be the seventh day after the date such preceding Auction Date would have been if it had been a Business Day; provided further, however, that the Auction Date for the Auction at the conclusion of any Special Dividend Period shall be the last Business Day in such Special Dividend Period and that no more than one Auction shall be held during any Dividend Period.
"Auction Procedures" means the procedures for conducting Auctions as set forth in Article II of these Articles Supplementary.
"Beneficial Owner," with respect to Series C Preferred Shares, means a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of Series C Preferred Shares.
"Bid" has the meaning set forth in paragraph 2(a) of Article II of these Articles Supplementary.
"Bidder" has the meaning set forth in paragraph 2(a) of Article II of these Articles Supplementary, provided however that neither the Corporation nor any Affiliate shall be permitted to be Bidder in an Auction.
"Board of Directors" or "Board" means the Board of Directors of the Corporation or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity permitted by law to perform the functions required of a Broker-Dealer by the Auction Procedures, that has been selected by the Corporation and has entered into a Broker- Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which banks in The City of New York, New York are authorized or obligated by law to close.
"Charter" means the Charter of the Corporation, as amended, restated and supplemented from time to time.
"Code" means the Internal Revenue Code of 1986, as amended, or any successor statute.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the shares of the Corporation's common stock, par value $.001 per share.
"Corporation" has the meaning set forth in the preamble to these Articles Supplementary.
"Cure Date" has the meaning set forth in paragraph 3(a)(ii) of Article I of these Articles Supplementary.
"Date of Original Issue" means the date on which the Series C Preferred Shares are originally issued by the Corporation.
"Default" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Default Period" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Default Rate" has the meaning set forth in paragraph 2(c)(iii) of Article I of these Articles Supplementary.
"Deposit Securities" means cash and any obligations or securities, including Short Term Money Market Instruments that are Eligible Assets, rated at least AAA or A-1+ by S&P, except that, for purposes of optional redemption, such obligations or securities will be considered "Deposit Securities" only if they also are rated at least P-1 by Moody's.
"Discount Factor" means (a) so long as Moody's is rating the Series C Preferred Shares at the Corporation's request, the Moody's Discount Factor or (b) any applicable discount factor established by any Other Rating Agency, whichever is applicable.
"Discounted Value" means, as applicable, (a) the quotient of the Market Value of an Eligible Asset divided by the applicable Discount Factor or (b) the product of the Market Value of an Eligible Asset multiplied by the applicable Advance Rate, provided, in either case that with respect to an Eligible Asset that is currently callable, Discounted Value will be equal to the applicable quotient or product as calculated above or the call price, whichever is lower, and that with respect to an Eligible Asset that is prepayable, Discounted Value will be equal to the applicable quotient or product as calculated above or the par value, whichever is lower.
"Dividend Default" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Dividend Payment Date" with respect to the Series C Preferred Shares means any date on which dividends are payable pursuant to paragraph 2(b) of Article I of these Articles Supplementary.
"Dividend Period" means, with respect to Series C Preferred Shares, the initial period determined in the manner set forth under "Designation" above, and thereafter, the period commencing on the Business Day following each Auction Date and ending on the next Auction Date or, if such next Auction Date is not immediately followed by a Business Day, on the latest calendar day prior to the next succeeding Business Day.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the Series C Preferred Shares at the request of the Corporation), S&P Eligible Assets (if S&P is then rating the Series C Preferred Shares at the request of the Corporation), and/or Other Rating Agency Eligible Assets, whichever is applicable.
"Hedging Transactions"has the meaning set forth in paragraph 11(b)(i) of Article I of these Articles Supplementary.
"Holder" means, with respect to the Preferred Stock, including the Series C Preferred Shares, the registered holder of such shares as the same appears on the stock ledger or stock records of the Corporation or records of the Auction Agent, as the case may be.
"Independent Accountants" means a nationally recognized accountant, or firm of accountants, that is with respect to the Corporation an independent public accountant or firm of independent public accountants under the 1933 Act.
"Industry Classification" means a six-digit industry classification in the Standard Industry classification system published by the United States.
"Liquidation Preference" shall, with respect to each Series C Preferred Share, have the meaning set forth in paragraph 7(a) of Article I of these Articles Supplementary and shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Mandatory Redemption Date" has the meaning set forth in paragraph 3(a)(iii) of Article I of these Articles Supplementary.
"Mandatory Redemption Price" means the Redemption Price plus (in the case of a Dividend Period of one year or more only) a redemption premium, if any, determined by the Board of Directors after consultation with the Broker-Dealers and set forth in the notice describing any applicable Specific Redemption Provisions.
"Market Value" means the amount determined by the Corporation with respect to specific Eligible Assets in accordance with valuation policies adopted from time to time by the Board of Directors as being in compliance with the requirements of the 1940 Act.
Notwithstanding the foregoing, "Market Value" may, at the option of the Corporation with respect to any of its assets, mean the amount determined with respect to specific Eligible Assets of the Corporation in the manner set forth below:
(a) as to any common or preferred stock which is an Eligible Asset, (i) if the stock is traded on a national securities exchange or quoted on the Nasdaq System, the last sales price reported on the Valuation Date or (ii) if there was no reported sales price on the Valuation Date, the lower of two bid prices for such stock provided by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P's then-current rating of the Series C Preferred Shares) to the Administrator of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such Administrator, or, if two bid prices cannot be obtained, such Eligible Asset shall have a Market Value of zero;
(b) as to any U.S. Government Obligation, Short Term Money Market Instrument (other than demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements) and commercial paper, with maturities greater than 60 days, the product of (i) the principal amount (accreted principal to the extent such instrument accretes interest) of such instrument, and (ii) the lower of the bid prices for the same kind of instruments having, as nearly as practicable, comparable interest rates and maturities provided by two recognized dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P's then-current rating of the Series C Preferred Shares) to the Administrator, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such Administrator, or, if two bid prices cannot be obtained, such Eligible Asset will have a Market Value of zero;
(c) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day's repurchase agreements included in Short Term Money Market Instruments, the face value thereof;
(d) as to any U.S. Government Obligation, Short Term Money Market Instrument or commercial paper with a maturity of 60 days or fewer, amortized cost unless the Board of Directors determines that such value does not constitute fair value;
(e) as to any other evidence of indebtedness which is an Eligible Asset, (i) the product of (A) the unpaid principal balance of such indebtedness as of the Valuation Date and (B)(1) if such indebtedness is traded on a national securities exchange or quoted on the Nasdaq System, the last sales price reported on the Valuation Date or (2) if there was no reported sales price on the Valuation Date or if such indebtedness is not traded on a national securities exchange or quoted on the Nasdaq System, the lower of two bid prices for such indebtedness provided by two recognized dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and S&P) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and S&P's then-current rating of the Series C Preferred Shares) to the Administrator of the Corporation's assets, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcription, computer obtained quotation reducible to written form or similar means, and in turn provided to the Corporation by any such means by such Administrator, plus (ii) accrued interest on such indebtedness.
"Maximum Rate" means, on any date on which the Applicable Rate is determined, (i) in the case of dividend period of 184 days or less, the applicable percentage of the "AA" Financial Composite Commercial Paper Rate on the date of such Auction determined as set forth below based on the lower of the credit ratings assigned to the Series C Preferred by Moody's and S&P subject to upward but not downward adjustment in the discretion of the Board of Directors after consultation with the Broker-Dealers; provided that immediately following any such increase the Fund would be in compliance with the Series C Preferred Basic Maintenance Amount or (ii) in the case of a dividend period of longer than 184 days, the Treasury Index Rate.
Moody's Credit Rating S&P Credit Rating Applicable Percentage ----------------------- ---------------------- ----------------------- Aa3 or higher AA- or higher 150% A3 or A1 A- to A+ 175% Baa3 to Baa1 BBB- to BBB+ 250% Below Baa3 Below BBB- 275% |
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" means, with respect to a Moody's Eligible Asset specified below, the following applicable number:
Moody's
Type of Moody's Eligible Asset: Discount Factor:
------------------------------ ---------------
Short Term Money Market Instruments (other than U.S.
Government Obligations set forth below) and other commercial
paper:
U.S. Treasury Securities with final maturities that are less
than or equal to 60 days........................................ 1.00
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 Factor applicable to
the underlying assets
U.S. Common Stocks and Common Stocks of foreign issuers for
which ADRs are traded................................................ 3.00
Common Stocks of foreign issuers (in existence for at least five
years) for which no ADRs are traded.................................. 4.00
Convertible Preferred Stocks......................................... 3.00
Preferred stocks:
Auction rate preferred stocks................................... 3.50
Other preferred stocks issued by issuers in the financial and
industrial industries........................................... 1.62
Other preferred stocks issued by issuers in the utilities
industry........................................................ 1.40
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 at least 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 at least 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
30 years or less............................................ 1.39
Corporate evidences of indebtedness rated at least A3 with
remaining terms to maturity of:
1 year or less.............................................. 1.20
2 years or less............................................. 1.26
3 years or less............................................. 1.29
4 years or less............................................. 1.33
5 years or less............................................. 1.35
7 years or less............................................. 1.39
10 years or less............................................ 1.42
15 years or less............................................ 1.43
20 years or less............................................ 1.45
30 years or less............................................ 1.45
Corporate evidences of indebtedness rated at least Baa3 with
remaining terms of maturity of:
1 year or less.............................................. 1.25
2 years or less............................................. 1.31
3 years or less............................................. 1.35
4 years or less............................................. 1.38
5 years or less............................................. 1.41
7 years or less............................................. 1.45
10 years or less............................................ 1.48
15 years or less............................................ 1.50
20 years or less............................................ 1.51
30 years or less............................................ 1.52
Corporate evidences of indebtedness rated at least Ba3 with
remaining terms of maturity of:
1 year or less.............................................. 1.36
2 years or less............................................. 1.42
3 years or less............................................. 1.46
4 years or less............................................. 1.50
5 years or less............................................. 1.53
7 years or less............................................. 1.57
10 years or less............................................ 1.61
15 years or less............................................ 1.62
20 years or less............................................ 1.64
30 years or less............................................ 1.64
Corporate evidences of indebtedness rated at least B1 and B2 with
remaining terms of maturity of:
1 year or less.............................................. 1.46
2 years or less............................................. 1.53
3 years or less............................................. 1.57
4 years or less............................................. 1.61
5 years or less............................................. 1.65
7 years or less............................................. 1.70
10 years or less............................................ 1.73
15 years or less............................................ 1.75
20 years or less............................................ 1.76
30 years or less............................................ 1.77
Convertible corporate evidences of indebtedness with senior debt
securities rated at least 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 at least 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 at least Baa3 issued by the following type of issuers:
Utility......................................................... 1.48
Industrial...................................................... 1.95
Financial....................................................... 1.73
Transportation.................................................. 2.33
Convertible corporate evidences of indebtedness with senior debt
securities rated at least Ba3 issued by the following type of issuers:
Utility......................................................... 1.49
Industrial...................................................... 1.96
Financial....................................................... 1.74
Transportation.................................................. 2.34
Convertible corporate evidences of indebtedness with senior debt
securities rated at least B2 issued by the following type of issuers:
Utility......................................................... 1.59
Industrial...................................................... 2.06
Financial....................................................... 1.84
Transportation.................................................. 2.44
|
"Moody's Eligible Assets" means:
(a) 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);
(b) Short-Term Money Market Instruments;
(c) 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;
(d) preferred stocks (i) which either (A) are issued by issuers whose senior debt securities are rated at least Baa1 by Moody's or (B) are rated at least Baa3 by Moody's or (C) 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, (ii) of issuers which have (or, in the case of issuers which are special purpose corporations, whose parent companies have) common stock listed on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market System, (iii) which have a minimum issue size (when taken together with other of the issuer's issues of similar tenor) of $50,000,000, (iv) 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), (v) which pay cumulative cash dividends in U.S. dollars, (vi) which are not convertible into any other class of stock and do not have warrants attached, (vii) which are not issued by issuers in the transportation industry and (viii) 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 Value of the Company's holdings of any single issue of auction rate preferred stock shall not be more than 1% of the Corporation's total assets.
(e) common stocks (i) (A) which are traded on a
nationally recognized stock exchange or in the over-the-counter market, (B)
if cash dividend paying, pay cash dividends in U.S. dollars and (C) which
may be sold without restriction by the Corporation; provided, however, that
(y) common stock which, while a Moody's Eligible Asset owned by the
Corporation, ceases paying any regular cash dividend will no longer be
considered a Moody's Eligible Asset until 71 days after the date of the
announcement of such cessation, unless the issuer of the common stock has
senior debt securities rated at least A3 by Moody's and (z) the aggregate
Market Value of the Corporation's holdings of the common stock of any
issuer in excess of 4% in the case of utility common stock and 6% in the
case of non- utility common stock of the aggregate Market Value of the
Corporation's holdings shall not be Moody's Eligible Assets, (ii) which are
securities denominated in any currency other than the U.S. dollar or
securities of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
dollar-denominated American Depository Receipts ("ADRs") or their
equivalents which are traded in the United States on exchanges or
over-the-counter and are issued by banks formed under the laws of the
United States, its states or the District of Columbia or (iii) which are
securities of issuers formed under the laws of jurisdictions other than the
United States (and in existence for at least five years) for which no ADRs
are traded; provided, however, that the aggregate Market Value of the
Corporation's holdings of securities denominated in currencies other than
the U.S. dollar and ADRs in excess of (A) 6% of the aggregate Market Value
of the Outstanding shares of common stock of such issuer thereof or (B) in
excess of 10% of the Market Value of the Corporation's Moody's Eligible
Assets with respect to issuers formed under the laws of any single such
non-U.S. jurisdiction other than Australia, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom, shall
not be a Moody's Eligible Asset;
(f) U.S. Government Obligations;
(g) corporate evidences of indebtedness (i) which may be sold without restriction by the Corporation 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, (ii) which have a minimum issue size of at least (A) $100,000,000 if rated at least Baa3 or (B) $50,000,000 if rated B or Ba3, (iii) which are not convertible or exchangeable into equity of the issuing corporation and have a maturity of not more than 30 years and (iv) for which, if rated below Baa3 or not rated, the aggregate Market Value of the Company'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; and
(h) convertible corporate evidences of indebtedness (i) 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), (ii) which are convertible into common stocks which are traded on the New York Stock Exchange or the American Stock Exchange or are quoted on the Nasdaq National Market System and (iii) 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 (e) above and other relevant criteria set forth in this definition in order to be a Moody's Eligible Asset; provided, however, that the Corporation's investments in auction rate preferred stocks described in clause (d) 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 Corporation's investments meeting the criteria set forth in clauses (a) through (g) above less the aggregate Market Value of those investments excluded from Moody's Eligible Assets pursuant to the proviso appearing after clause (i) below; and
(i) no assets which are subject to any lien or irrevocably deposited by the Corporation for the payment of amounts needed to meet the obligations described in clauses (a)(i) through (a)(iv) of the definition of "Series C Preferred Basic Maintenance Amount" may be includible in Moody's Eligible Assets.
Notwithstanding anything to the contrary in the preceding clauses
(a)-(i), the Corporation's investment in preferred stock, common stock,
corporate evidences of indebtedness and convertible corporate evidences of
indebtedness shall not be treated as Moody's Eligible Assets except to the
extent they satisfy the following diversification requirements (utilizing
Moody's Industry and Sub-industry Categories) with respect to the Market
Value of the Corporation's holdings:
Issuer:
Non-Utility Utility
Maximum Single Maximum Single
Moody's Rating(1)(2) Issuer(3)(4) Issuer(3)(4)
-------------- -------------- -------------
Aaa 100% 100%
Aa 20% 20%
A 10% 10%
CS/CB, "Baa", Baa(5) 6% 4%
Ba 4% 4%
B1/B2 3% 3%
B3 (Caa subordinate) 2% 2%
Industry and State:
Utility
Non-Utility Maximum Utility
Maximum Single Single Sub- Maximum Single
Moody's Rating(1) Industry(3) Industry(3)(6) State(3)
----------------- ------------- -------------- --------------
Aaa 100% 100% 100%
Aa 60% 60% 20%
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%
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(1) The equivalent Moody's rating must be lowered one full rating category for preferred stocks, corporate evidences of indebtedness and convertible corporate evidences of indebtedness rated by S&P but not by Moody's.
(2) Corporate evidences of indebtedness from issues ranging $50,000,000 to $100,000,000 are limited to 20% of Moody's Eligible Assets.
(3) The referenced percentages represent maximum cumulative totals only for the related Moody's rating category and each lower Moody's rating category.
(4) Issuers subject to common ownership of 25% or more are considered as one name.
(5) CS/CB refers to common stock and convertible corporate evidences of indebtedness, which are diversified independently from the rating level.
(6) In the case of utility common stock, utility preferred stock, utility evidences of indebtedness and utility convertible evidences of indebtedness, the definition of industry refers to sub- industries (electric, water, hydro power, gas, diversified). Investments in other sub-industries are eligible only to the extent that the combined sum represents a percentage position of the Moody's Eligible Assets less than or equal to the percentage limits in the diversification tables above.
(7) Such percentage shall be 15% in the case of utilities regulated by California, New York and Texas.
"Moody's Industry and Sub-Industry Categories" means:
Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition
Automobile: Automotive Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers
Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables
Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks, Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
Broadcasting: Radio, T.V.
Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting, Engineering, Construction, Hardware, Forest Products (building-related only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land Development
Cable: Distribution, Equipment, Programming
Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating
Communications (excluding companies primarily engaged in offering Telephone services): Satellite, Wireless, Equipment
Containers, Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood, or Fiberglass
Personal and Non Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
Diversified/Conglomerate Manufacturing
Diversified/Conglomerate Service
Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales
Ecological: Pollution Control, Waste Removal, Waste Treatment, Waste Disposal
Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology
Entertainment: Recording Industry, Motion Exhibition Theaters, Motion Picture Production and Distribution
Finance: Investment Brokerage, Leasing, Syndication, Securities
Farming and Agriculture: Livestock, Grains, Produce; Agriultural Chemicals, Agricultural Equipment, Fertilizers
Grocery: Grocery Stores, Convenience Food Stores
Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment
Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
Hotels, Motels, Inns and Gaming
Insurance: Life, Property and Casualty, Broker, Agent, Surety
Leisure, Amusement, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy Manufacturing
Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
Mining, Steel, Iron and Non Precious Metals: Coal, Copper, Lead, Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production, Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and Sales
Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
Personal, Food and Miscellaneous Services
Printing and Publishing: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks
Cargo Transport: Rail, Shipping, Railroads, Rail-Car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom
Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Equipment, Research
Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes
Personal Transportation: Air, Bus, Rail, Car, Rental
Utilities: Electric, Water, Hydro Power, Gas, Diversified
Sovereigns: Semi-sovereigns, Canadian Provinces, Supra- national agencies
"1933 Act" means the Securities Act of 1933, as amended, or any successor statute.
"1940 Act" means the Investment Company Act of 1940, as amended, or any successor statute.
"1940 Act Asset Coverage" means asset coverage, as determined in accordance with Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior securities of the Corporation which are stock, including all Outstanding Series C Preferred Shares (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are stock of a closed-end investment company as a condition of declaring dividends on its common shares), determined on the basis of values calculated as of a time within 48 hours (not including Saturdays, Sundays or holidays) next preceding the time of such determination.
"1940 Act Asset Coverage Certificate" means the certificate required to be delivered by the Corporation pursuant to paragraph 9(a)(i) of Article I of these Articles Supplementary.
"1940 Act Asset Coverage Cure Date" means, with respect to the failure by the Corporation to maintain 1940 Act Asset Coverage (as required by paragraph 9(a)(i) of Article I of these Articles Supplementary) as of the last Business Day of each March, June, September and December of each year, 10 days following such Business Day.
"Non-Call Period" means a period determined by the Board of Directors after consultation with the Broker-Dealers, during which the Series C Preferred Shares subject to such Special Dividend Period are not subject to redemption at the option of the Corporation but only to mandatory redemption.
"Notice of Redemption" means any notice with respect to the redemption of Series C Preferred Shares pursuant to paragraph 3 of Article I of these Articles Supplementary.
"Order" has the meaning set forth in paragraph 2(a)(ii) of Article II of these Articles Supplementary.
"Other Rating Agency" means any rating agency other than Moody's or S&P then providing a rating for the Series C Preferred Shares at the request of the Corporation.
"Other Rating Agency Eligible Assets" means assets of the Corporation designated by any Other Rating Agency as eligible for inclusion in calculating the discounted value of the Corporation's assets in connection with such Other Rating Agency's rating of the Series C Preferred Shares.
"Outstanding" means, as of any date, Preferred Stock theretofore issued by the Corporation except:
(a) any such share of Preferred Stock theretofore cancelled by the Corporation or delivered to the Corporation for cancellation;
(b) any such share of Preferred Stock other than the Series C Preferred Shares as to which a notice of redemption shall have been given and for whose payment at the redemption thereof deposit assets in the necessary amount are held by the Corporation in trust for or were paid by the Corporation to the holder of such share pursuant to the Articles Supplementary with respect thereto;
(c) in the case of the Series C Preferred Shares, any such shares theretofore delivered to the Auction Agent for cancellation or with respect to which the Corporation has given notice of redemption and irrevocably deposited with the Paying Agent sufficient funds to redeem such shares; and
(d) any such share in exchange for or in lieu of which other shares have been issued and delivered.
Notwithstanding the foregoing, (i) for purposes of voting rights (including
the determination of the number of shares required to constitute a quorum),
any Preferred Stock as to which the Corporation or any Affiliate is the
Existing Holder will be disregarded and deemed not Outstanding; (ii) in
connection with any Auction, any Series C Preferred Shares as to which the
Corporation or any Person known to the Auction Agent to be an Affiliate is
the Existing Holder will be disregarded and not deemed Outstanding; and
(iii) for purposes of determining the Series C Preferred Basic Maintenance
Amount, Series C Preferred Shares held by the Corporation will be
disregarded and deemed not Outstanding, but shares held by any Affiliate
(other than any controlled Affiliates) will be deemed Outstanding.
"Paying Agent" means The Bank of New York unless and until another entity appointed by a resolution of the Board of Directors enters into an agreement with the Corporation to serve as paying agent, which paying agent may be the same as the Auction Agent.
"Person" or "Persons" means and includes an individual, a partnership, the corporation, a trust, a corporation, a limited liability company, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.
"Preferred Stock" means the preferred stock, par value $.001 per share, of the Corporation, and includes the Series C Preferred Shares.
"Premium Call Period" means a period consisting of a number of whole years as determined by the Board of Directors after consultation with the Broker- Dealers, during each year of which the shares subject to such Special Dividend Period will be redeemable at the Corporation's option at a price per share equal to the Liquidation Preference plus accumulated but unpaid dividends (whether or not earned or declared) plus a premium expressed as a percentage or percentages of the Liquidation Preference or expressed as a formula using specified variables as determined by the Board of Directors after consultation with the Broker-Dealers.
"Public Equity Large-Cap" means any equity issuer with a market capitalization in excess of $10 billion.
"Public Equity Mid-Cap" means any equity issuer with a market capitalization in excess of $1 billion but less than or equal to $10 billion.
"Public Equity Small-Cap" means any equity issuer with a market capitalization of less than or equal to $1 billion.
"Quarterly Valuation Date" means the last Valuation Date in March, June, September and December of each year, commencing June, 2002.
"Rating Agency" means Moody's and S&P as long as such rating agency is then rating the Series C Preferred Shares at the Corporation's request or any other rating agency then rating the Series C Preferred Shares at the Corporation's request.
"Redemption Date" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Redemption Default" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Redemption Price" has the meaning set forth in paragraph 3(a)(i) of Article I of these Articles Supplementary.
"Reference Rate" means, with respect to the determination of the Default Rate, the applicable "AA" Financial Composite Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate (for a Dividend Period of 184 days or more).
"Registrar" means The Bank of New York, unless and until another entity appointed by a resolution of the Board of Directors enters into an agreement with the Corporation to serve as registrar.
"S&P" means Standard and Poor's Rating Services and its successors at law.
"S&P Rating Factor" means, with respect to a S&P Eligible Asset specified below, the following applicable number:
Asset Class Obligor Overcollateralization
(Collateral) Advance Rates (1) Factors (1)
------------ ----------------- -----------
Public Equity Small-Cap 46.0% 217.4%
Public Equity Mid-Cap 53.6% 186.6%
Public Equity Large-Cap 59.7% 167.6%
Cash and Other Deposit 100% 100%
Securities with
Maturities of 30 days
or less
______________
|
(1) For an S&P rating of AAA.
"S&P Eligible Assets" means:
(a) Deposit Securities; and
(b) common stocks that satisfy all of the following conditions:
(i) such common stock (including the common stock of any predecessor or constituent issuer) has been traded on a recognized national securities exchange or quoted on the National Market System (or any equivalent or successor thereto) of Nasdaq for at least 450 days,
(ii) the Market Capitalization of such issuer of common stock exceeds $100 million,
(iii) the issuer of such common stock is not an entity that is treated as a partnership for federal income tax purposes,
(iv) if such issuer is organized under the laws of any jurisdiction other than the United States, any state thereof, any possession or territory thereof or the District of Columbia, the common stock of such issuer held by the Corporation is traded on a recognized national securities exchange or quoted on the National Market System of Nasdaq either directly or in the form of depository receipts, and
(v) if such issuer is registered as an investment company under the 1940 Act, such issuer does not invest more than 25% of the value of its gross assets in securities that are not S&P Eligible Assets by reason of clause (iv) above;
provided, however, that the Corporation's holdings of the common stock of any single issuer that satisfies the conditions set forth in clauses (i) through (v) above shall be included in S&P Eligible Assets only to the extent that:
(1) such holdings may be sold publicly by the Corporation at any time without registration,
(2) to the extent remaining eligible after the operation of item (1) above, such holdings do not exceed a number of shares representing the average weekly trading volume of such common stock during the preceding 30 day period,
(3) to the extent remaining eligible after the operation of items (1) and (2) above, the aggregate Market Value of such holdings, when added to the aggregate Market Value of the Corporation's holdings of all other similarly eligible shares of common stock of issuers in the same Industry Classification, does not exceed 10% of the aggregate Market Value of the Corporation's S&P Eligible Assets, and
(4) to the extent remaining eligible after the operation of items (1) through (3) above, the aggregate Market Value of the Corporation's holdings of each of the three largest issuers is not in excess of 5% of the aggregate Market Value of the Corporation's S&P Eligible Assets, and of the remaining issuers, is not in excess of 2% of the aggregate Market Value of the Corporation's S&P Eligible Assets.
(c) Preferred Stocks, on such basis as S&P may determine in response to a request from the Corporation.
Notwithstanding the foregoing, an asset will not be considered an S&P Eligible Asset if it is held in a margin account, is subject to any material lien, mortgage, pledge, security interest or security agreement of any kind or has been deposited irrevocably for the payment of dividends, redemption payments or any other payment or obligation under the Corporation's Articles Supplementary.
"Securities Depository" means The Depository Trust Company and its successors and assigns or any successor securities depository selected by the Corporation that agrees to follow the procedures required to be followed by such securities depository in connection with the Series C Preferred Shares.
"Series C Preferred Basic Maintenance Amount" means, as of any
Valuation Date, the dollar amount equal to (a) the sum of (i) the product
of the number of shares of each class or series of Preferred Stock
Outstanding on such Valuation Date multiplied, in the case of each such
series or class, by the per share Liquidation Preference applicable to each
such series or class; (ii) to the extent not included in (i) the aggregate
amount of cash dividends (whether or not earned or declared) that will have
accumulated for each Outstanding share of Preferred Stock from the most
recent applicable dividend payment date to which dividends have been
paid or duly provided for (or, in the event the Series C Preferred Basic
Maintenance Amount is calculated on a date prior to the initial Dividend
Payment Date with respect to a class or series of the Preferred Stock, then
from the Date of Original Issue of such shares) 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 at the applicable
rate or default rate then in effect with respect to such shares; (iii) the
Corporation's other liabilities due and payable as of such Valuation Date
(except that dividends and other distributions payable by the Corporation
on Common Stock shall not be included as a liability) and such liabilities
projected to become due and payable by the Corporation during the 90 days
following such Valuation Date (excluding liabilities for investments to be
purchased and for dividends and other distributions not declared as of such
Valuation Date); and (iv) any current liabilities of the Corporation as of
such Valuation Date to the extent not reflected in any of (a)(i) through
(a)(iii) (including, without limitation, and immediately upon
determination, any amounts due and payable by the Corporation pursuant to
reverse repurchase agreements and any payables for assets purchased as of
such Valuation Date) less (b) (i) the Adjusted Value of any of the
Corporation's assets or (ii) the face value of any of the Corporation's
assets if, in the case of both (b)(i) and (b)(ii), 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 Corporation's custodian bank in a segregated
account or deposited by the Corporation with the dividend-disbursing agent
or Paying Agent, as the case may be, for the payment of the amounts needed
to redeem or repurchase Preferred Stock subject to redemption or repurchase
or any of (a)(ii) through (a)(iv); and provided that in the event the
Corporation has repurchased Preferred Stock and irrevocably segregated or
deposited assets as described above with its custodian bank, the
dividend-disbursing agent or Paying Agent for the payment of the repurchase
price the Corporation may deduct 100% of the Liquidation Preference of such
Preferred Stock to be repurchased from (a) above.
"Series C Preferred Basic Maintenance Amount Cure Date" means 10 Business Days following a Valuation Date, such date being the last day upon which the Corporation's failure to comply with paragraph 9(a)(ii)(A) of Article I of these Articles Supplementary could be cured.
"Series C Preferred Basic Maintenance Amount Test" means a test which is met if the lower of the aggregate Discounted Values of the Moody's Eligible Assets or the S&P Eligible Assets if both Moody's and S&P are then rating the Series C Preferred Shares at the request of the Corporation, or the Eligible Assets of whichever of Moody's or S&P is then doing so if only one of Moody's or S&P is then rating the Series C Preferred Shares at the request of the Corporation, meets or exceeds the Series C Preferred Basic Maintenance Amount.
"Series C Preferred Basic Maintenance Report"means a report prepared by the Administrator of the Corporation which sets forth, as of the related Valuation Date, the Corporation's Eligible Assets, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Series C Preferred Basic Maintenance Amount and the remainder obtained by subtracting the Series C Preferred Basic Maintenance Amount from the Discounted Value of such Eligible Assets.
"Series C Preferred Shares" means the Corporation's Series C Auction Rate Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25,000 per share.
"Short-Term Money Market Instrument" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper matures in 30 days or A-1+ if such commercial paper matures in over 30 days;
(ii)demand or time deposits in, and banker's acceptances and certificates of deposit of (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);
(iii) overnight funds; and
(iv) U.S. Government Obligations.
"Special Dividend Period" means a Dividend Period that is not a Standard Dividend Period.
"Specific Redemption Provisions" means, with respect to any Special Dividend Period of more than one year, either, or any combination of (i) a Non-Call Period and (ii) a Premium Call Period.
"Standard Dividend Period" means a Dividend Period of seven days, subject to increase or decrease to the extent necessary for the next Auction Date and Dividend Payment Date to each be Business days.
"Submission Deadline" means 1:00 p.m., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time.
"Transfer Agent" means The Bank of New York, unless and until another entity appointed by a resolution of the Board of Directors enters into an agreement with the Corporation to serve as transfer agent.
"Treasury Index Rate" means the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities having the same number of 30-day periods to maturity as the length of the applicable Dividend Period, determined, to the extent necessary, by linear interpolation based upon the yield for such securities having the next shorter and next longer number of 30-day periods to maturity treating all Dividend Periods with a length greater than the longest maturity for such securities as having a length equal to such longest maturity, in all cases based upon data set forth in the most recent weekly statistical release published by the Board of Governors of the Federal Reserve System (currently in H.15 (519)); provided, however, if the most recent such statistical release shall not have been published during the 15 days preceding the date of computation, the foregoing computations shall be based upon the average of comparable data as quoted to the Corporation by at least three recognized dealers in U.S. Government Obligations selected by the Corporation.
"U.S. Government Obligations" means direct obligations of the United States or by its agencies or instrumentalities that are entitled to the full faith and credit of the United States and that, other than United States Treasury Bills, provide for the periodic payment of interest and the full payment of principal at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week, or such other date as the Corporation and Rating Agencies may agree to for purposes of determining the Series C Preferred Basic Maintenance Amount.
"Voting Period" has the meaning set forth in paragraph 6(b) of Article I of these Articles Supplementary.
14. Interpretation. References to sections, subsections, clauses, sub-clauses, paragraphs and subparagraphs are to such sections, subsections, clauses, sub-clauses, paragraphs and subparagraphs contained in this Article I or Article II or Article III hereof, as the case may be, unless specifically identified otherwise.
Article II: Auction Procedures
1. Certain Definitions. As used in these Articles Supplementary, the following terms shall have the following meanings:
"Agent Member" means a member of or participant in the Securities Depository that will act on behalf of a Bidder.
"Available Preferred Shares" has the meaning set forth in paragraph 4(a)(i) of Article II of these Articles Supplementary.
"Existing Holder" means (a) a Person who beneficially owns those shares of Preferred Stock, including Series C Preferred Shares, listed in that Person's name in the records of the Corporation or Auction Agent, as the case may be, or (b) the beneficial owner of those Series C Preferred Shares which are listed under such person's Broker-Dealer's name in the records of the Auction Agent, which Broker- Dealer shall have signed a Master Purchaser's Letter.
"Hold Order" has the meaning set forth in paragraph 2(a) of Article II of these Articles Supplementary.
"Master Purchaser's Letter" means the letter which is required to be executed by each prospective purchaser of Series C Preferred Shares or by the Broker-Dealer through whom the shares will be held.
"Order" has the meaning set forth in paragraph 2(a) of Article II of these Articles Supplementary.
"Potential Holder" means (a) any Existing Holder who may be interested in acquiring additional Series C Preferred Shares or (b) any other Person who may be interested in acquiring Series C Preferred Shares and who has signed a Master Purchaser's Letter or whose shares will be listed under such person's Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer shall have executed a Master Purchaser's Letter.
"Sell Order" has the meaning set forth in paragraph 2(a) of Article II of these Articles Supplementary.
"Submitted Bid" has the meaning set forth in paragraph 4(a) of Article II of these Articles Supplementary.
"Submitted Hold Order" has the meaning set forth in paragraph 4(a) of Article II of these Articles Supplementary.
"Submitted Order" has the meaning set forth in paragraph 4(a) of Article II of these Articles Supplementary.
"Submitted Sell Order" has the meaning set forth in paragraph 4(a) of Article II of these Articles Supplementary.
"Sufficient Clearing Bids" has the meaning set forth in paragraph 4(a)(ii) of Article II of these Articles Supplementary.
"Sufficient Clearing Orders" means that all Series C Preferred
Shares are the subject of Submitted Hold Orders or that the number of
Series C Preferred Shares that are the subject of Submitted Bids by
Potential Holders specifying one or more rates equal to or less than the
Maximum Rate exceeds or equals the sum of (a) the number of Series C
Preferred Shares that are subject of Submitted Bids by Existing Holders
specifying one or more rates higher than the Maximum Applicable Rate and
(b) the number of Series C Preferred Shares that are subject to Submitted
Sell Orders.
"Winning Bid Rate" means the lowest rate specified in the Submitted Bids which if:
(a) (i) each such Submitted Bid of Existing Holders specifying such lowest rate and
(ii) all other such Submitted Bids of Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of such series that are subject to such Submitted Bids; and
(b) (i) each such Submitted Bid of Potential Holders specifying such lowest rate and
(ii) all other such Submitted Bids of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (a) above continuing to hold an aggregate number of Outstanding Series C Preferred Shares which, when added to the number of Outstanding Series C Preferred Shares to be purchased by such Potential Holders described in subclause (b) above, would equal not less than the Available Preferred Shares.
2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for Series C Preferred Shares:
(i) each Beneficial Owner of Series C Preferred Shares may submit to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding Series C Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period;
(B) the number of Outstanding Series C Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner offers to sell if the Applicable Rate for the next succeeding Dividend Period shall be less than the rate per annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding Series C Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and
(ii) each Broker-Dealer, using lists of potential Beneficial Owners, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact potential Beneficial Owners (by telephone or otherwise), including Persons that are not Beneficial Owners, on such lists to determine the number of Series C Preferred Shares, if any, that each such potential Beneficial Owner offers to purchase if the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent, of information referred to in clauses (a)(i) or (a)(ii) of this paragraph (2) is hereinafter referred to as an "Order" and collectively as "Orders" and each Beneficial Owner and each potential Beneficial Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the Auction Agent, is hereinafter referred to as a "Bidder" and collectively as "Bidders;" an Order containing the information referred to in clause (a)(i)(A) of this paragraph (2) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders;" an Order containing the information referred to in clauses (a)(i)(B) or (a)(ii) of this paragraph (2) is hereinafter referred to as a "Bid" and collectively as "Bids;" and an Order containing the information referred to in clause (a)(i)(C) of this paragraph (2) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of Series C Preferred Shares subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding Series C Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding Series C Preferred Shares to be determined as set forth in paragraph 5(a)(iv) if the Applicable Rate for Series C Preferred Shares determined on such Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding Series C Preferred Shares specified in such Bid if the rate specified therein shall be higher than the Maximum Rate, or such number or a lesser number of Outstanding Series C Preferred Shares to be determined as set forth in paragraph 5(b)(iii) if the rate specified therein shall be higher than the Maximum Rate and Sufficient Clearing Bids do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of Series C Preferred Shares subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding Series C Preferred Shares specified in such Sell Order; or
(B) such number or a lesser number
of Outstanding Series C Preferred Shares as set forth in
paragraph 5(b)(iii) if Sufficient Clearing Bids do not
exist; provided, however, that a Broker-Dealer that is an
Existing Holder with respect to Series C Preferred Shares
shall not be liable to any Person for failing to sell
such shares pursuant to a Sell Order described in the
proviso to paragraph 3(c) if (1) such shares were
transferred by the Beneficial Owner thereof without
compliance by such Beneficial Owner or its transferee
Broker-Dealer (or other transferee Person, if permitted
by the Corporation) with the provisions of paragraph 6 or
(2) such Broker-Dealer has informed the Auction Agent
pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker- Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of
such shares.
(iii) A Bid by a Potential Holder of Series C Preferred Shares subject to an Auction on any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding Series C Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding Series C Preferred Shares as set forth in paragraph 5(a)(v) if the Applicable Rate determined on such Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of Series C Preferred Shares other than whole shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders for Series C Preferred Shares subject to an Auction on such Auction Date obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Corporation) as an Existing Holder in respect of shares subject to Orders submitted or deemed submitted to it by Beneficial Owners and as a Potential Holder in respect of shares subject to Orders submitted to it by potential Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless otherwise permitted by the Corporation);
(ii) the aggregate number of Series C Preferred Shares that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of Series C Preferred Shares:
(A) the number of Series C Preferred Shares, if any, subject to any Hold Order of such Existing Holder;
(B) the number of Series C Preferred Shares, if any, subject to any Bid of such Existing Holder and the rate specified in such Bid; and
(C) the number of Series C Preferred Shares, if any, subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of Series C Preferred Shares, the rate and number of Series C Preferred Shares specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Series C Preferred Shares held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted by or on behalf of such Existing Holder covering the number of Outstanding Series C Preferred Shares held by such Existing Holder and not subject to Orders submitted to the Auction Agent; provided, however, that if an Order or Orders covering all of the Outstanding Series C Preferred Shares held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline for an Auction relating to a Special Dividend Period consisting of more than 28 calendar days, the Auction Agent shall deem a Sell Order to have been submitted by or on behalf of such Existing Holder covering the number of Outstanding Series C Preferred Shares held by such Existing Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction Agent covering in the aggregate more than the number of Outstanding Series C Preferred Shares subject to an Auction held by such Existing Holder, such Orders shall be considered valid in the following order of priority:
(i) all Hold Orders shall be considered valid, but only up to and including in the aggregate the number of Outstanding Series C Preferred Shares held by such Existing Holder, and if the number of shares subject to such Hold Orders exceeds the number of Outstanding Series C Preferred Shares held by such Existing Holder, the number of shares subject to each such Hold Order shall be reduced pro rata to cover the number of Outstanding Series C Preferred Shares held by such Existing Holder;
(ii)(A) any Bid for Series C Preferred Shares shall be considered valid up to and including the excess of the number of Outstanding Series C Preferred Shares held by such Existing Holder over the number of Series C Preferred Shares subject to any Hold Orders referred to in clause (d)(i) above;
(B) subject to subclause
(d)(ii)(A), if more than one Bid of an Existing Holder for Series
C Preferred Shares is submitted to the Auction Agent with the same
rate and the number of Outstanding Series C Preferred Shares
subject to such Bids is greater than such excess, such Bids shall
be considered valid up to and including the amount of such excess,
and the number of Series C Preferred Shares subject to each Bid
with the same rate shall be reduced pro rata to cover the number
of shares equal to such excess;
(C) subject to subclauses
(d)(ii)(A) and (B), if more than one Bid of an Existing Holder for
Series C Preferred Shares is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the
amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding Series C Preferred Shares subject to any portion of Bids considered not valid in whole or in part under this paragraph 3(d)(ii) shall be treated as the subject of a Bid by or on behalf of a Potential Holder at the rate therein specified; and
(iii) all Sell Orders for Series C Preferred Shares shall be considered valid up to and including the excess of the number of Outstanding Series C Preferred Shares held by such Existing Holder over the sum of Outstanding Series C Preferred Shares subject to valid Hold Orders referred to in paragraph 3(d)(i) above and valid Bids referred to in paragraph 3(d)(ii) above.
(e) If more than one Bid for Series C Preferred Shares is submitted to the Auction Agent by or on behalf of any Potential Holder, each such Bid submitted shall be a separate Bid with the rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any Auction Date, shall be irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for Series C Preferred Shares, the Auction Agent shall assemble all valid Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and shall determine:
(i) the excess of the number of Outstanding Series C Preferred Shares over the number of Outstanding Series C Preferred Shares subject to Submitted Hold Orders (such excess being hereinafter referred to as the "Available Preferred Shares");
(ii) from the Submitted Orders for Series C Preferred Shares whether:
(A) the number of Outstanding Series C Preferred Shares subject to Submitted Bids of Potential Holders specifying one or more rates equal to or lower than the Maximum Rate exceeds or is equal to the sum of
(B) the number of Outstanding Series C Preferred Shares subject to Submitted Bids of Existing Holders specifying one or more rates higher than the Maximum Rate; and
(C) the number of Outstanding Series C Preferred Shares subject to Submitted Sell Orders (in the event such excess or such equality exists (other than because the number of Series C Preferred Shares in clauses (a)(ii)(A) and (B) above is zero because all of the Outstanding Series C Preferred Shares are subject to Submitted Hold Orders), such Submitted Bids in clause (a)(ii)(A) above being hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(iii) if Sufficient Clearing Bids exist, the Winning Bid Rate.
(b) Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall advise the Corporation of the Maximum Rate for Series C Preferred Shares for which an Auction is being held on the Auction Date and, based on such determination, promptly after the Auction Agent has made the determinations pursuant to paragraph 4(a), the Auction Agent shall advise the Corporation of the Applicable Rate for the next succeeding Dividend Period thereof as follows:
(i) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period thereof shall be equal to the Winning Bid Rate so determined;
(ii) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of such series are subject to Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period thereof shall be equal to the Maximum Rate; or
(iii) if all of the Outstanding Series C Preferred Shares are subject to Submitted Hold Orders, that the Applicable Rate for the next succeeding Dividend Period thereof shall be the All Hold Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation.
Existing Holders shall continue to hold the Series C Preferred Shares that are subject to Submitted Hold Orders, and, based on the determinations made pursuant to paragraph 4(a), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for Series C Preferred Shares have been made, all Submitted Sell Orders shall be accepted and, subject to the provisions of paragraphs 5(d) and 5(e), Submitted Bids shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:
(i) Existing Holders' Submitted Bids for Series C Preferred Shares specifying any rate that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Series C Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for Series C Preferred Shares specifying any rate that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Series C Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for Series C Preferred Shares specifying any rate that is lower than the Winning Bid Rate shall be accepted;
(iv) each Existing Holder's Submitted Bid for Series C Preferred Shares specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Series C Preferred Shares subject to such Submitted Bid, unless the number of Outstanding Series C Preferred Shares subject to all such Submitted Bids shall be greater than the number of Series C Preferred Shares ("remaining shares") in the excess of the Available Preferred Shares over the number of Series C Preferred Shares subject to Submitted Bids described in paragraphs 5(a)(ii) and 5(a)(iii), in which event such Submitted Bid of such Existing Holder shall be rejected in part, and such Existing Holder shall be entitled to continue to hold Series C Preferred Shares subject to such Submitted Bid, but only in an amount equal to the Series C Preferred Shares obtained by multiplying the number of remaining shares by a fraction, the numerator of which shall be the number of Outstanding Series C Preferred Shares held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the aggregate number of Outstanding Series C Preferred Shares subject to such Submitted Bids made by all such Existing Holders that specified a rate equal to the Winning Bid Rate; and
(v) each Potential Holder's Submitted
Bid for Series C Preferred Shares specifying a rate that is equal
to the Winning Bid Rate shall be accepted but only in an amount
equal to the number of shares obtained by multiplying the number
of Series C Preferred Shares in the excess of the Available
Preferred Shares over the number of Series C Preferred Shares
subject to Submitted Bids described in paragraph 5(a)(ii) through
(iv) by a fraction, the numerator of which shall be the number of
Outstanding Series C Preferred Shares subject to such Submitted
Bid and the denominator of which shall be the aggregate number of
Outstanding Series C Preferred Shares subject to such Submitted
Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate.
(b) If Sufficient Clearing Bids for Series C Preferred Shares have not been made (other than because all of the Outstanding shares are subject to Submitted Hold Orders), subject to the provisions of paragraph 5(d), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids for Series C Preferred Shares shall be rejected:
(i) Existing Holders' Submitted Bids for Series C Preferred Shares specifying any rate that is equal to or lower than the Maximum Rate shall be rejected, thus entitling such Existing Holders to continue to hold the Series C Preferred Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for Series C Preferred Shares specifying any rate that is equal to or lower than the Maximum Rate shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for Series C Preferred Shares specifying any rate that is higher than the Maximum Rate and the Submitted Sell Orders of each Existing Holder shall be accepted, thus entitling each Existing Holder that submitted or on whose behalf was submitted any such Submitted Bid or Submitted Sell Order to sell Series C Preferred Shares subject to such Submitted Bid or Submitted Sell Order, but in both cases only in an amount equal to the number of Series C Preferred Shares obtained by multiplying the number of Series C Preferred Shares subject to Submitted Bids described in paragraph 5(b)(ii) by a fraction, the numerator of which shall be the number of Outstanding Series C Preferred Shares held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the aggregate number of Outstanding Series C Preferred Shares subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding Series C Preferred Shares are subject to Submitted Hold Orders, all Submitted Bids for such shares shall be rejected.
(d) If, as a result of the procedures described in paragraph 5(a)(iv) or (v) or paragraph 5(b)(iii), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Series C Preferred Share on any Auction Date, the Auction Agent shall, in such manner as it shall determine in its sole discretion, round up or down the number of Series C Preferred Shares to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date as a result of such procedures so that the number of shares so purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares.
(e) If, as a result of the procedures described in paragraph 5(a)(v) any Potential Holder would be entitled or required to purchase less than a whole Series C Preferred Share on any Auction Date, the Auction Agent shall, in such manner as it shall determine in its sole discretion, allocate Series C Preferred Shares for purchase among Potential Holders so that only whole shares are purchased on such Auction Date as a result of such procedures by any Potential Holder, even if such allocation results in one or more Potential Holders not purchasing Series C Preferred Shares on such Auction Date.
(f) Based on the results of each Auction for Series C Preferred Shares, the Auction Agent shall determine the aggregate number of such shares to be purchased and the aggregate number of such shares to be sold by Potential Holders and Existing Holders and, with respect to each Potential Holder and Existing Holder, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Potential Holder(s) or Existing Holder(s) they shall deliver, or from which other Potential Holder(s) or Existing Holder(s) they shall receive, as the case may be, Series C Preferred Shares. Notwithstanding any provision of the Auction Procedures to the contrary, in the event an Existing Holder or Beneficial Owner of Series C Preferred Shares with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that was accepted in whole or in part, or submitted or is deemed to have submitted a Sell Order for such shares that was accepted in whole or in part, fails to instruct its Agent Member to deliver such shares against payment therefor, partial deliveries of Series C Preferred Shares that have been made in respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for Series C Preferred Shares that have been accepted in whole or in part shall constitute good delivery to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Corporation nor the Auction Agent nor any affiliate of either shall have any responsibility or liability with respect to the failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial Owner or its respective Agent Member to deliver Series C Preferred Shares or to pay for Series C Preferred Shares sold or purchased pursuant to the Auction Procedures or otherwise.
6. Transfer of Series C Preferred Shares.
Unless otherwise permitted by the Corporation, a Beneficial Owner
or an Existing Holder may sell, transfer or otherwise dispose of Series C
Preferred Shares only in whole shares and only pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the procedures
described in this Article II or to a Broker-Dealer; provided, however, that
(a) a sale, transfer or other disposition of Series C Preferred Shares from
a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the Holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer
or other disposition for purposes of this paragraph 6 if such Broker-Dealer
remains the Existing Holder of the shares so sold, transferred or disposed
of immediately after such sale, transfer or disposition and (b) in the case
of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other Person, if permitted by the Corporation) to whom such transfer is
made shall advise the Auction Agent of such transfer.
ARTICLE III
ABILITY OF BOARD OF DIRECTORS TO MODIFY THE ARTICLES
SUPPLEMENTARY
The calculation of Adjusted Value, Series C Preferred Basic Maintenance Amount and the elements of each of them and the definitions of such terms and elements may be modified by action of the Board of Directors without further action by the stockholders if the Board of Directors determines that such modification is necessary to prevent a reduction in rating of the shares of Preferred Stock by the Rating Agencies rating such shares at the request of the Corporation or is in the best interests of the holders of Common Shares and is not adverse to the Holders of Preferred Stock in view of advice to the Corporation by the relevant Rating Agencies that such modification would not adversely affect the then-current rating of the Series C Preferred Shares. To the extent the Corporation is unable to obtain an opinion of counsel to the effect that operation of the foregoing sentence is enforceable in the circumstances then obtaining, the calculation of Adjusted Value, Series C Preferred Basic Maintenance Amount and the elements of each of them and the definitions of such terms and the elements thereof shall be adjusted from time to time without further action by the Board of Directors and the stockholders only to reflect changes made thereto independently by a Rating Agency then rating Preferred Stock at the request of the Corporation if such Rating Agency has advised the Corporation in writing separately (a) of such adjustments and (b) that the revised calculation definition would not cause such Rating Agency to reduce or withdraw its then-current rating of the shares of Preferred Stock or any other Rating Agency then rating Preferred Stock at the request of the Corporation to reduce or withdraw its then-current rating. The adjustments contemplated by the preceding sentence shall be made effective upon the time the Corporation receives the notice from such Rating Agency to the effect specified in clause (b) of the preceding sentence. Any such modification may be rescinded or further modified by action of the Board of Directors and stockholders.
In addition, subject to compliance with applicable law, the Board of Directors may amend the definition of Maximum Rate to increase the percentage amount by which the Reference Rate is multiplied to determine the Maximum Rate shown therein without the vote or consent of the Holders of shares of Preferred Stock, including the Series C Preferred Shares, or any other stockholder of the Corporation, after consultation with the Broker-Dealers, and with confirmation from each Rating Agency that immediately following any such increase the Corporation would meet the Series C Preferred Basic Maintenance Amount Test.
Notwithstanding the provisions of the preceding paragraph, to the extent permitted by law, the Board of Directors, without the vote of the Holders of the Series C Preferred Shares or any other capital stock of the Corporation, may amend the provisions of these Articles Supplementary to resolve any inconsistency or ambiguity or to remedy any formal defect so long as the amendment does not materially adversely affect any of the contract rights of holders of shares of the Series C Preferred Shares or any other capital stock of the Corporation or adversely affect the then current rating on the Series C Preferred Shares by any Rating Agency.
IN WITNESS WHEREOF, THE GABELLI EQUITY TRUST INC. has caused these presents to be signed in its name and on its behalf by a duly authorized officer, and its corporate seal to be hereunto affixed and attested by its Secretary, and the said officers of the Corporation further acknowledge said instrument to be the corporate act of the Corporation, and state that to the best of their knowledge, information and belief under penalty of perjury the matters and facts herein set forth with respect to approval are true in all material respects, all on June [_], 2002.
THE GABELLI EQUITY TRUST INC.
Attest:
CERTIFICATE NUMBER NUMBER OF SHARES
1 5,200
THE GABELLI EQUITY TRUST INC.
a Maryland corporation
Series C Auction Rate Cumulative Preferred Stock $.001 Par Value Per Share $25,000 Liquidation Preference Per Share
Cusip No.362397 50 7
This certifies that Cede & Co. is the owner of 5,200 fully paid and non-assessable Shares of Series C Auction Rate Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25,000 per share, of The Gabelli Equity Trust Inc. (the "Fund") transferable only on the books of the Fund by the holder thereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the transfer agent and registrar.
IN WITNESS WHEREOF, the Fund has caused this Certificate to be signed by its duly authorized officers and its Seal to be hereunto affixed this______________ day of _____________________ A.D. 2002.
_______________________________,
As Transfer Agent and Registrar THE GABELLI EQUITY TRUST INC.
By:_________________________ By:___________________________________
Authorized Signature Name: Bruce Alpert
Title: Treasurer and Vice President
Attest:_______________________________
Name:
|
Title:
SERIES C PREFERRED SHARES MAY BE TRANSFERRED ONLY (A) PURSUANT TO AN ORDER PLACED IN AN AUCTION, (B) TO OR THROUGH A BROKER-DEALER OR (C) TO THE FUND OR ANY AFFILIATE. NOTWITHSTANDING THE FOREGOING, A TRANSFER OTHER THAN PURSUANT TO AN AUCTION WILL NOT BE EFFECTIVE UNLESS THE SELLING EXISTING HOLDER OR THE AGENT MEMBER OF SUCH EXISTING HOLDER (IN THE CASE OF AN EXISTING HOLDER WHOSE SHARES ARE LISTED IN ITS OWN NAME ON THE BOOKS OF THE AUCTION AGENT), OR THE BROKER-DEALER OR AGENT MEMBER OF SUCH BROKER- DEALER (IN THE CASE OF A TRANSFER BETWEEN PERSONS HOLDING SHARES OF ANY SERIES THROUGH DIFFERENT BROKER-DEALERS), ADVISES THE AUCTION AGENT OF SUCH TRANSFER.
TRANSFER FORM
FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers _______ Shares of Series C Auction Rate Cumulative Preferred Stock represented by this Certificate unto _______________ , and does hereby irrevocably constitute and appoint ___________________________ attorney to transfer said Shares on the books of the within named Fund with full power of substitution in the premises.
Dated: _____________________, _______
In presence of:
Shares of Series C Auction Rate Cumulative Preferred Stock evidenced by this Certificate may be sold, transferred or otherwise disposed of only pursuant to the provisions of the Fund's Articles Supplementary Creating and Fixing the Rights of the Series C Auction Rate Cumulative Preferred Stock, a copy of which may be obtained at the office of the State Department of Assessments and Taxation of Maryland.
The Fund will furnish information about the restrictions on transferability to any stockholder upon request and without charge. Any such request should be addressed to the Secretary of the Fund.
The Fund will furnish to any stockholder on request and without charge a full statement of the designations, and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class authorized to be issued, the differences in the relative rights and preferences between shares of any series of any authorized preferred or special class to the extent they have been set, and the authority of the Board of Directors to classify unissued shares and to set the relative rights and preference thereof and of any subsequent series of such preferred or special classes. Any such request should be addressed to the Secretary of the Fund.
Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Fund or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in
the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.
[ ] Shares
THE GABELLI EQUITY TRUST INC.
Series C Auction Rate Cumulative Preferred Stock
Liquidation Preference $25,000 Per Share
UNDERWRITING AGREEMENT
[June __], 2002
SALOMON SMITH BARNEY INC.
GABELLI & COMPANY, INC.
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Dear Ladies and Gentleman:
The Gabelli Equity Trust Inc., a Maryland corporation (the "Fund"), proposes, upon the terms and conditions set forth herein, to issue and sell an aggregate of [ ] shares (the "Shares") of its Series C Auction Rate Cumulative Preferred Stock, liquidation preference $25,000 per share, $.001 par value per share (the "Series C Preferred"), to the several Underwriters named in Schedule I hereto (the "Underwriters"). The Shares will be authorized by, and subject to the terms and conditions of, the Articles Supplementary to be adopted in connection with the issuance of the Shares (the "Articles Supplementary").
The Fund and its investment adviser, Gabelli Funds, LLC, a New York limited liability company (the "Adviser"), wish to confirm as follows their agreement with you in connection with the several purchases of the Shares by the Underwriters.
The Fund has entered into an investment advisory agreement with the Adviser, a custodian agreement with Boston Safe Deposit and Trust Company, a registrar, transfer agency and dividend reinvestment plan with Equiserve Trust Company, and an auction agency agreement with The Bank of New York. Such agreements are hereinafter referred to as the "Investment Advisory Agreement", the "Custodian Agreement", the "Transfer Agency Agreement" and the "Auction Agency Agreement", respectively. Collectively, the Investment Advisory Agreement, the Custodian Agreement, the Transfer Agency Agreement and the Auction Agency Agreement are hereinafter referred to as the "Fund Agreements". This Underwriting Agreement is hereinafter referred to as the "Agreement".
1. REGISTRATION STATEMENT AND PROSPECTUS. The Fund has prepared
in conformity with the provisions of the Securities Act of 1933, as amended
(the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940
Act") and the rules and regulations of the Securities and Exchange Commission
(the "Commission") promulgated under the 1933 Act (the "1933 Act Rules and
Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and,
together with the 1933 Act Rules and Regulations, the "Rules and
Regulations") a registration statement on Form N-2 (File Nos. 333-86554 and
811-4700) under the 1933 Act and the 1940 Act (the "registration statement"),
including a prospectus relating to the Shares, and has filed the registration
statement and prospectus in accordance with the 1933 Act and the 1940 Act.
The Fund also has filed a notification of registration of the Fund as an
investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or,
if the registration statement became effective under the 1933 Act prior to
the execution of this Agreement, as amended or supplemented at the time it
became effective, prior to the execution of this Agreement. If it is
contemplated, at the time this Agreement is executed, that a post-effective
amendment to the registration statement will be filed under the 1933 Act and
must be declared effective before the offering of the Shares may commence,
the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. If the
Fund has filed an abbreviated registration statement to register an
additional amount of Shares pursuant to Rule 462(b) under the 1933 Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall include such Rule 462 Registration Statement.
The term "Prospectus" as used in this Agreement means the prospectus and
statement of additional information in the forms included in the Registration
Statement or, if the prospectus and statement of additional information
included in the Registration Statement omits information in reliance on Rule
430A under the 1933 Act Rules and Regulations and such information is
included in a prospectus and statement of additional information filed with
the Commission pursuant to Rule 497(h) under the 1933 Act Rules and
Regulations, the term "Prospectus" as used in this Agreement means the
prospectus and statement of additional information in the form included in
the Registration Statement as supplemented by the addition of the information
contained in the prospectus filed with the Commission pursuant to Rule
497(h). The term "Prepricing Prospectus" as used in this Agreement means the
prospectus and statement of additional information subject to completion in
the form included in the registration statement at the time of filing of
amendment No. [ ] to the registration statement with the Commission on [June
, 2002] and as such prospectus and statement of additional information shall
have been amended from time to time prior to the date of the Prospectus,
together with any other prospectus and statement of additional information
relating to the Fund other than the Prospectus, approved in writing by or
directly or indirectly prepared by the Fund or the Adviser; it being
understood that the definition of Prepricing Prospectus above shall not
include any Prepricing Prospectus prepared by any Underwriter unless approved
in writing by the Fund or Adviser. The terms "Registration Statement",
"Prospectus" and "Prepricing Prospectus" shall also include any financial
statements incorporated by reference therein.
The Fund has furnished you with copies of such Registration Statement, each amendment to such Registration Statement filed with the Commission and each Prepricing Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Fund hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Fund and the Adviser herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase price of $ per Share, the number of Shares set forth opposite the name of such Underwriter in Schedule I hereto.
3. TERMS OF PUBLIC OFFERING. The Fund and the Adviser have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Shares shall be made at the office of
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at
[____] A.M., New York City time, on [ , 2002] (the "Closing Date"). The place
of closing for the Shares and the Closing Date may be varied by agreement
between you and the Fund.
Certificates for the Shares shall be registered in such names and in such denominations as you shall request prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date. The certificates evidencing the Shares shall be delivered to you on the Closing Date against payment of the purchase price therefor in immediately available funds.
5. AGREEMENTS OF THE FUND AND THE ADVISER. The Fund and the Adviser, jointly and severally, agree with the several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective under the 1933 Act before the offering of the Shares may commence, the Fund will endeavor to cause the Registration Statement or such post-effective amendment to become effective under the 1933 Act as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing when the Registration Statement or such post-effective amendment has become effective.
(b) The Fund will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request made by the
Commission for amendment of or a supplement to the Registration Statement,
any Prepricing Prospectus or the Prospectus (or any amendment or supplement
to any of the foregoing) or for additional information, (ii) of the issuance
by the Commission, the National Association of Securities Dealers, Inc. (the
"NASD"), any state securities commission, any national securities exchange,
any arbitrator, any court or any other governmental, regulatory,
self-regulatory or administrative agency or any official of any order
suspending the effectiveness of the Registration Statement, prohibiting or
suspending the use of the Prospectus, any Prepricing Prospectus or any sales
material (as hereinafter defined), of any notice pursuant to Section 8(e) of
the 1940 Act, of the suspension of qualification of the Shares for offering
or sale in any jurisdiction, or the initiation or contemplated initiation of
any proceeding for any such purposes, (iii) of receipt by the Fund, the
Adviser, any affiliate of the Fund or the Adviser or any representative or
attorney of the Fund or the Adviser of any other material communication from
the Commission, the NASD, any state securities commission, any national
securities exchange, any arbitrator, any court or any other governmental,
regulatory, self-regulatory or administrative agency or any official relating
to the Fund (if such communication relating to the Fund is received by such
person within three years after the date of this Agreement), the Registration
Statement, the 1940 Act Notification, the Prospectus, any Prepricing
Prospectus, any sales material (as hereinafter defined) (or any amendment or
supplement to any of the foregoing), this Agreement or any of the Fund
Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Fund or the Adviser or of the happening of any event which makes any
statement of a material fact made in the Registration Statement, the
Prospectus, any Prepricing Prospectus or any sales material (as hereinafter
defined) (or any amendment or supplement to any of the foregoing) untrue or
which requires the making of any additions to or changes in the Registration
Statement, the Prospectus, any Prepricing Prospectus or any sales materials
(as herein defined) (or any amendment or supplement to any of the foregoing)
in order to state a material fact required by the 1933 Act, the 1940 Act or
the Rules and Regulations to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading or of the necessity to amend or supplement the
Registration Statement, the Prospectus, any Prepricing Prospectus or any
sales material (as herein defined) (or any amendment or supplement to any of
the foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and
Regulations or any other law or order of any court or regulatory body. If at
any time the Commission, the NASD, any state securities commission, any
national securities exchange, any arbitrator, any court or any other
governmental, regulatory, self-regulatory or administrative agency or any
official shall issue any order suspending the effectiveness of the
Registration Statement, prohibiting or suspending the use of the Prospectus
or any sales material (as hereinafter defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Fund will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Fund will furnish to you, without charge, three signed copies of the registration statement and the 1940 Act Notification as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto and will also furnish to you, without charge, such number of additional copies of the registration statement and of each amendment thereto, but without exhibits, as you may request.
(d) The Fund will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a Prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), without delivering a copy of such information, documents or reports to you prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Fund has delivered to you, without charge, in such quantities as you have requested, copies of the form of the Prepricing Prospectus. The Fund consents to the use, in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund.
(f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the 1933 Act to be delivered in connection with sales by any Underwriter or dealer, the Fund will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendments or supplements thereto) as you may request. The Fund consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the 1933 Act and with the state securities or blue sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Fund or in the opinion of counsel for the Underwriters is required to be set forth in the Registration Statement or the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Registration Statement or the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other federal law, rule or regulation, or any state securities or blue sky disclosure laws, rules or regulations, the Fund will forthwith prepare and, subject to the provisions of paragraph (d) above, promptly file with the Commission an appropriate supplement or amendment thereto, and will expeditiously furnish to the Underwriters and dealers, without charge, a reasonable number of copies thereof. In the event that the Fund and you agree that the Registration Statement or the Prospectus is to be amended or supplemented, the Fund, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement.
(g) The Fund and the Adviser will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification, if necessary, of the Shares for offering and sale by the several Underwriters and by dealers under the securities or blue sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents, if any, necessary or appropriate in order to effect such registration or qualification.
(h) The Fund will make generally available to its security holders an earnings statement, which need not be audited, covering a twelve-month period ending not later than 15 months after the effective date of the Registration Statement, as soon as practicable after the end of such period, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and Regulations.
(i) During the period of five years hereafter, the Fund will furnish to you (i) as soon as available, a copy of each report of the Fund mailed to stockholders or filed with the Commission or furnished to the New York Stock Exchange (the "NYSE") other than reports on Form N-SAR, and (ii) from time to time such other information concerning the Fund as you may request.
(j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 11 hereof or by notice given by you terminating this Agreement pursuant to Section 11 or Section 12 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Fund or the Adviser to comply with the terms or fulfill any of the conditions of this Agreement required to be complied with or fulfilled by them, the Fund or, in the case of a failure or refusal by the Fund, the Adviser, agrees to reimburse you for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith.
(k) The Fund will apply the net proceeds from the sale of the Shares in accordance with the description set forth in the Prospectus and in such a manner as to comply with the investment objectives, policies and restrictions of the Fund as described in the Prospectus.
(l) The Fund will timely file the requisite copies of the Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations, whichever is applicable or, if applicable, will timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and Regulations and will advise you of the time and manner of such filing.
(m) Except as provided in this Agreement and except to the extent any hedging activities disclosed in the Prospectus may be considered senior securities, the Fund will not sell, contract to sell, or otherwise dispose of any senior securities of the Fund, or grant any options or warrants to purchase senior securities of the Fund, for a period of 180 days after the date of the Prospectus, without the prior written consent of Salomon Smith Barney Inc.
(n) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, neither the Fund nor the Adviser has taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares; it being understood that the Underwriters include certain affiliates of the Adviser and that stabilization or other activity by you on behalf of the Underwriters shall not be deemed to be violative of this representation.
(o) The Fund will use its best efforts to cause the Series C Preferred, prior to the Closing Date, to be assigned a rating of Aaa by Moody's Investors Service, Inc. ("Moody's") and AAA by Standard and Poor's Rating Services ("S&P", and together with Moody's, the "Rating Agencies").
(p) The Fund and the Adviser will use their best efforts to perform all of the agreements required of them and discharge all conditions to closing as set forth in this Agreement.
(q) The Fund will furnish to you, on the date on which delivery is made to the Rating Agencies, the Accountant's Confirmation (as defined in the Articles Supplementary) corresponding to the Series C Preferred Basic Maintenance Report (as defined in the Articles Supplementary) for the first Valuation Date (as defined in the Articles Supplementary) following the Closing Date.
6. REPRESENTATIONS AND WARRANTIES OF THE FUND AND THE ADVISER. The Fund and the Adviser, jointly and severally, represent and warrant to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied when so filed in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Registration Statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any amendment or supplement thereto when filed with the Commission under Rule 497 of the 1933 Act Rules and Regulations and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission, complied or will comply in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in writing by or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding shares of capital stock of the Fund have been duly authorized and validly issued, are fully paid and nonassessable and are free of any preemptive or similar rights; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them). The capital stock of the Fund conforms to the description thereof in the Registration Statement and the Prospectus (and any amendment or supplement to either of them).
(d) The Fund is a corporation duly organized and validly existing in good standing under the laws of the State of Maryland, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund. The Fund has no subsidiaries.
(e) There are no legal or governmental proceedings pending or threatened, against the Fund, or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) but are not described as required, and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (and any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations.
(f) The Fund is not in violation of its articles of incorporation or by-laws, or other organizational documents, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Fund or of any decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or governmental agency, body or official having jurisdiction over the Fund, or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any contract required to be included as an exhibit to the Registration Statement (each, a "Material Fund Agreement").
(g) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement or any of the Fund Agreements by the Fund, nor the consummation by the Fund of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may have been obtained prior to the date hereof and such as may be required for compliance with the state securities or blue sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation, including the Articles Supplementary, or by-laws, or other organizational documents, of the Fund or (B) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Fund or any of its properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of its property or assets is subject. The Fund is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency.
(h) The accountants, PriceWaterhouseCoopers LLP, who have audited and certified or shall audit and certify the financial statements included or incorporated by reference in the Registration Statement and the Prospectus (or any amendment or supplement to either of them) are independent public accountants as required by the 1933 Act, the 1940 Act and the Rules and Regulations.
(i) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), present fairly the financial position, results of operations and changes in financial position of the Fund on the basis stated or incorporated by reference in the Registration Statement and the Prospectus at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data included in the Registration Statement and the Prospectus (and any amendment or supplement to either of them) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Fund.
(j) The execution and delivery of, and the performance by the Fund of its obligations under, this Agreement and the Fund Agreements have been duly and validly authorized by the Fund, and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder and thereunder may be limited by federal or state securities laws.
(k) Except as disclosed in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), the Fund has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Fund, and there has not been any change in the capital stock, or material increase in the short-term debt or long-term debt, of the Fund, or any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Fund, whether or not arising in the ordinary course of business, it being understood that a change of up to 15% of the aggregate market value of the Fund's assets shall not cause this representation to be untrue.
(l) The Fund has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the 1933 Act, the 1940 Act or the Rules and Regulations.
(m) The Fund has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment or supplement thereto), subject to such qualifications as may be set forth in the Prospectus; the Fund has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any amendment or supplement thereto); and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Fund.
(n) The Fund maintains and will maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization and with the investment policies and restrictions of the Fund
and with the applicable requirements of the 1940 Act, the 1940 Act Rules and
Regulations and the Internal Revenue Code of 1986, as amended (the "Code");
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles, to calculate net asset value, and to maintain accountability for
assets and to maintain compliance with the books and records requirements
under the 1940 Act and the 1940 Act Rules and Regulations; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(o) To the Fund's knowledge, except as disclosed in the Prospectus, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus.
(p) The Fund has filed all tax returns required to be filed, which returns are complete and correct, and the Fund is not in material default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto.
(q) No holder of any security of the Fund has any right to require registration of any shares of capital stock or any other security of the Fund because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement.
(r) The Fund, subject to the Registration Statement having been declared effective and the filing of the Prospectus under Rule 497 under the Rules and Regulations, has taken all required action under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Shares as contemplated by this Agreement.
(s) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license.
(t) The Fund is duly registered under the 1940 Act as a closed-end non-diversified management investment company and the 1940 Act Notification has been duly filed with the Commission and, at the time of filing thereof and any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund is, and at all times through the completion of the transactions contemplated hereby, will be, in compliance in all material respects with the terms and conditions of the 1933 Act and the 1940 Act. No person is serving or acting as an officer, director or investment adviser of the Fund except in accordance with the provisions of the 1940 Act and the 1940 Act Rules and Regulations and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and regulations of the Commission promulgated under the Advisers Act (the "Advisers Act Rules and Regulations").
(u) Except as stated in this Agreement and in the Prospectus (and any amendment or supplement thereto), the Fund has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Fund is not aware of any such action taken or to be taken by any affiliates of the Fund.
(v) The Fund has filed in a timely manner each document or report required to be filed by it pursuant to the 1934 Act and the rules and regulations of Commission promulgated thereunder (the "1934 Act Rules and Regulations"); each such document or report at the time it was filed conformed to the requirements of the 1934 Act and the 1934 Act Rules and Regulations; and none of such documents or reports contained an untrue statement of any material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading.
(w) All advertising, sales literature or other promotional material (including "prospectus wrappers," "broker kits," "road show slides" and "road show scripts"), whether in printed or electronic form, authorized in writing by or prepared by the Fund or the Adviser for use in connection with the offering and sale of the Shares (collectively, "sales material") complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and Regulations and the rules and interpretations of the NASD and no such sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(x) Each of the Fund Agreements and the Fund's and the Adviser's obligations under this Agreement and each of the Fund Agreements comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act the Advisers Act Rules and Regulations.
(y) At all times since its inception, as required by Subchapter M of the Code, the Fund has complied with the requirements to qualify as a regulated investment company under the Code.
(z) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), no director of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of any Underwriter.
7. REPRESENTATIONS AND WARRANTIES OF THE ADVISER. The Adviser represents and warrants to each Underwriter as follows:
(a) The Adviser is a limited liability company duly organized and validly existing in good standing under the laws of the State of New York, with full limited liability company power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(b) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto). There does not exist any proceeding or any facts or circumstances the existence of which could lead to any proceeding which might adversely affect the registration of the Adviser with the Commission.
(c) There are no legal or governmental proceedings pending or, to the knowledge of the Adviser, threatened against the Adviser, or to which the Adviser or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or that may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, or on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(d) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, nor the consummation by the Adviser of the transactions contemplated hereby or thereby (A) requires the Adviser to obtain any consent, approval, authorization or other order of or registration or filing with, the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court, regulatory body, administrative agency or other governmental body, agency or official or conflicts or will conflict with or constitutes or will constitute a breach of or a default under the certificate of incorporation or by-laws, or other organizational documents of the Adviser or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any agreement, indenture, lease or other instrument to which the Adviser is a party or by which it or any of its properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Adviser or any of its properties or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser pursuant to the terms of any agreement or instrument to which it is a party or by which it may be bound or to which any of the property or assets of the Adviser is subject. The Adviser is not subject to any order of any court or of any arbitrator, governmental authority or administrative agency except for (a) an Order of the Securities and Exchange Commission, dated August 17, 1988 and (b) an Order of the Federal Communications Commission, dated August 21, 1992.
(e) The execution and delivery of, and the performance by the Adviser of its obligations under, this Agreement and the Investment Advisory Agreement have been duly and validly authorized by the Adviser, and this Agreement and the Investment Advisory Agreement have been duly executed and delivered by the Adviser and each constitutes the valid and legally binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws.
(f) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Prospectus (or any amendment or supplement thereto) and under this Agreement and the Investment Advisory Agreement.
(g) The description of the Adviser in the Registration Statement and the Prospectus (and any amendment or supplement thereto) complied and comply in all material respects with the provisions the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(h) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), the Adviser has not incurred any liability or obligation, direct or contingent, or entered into any transaction, not in the ordinary course of business, that is material to the Adviser and its subsidiaries, taken as a whole, and that is required to be disclosed in the Registration Statement or in the Prospectus and there has not been any material adverse change, or any development involving or which may reasonably be expected to involve, a prospective material adverse change, in the condition (financial or other), business, prospects, properties, net assets or results of operations of the Adviser and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, or which, in each case, could have a material adverse effect on the ability of the Adviser to perform its obligations under this Agreement and the Investment Advisory Agreement.
(i) The Adviser has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its properties and to conduct its business in the manner described in the Prospectus (and any amendment or supplement thereto); the Adviser has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the Adviser under any such permit; and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Adviser.
(j) Except as stated in this Agreement and in the Prospectus (and in any amendment or supplement thereto), the Adviser has not taken, nor will it take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities issued by the Fund to facilitate the sale or resale of the Shares, and the Adviser is not aware of any such action taken or to be taken by any affiliates of the Adviser; it being understood that the Underwriters include certain affiliates of the Adviser and that stabilization or other activity by you shall not be deemed to be violative of this representation.
(k) Mario J. Gabelli is the validly appointed Chief Investment Officer of the Adviser and the portfolio manager of the Fund; Mr. Gabelli has not given notice nor made known an intention to give notice of termination of his employment and the Adviser knows of no reason why Mr. Gabelli should be unable to serve as portfolio manager to the Fund.
(l) In the event that the Fund or the Adviser makes available any promotional materials intended for use only by qualified broker-dealers and registered representatives thereof by means of a proprietary Internet web site administered by such party or similar electronic means, the Fund or the Adviser will install and maintain pre-qualification and password- protection or similar procedures which are reasonably designed to restrict access to such promotional materials by persons other than qualified broker-dealers and representatives thereof.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Fund and the Adviser, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any Prepricing Prospectus, any sales material (or any amendment or supplement to any of the foregoing), or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Fund by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of the Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the 1933 Act and the 1933 Act Rules and Regulations, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prepricing Prospectus was corrected in the Prospectus, provided that the Fund has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Fund or the Adviser may otherwise have.
(b) If any action, suit or proceeding shall be brought against
any Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Fund or the Adviser, such Underwriter or
such controlling person shall promptly notify the Fund or the Adviser, and
the Fund or the Adviser shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Underwriter
or any such controlling person shall have the right to employ separate
counsel in any such action, suit or proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Underwriter or such controlling person unless (i) the Fund or
the Adviser has agreed in writing to pay such fees and expenses, (ii) the
Fund and the Adviser have failed to assume the defense and employ counsel, or
(iii) the named parties to any such action, suit or proceeding (including any
impleaded parties) include both such Underwriter or such controlling person
and the Fund or the Adviser and such Underwriter or such controlling person
shall have been advised by its counsel that representation of such
indemnified party and the Fund or the Adviser by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual
or potential differing interests between them (in which case the Fund and the
Adviser shall not have the right to assume the defense of such action, suit
or proceeding on behalf of such Underwriter or such controlling person). It
is understood, however, that the Fund and the Adviser shall, in connection
with any one such action, suit or proceeding or separate but substantially
similar or related actions, suits or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for
the reasonable fees and expenses of only one separate firm of attorneys (in
addition to any local counsel) at any time for all such Underwriters and
controlling persons not having actual or potential differing interests with
you or among themselves, which firm shall be designated in writing by Salomon
Smith Barney Inc., and that all such fees and expenses shall be reimbursed as
they are incurred. The Fund and the Adviser shall not be liable for any
settlement of any such action, suit or proceeding effected without its
written consent, but if settled with such written consent, or if there be a
final judgment for the plaintiff in any such action, suit or proceeding, the
Fund and the Adviser agree to indemnify and hold harmless any Underwriter, to
the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Fund and the Adviser, their directors, any
officers who sign the Registration Statement, and any person who controls the
Fund or the Adviser within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act, to the same extent as the foregoing indemnity
from the Fund and the Adviser to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought
against the Fund or the Adviser, any of their directors, any such officer, or
any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (c), such Underwriter shall have the
rights and duties given to the Fund and the Adviser by paragraph (b) above
(except that if the Fund or the Adviser shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof, but the fees
and expenses of such counsel shall be at such Underwriter's expense), and the
Fund and the Adviser, their directors, any such officer, and any such
controlling person shall have the rights and duties given to the Underwriters
by paragraph (b) above. The foregoing indemnity agreement shall be in
addition to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Fund and the Adviser on the one hand (treated jointly for
this purpose as one person) and the Underwriters on the other hand from the
offering of the Shares, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Fund and the Adviser on the one
hand (treated jointly for this purpose as one person) and the Underwriters on
the other in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Fund
and the Adviser on the one hand (treated jointly for this purpose as one
person) and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Fund bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Fund and
the Adviser on the one hand (treated jointly for this purpose as one person)
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Fund and the Adviser on the one hand
(treated jointly for this purpose as one person) or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) The Fund, the Adviser and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 8
were determined by a pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
paragraph (d) above. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to
in paragraph (d) above shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating any claim or defending any
such action, suit or proceeding. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price of the Shares underwritten by
it and distributed to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8 are several in proportion to the
respective numbers of Shares set forth opposite their names in Schedule I
hereto and not joint.
(f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution
under this Section 8 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses
are incurred. The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Fund and the Adviser
set forth in this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Fund, the Adviser,
their directors or officers, or any person controlling the Fund or the
Adviser, (ii) acceptance of any Shares and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Underwriter or
any person controlling any Underwriter, or to the Fund, the Adviser, their
directors or officers, or any person controlling the Fund or the Adviser,
shall be entitled to the benefits of the indemnity, contribution, and
reimbursement agreements contained in this Section 8.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Shares hereunder are subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, the Registration Statement or such post-effective amendment shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933 Act Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or order pursuant to Section 8(e) of the 1940 Act shall have been issued and no proceeding for those purposes shall have been instituted or, to the knowledge of the Fund, the Adviser or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change (other than a change of up to 15% of the aggregate market value of the Fund's assets) or any development involving a prospective change, in or affecting the condition (financial or other), business, prospects, properties, net assets, or results of operations of the Fund or the Adviser and its subsidiaries, taken as a whole, not contemplated by the Prospectus, which in your opinion would materially, adversely affect the market for the Shares , or (ii) any event or development relating to or involving the Fund or the Adviser or any officer or director of the Fund or the Adviser which makes any statement made in the Prospectus untrue or which, in the opinion of the Fund and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your opinion materially adversely affect the market for the Shares.
(c) The Fund shall have furnished to you a report showing compliance with the asset coverage requirements of the 1940 Act and a Series C Preferred Basic Maintenance Report (as defined in the Articles Supplementary), each dated the Closing Date and in form and substance satisfactory to you. Each such report may use portfolio holdings and valuations as of the close of business of any day not more than the six business days preceding the Closing Date; provided, however, that the Fund represents in such report that its total net assets as of the Closing Date have not declined by 5% or more from such valuation date.
(d) You shall have received on the Closing Date, an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Fund, dated the Closing Date and addressed to you, to the effect that:
(i) The Fund is duly registered and qualified to conduct its business and is in good standing in the State of New York (which is the only jurisdiction identified by management of the Fund to such counsel in which the Fund owns property, has operations or conducts business);
(ii) The authorized and outstanding capital stock of the Fund is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Fund (including the Series C Preferred) conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the captions "Description of Capital Stock and Other Securities", "Description of Series C Preferred" and "The Auction";
(iii) To the extent the due authorization and valid issuance of the Shares is dependent upon the Fund having the authority to issue such Shares under Section 8(b)(1)(C) or Section 13(a)(2) of the 1940 Act, based on our review of the Fund's proxy statements dated April 3, 1997 and April 29, 1998 and the results of the meetings of stockholders referred to therein, the Fund has such authority;
(iv) Such counsel has been orally advised that the Registration Statement has become effective under the 1933 Act and, to the best knowledge of such counsel after reasonable inquiry, no stop order suspending the effectiveness of the Registration Statement or order pursuant to Section 8(e) of the 1940 Act has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; and any required filing of the Prospectus pursuant to Rule 497 has been made in accordance with Rule 497;
(v) Each of this Agreement and the Fund Agreements has been duly executed and delivered by the Fund and is a valid, legal and binding agreement of the Fund, enforceable against the Fund in accordance with its terms, except to the extent that (A) enforcement hereof and thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, or (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) and (B) enforcement of rights to indemnity and contribution hereunder and thereunder may be limited by Federal or state securities laws or principles of public policy;
(vi) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement and the Fund Agreements by the Fund, compliance by the Fund with the provisions hereof or thereof nor consummation by the Fund of the transactions contemplated hereby or thereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under any Material Fund Agreement, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Fund under any Material Fund Agreement, nor will any such action result in any violation of (a) any provision of the New York Business Corporation Law and those laws, rules and regulations of the State of New York and the United States of America that, in the experience of such counsel, are normally applicable to entities such as the Fund and transactions of the type contemplated by this Agreement, but without having made any special investigation concerning any other laws, rules or regulations (collectively, "Applicable Fund Laws"); provided, that the term "Applicable Fund Laws" does not include (1) the rules and regulations of the NASD, (2) any federal or state securities or blue sky laws, (3) any antifraud laws or (4) any law, rule or regulation that may have become applicable to the Fund as a result of the Underwriters' involvement with the transactions contemplated hereby or because of any facts specifically pertaining to the Underwriters, or (b) any judgment, order or decree of any New York or federal executive, legislative, judicial, administrative or regulatory body under Applicable Fund Laws and the NYSE (each, a "Governmental Fund Authority") identified in an officer's certificate;
(vii) No consent, approval, license, authorization, order or validation of, or filing, recording or registration with, any Governmental Fund Authority pursuant to Applicable Fund Laws (each, a "Governmental Fund Approval") is required for the valid issuance and sale of the Shares to the Underwriters or the execution, delivery and performance by the Fund of this Agreement and the Fund Agreements or the consummation of the transactions contemplated hereby and thereby except such Governmental Fund Approvals as have been obtained;
(viii) The 1940 Act Notification, the Registration Statement and the Prospectus and any supplements or amendments thereto (except for the financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the 1933 Act, the 1940 Act, the Rules and Regulations, the 1934 Act and the rules and regulations promulgated thereunder;
(ix) To the actual knowledge of such counsel after reasonable inquiry, other than as described or contemplated in the Registration Statement or Prospectus (or any supplement thereto), there are (A) no legal or governmental proceedings in the State of New York or, to the actual knowledge of such counsel, any other state, pending or threatened against the Fund, or to which the Fund or any of its properties is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement to either of them) that are not described as required and (B) no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement, that are not described or filed as required, as the case may be;
(x) The statements in the Registration Statement, Prospectus and statement of additional information under the caption "Taxation", insofar as they refer to statements of law or legal conclusions, are accurate and present fairly the information required to be shown;
(xi) Each of the Fund Agreements and the Fund's and the Adviser's obligations under each of this Agreement and the Fund Agreements comply as to form in all material respects with all applicable provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations;
(xii) The Fund is duly registered with the Commission under the 1940 Act as a closed-end non-diversified management investment company; and the provisions of the Fund's articles of incorporation, including the Articles Supplementary, and by-laws, and the investment policies and restrictions described in the Registration Statement and the Prospectus under the captions "The Fund", "Investment Objectives and Policies", "Risk Factors and Special Considerations" and "Investment Restrictions" (in the statement of additional information) comply in all material respects with the requirements of the 1940 Act, and all action has been taken by the Fund as is required of the Fund by the 1933 Act and the 1940 Act and the Rules and Regulations in connection with the issuance and sale of the Shares to make the public offering and consummate the sale of the Shares as contemplated by this Agreement;
(xiii) The Fund has all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies required under Applicable Fund Law (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Fund), to own its properties and to conduct business, as described in the Prospectus;
(xiv) To the actual knowledge of such counsel after reasonable inquiry, except as described in the Prospectus, there is no holder of any security of the Fund or any other person who has the right, contractual or otherwise pursuant to any Material Fund Agreement, to cause the Fund to sell or otherwise issue to them, or to permit them to underwrite the sale of, the Shares or the right to have any securities of the Fund included in the registration statement or the right, as a result of the filing of the registration statement, to require registration under the 1933 Act of any securities of the Fund;
(xv) If the Fund operates as described in the Prospectus, the Fund will qualify as a regulated investment company under the Code; and
(xvi) Such counsel shall also state that they have participated in conferences with officers and employees of the Fund, representatives of the independent accountants for the Fund, Maryland counsel to the Fund, the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although they are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus except to the limited extent otherwise covered by paragraphs (ii), (ix), (x) and (xii), and have made no independent check or verification thereof, on the basis of the foregoing, no facts have come to their attention that would have led them to believe that the Registration Statement or any amendment or supplement thereto, at the time it became effective, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements contained therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except that they express no belief with respect to the financial statements, schedules and other financial information and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement.
(e) You shall have received on the Closing Date, an opinion of Miles & Stockbridge P.C., Maryland counsel for the Fund, dated the Closing Date and addressed to you, to the effect that:
(i) The Fund is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Maryland with full corporate power to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them);
(ii) The authorized capital stock of the Fund is as set forth under the caption "Capitalization" in the Prospectus; and the authorized capital stock of the Fund conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock and Other Securities";
(iii) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. The issuance of the Shares will not be subject to preemptive or other similar rights entitling any person to purchase or acquire any of the Shares upon the issuance thereof by the Fund which arise by operation of the laws of the State of Maryland or under the articles of incorporation or by-laws of the Fund;
(iv) The Shares conform in all material respects to the description thereof contained in the Prospectus under the caption "Description of Series C Preferred" and "The Auction";
(v) The form of certificates for the Shares conforms to the requirements of the Maryland General Corporation Law;
(vi) The Fund has the requisite corporate power and authority to enter into and execute and deliver this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided for herein;
(vii) This Agreement has been duly authorized by the Fund. Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement by the Fund, compliance by the Fund with the provisions hereof nor consummation by the Fund of the transactions contemplated hereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation, including the Articles Supplementary, or by-laws of the Fund;
(viii) The Fund has full corporate power and to the knowledge of such counsel, all governmental authorizations, approvals, orders, licenses, certificates, franchises and permits necessary or required under the laws of the State of Maryland for the Fund to own its properties and to conduct its business as it now is being conducted as described in the Prospectus (except in cases where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial conditions of the Fund); and
(ix) No consent, approval, authorization or other order of, or registration or filing with, any securities commission, court, regulatory body, administrative agency or other governmental body, agency, or official of the State of Maryland is required on the part of the Fund for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement, the execution and delivery by the Fund of this Agreement and the performance by the Fund of its obligations hereunder or the consummation of the transactions contemplated hereby by the Fund, except those as may be required under the securities or blue sky laws of the State of Maryland; it being understood that such counsel do not express any opinion as to any such consent, approval, authorization or other order of, or registration or filing, which may be required as a result of the involvement of any other parties to this Agreement.
(f) You shall have received on the Closing Date an opinion of James E. McKee, general counsel for the Adviser, dated the Closing Date and addressed to you, to the effect that:
(i) The Fund is not in violation of its articles of incorporation, including the Articles Supplementary, or by-laws and, to the actual knowledge of such counsel after reasonable inquiry, is not in default in the performance of any material obligation, agreement or condition in any bond, debenture, note or other evidence of indebtedness, except as may be disclosed in the Prospectus;
(ii) The Fund is not in violation of any Material Fund Agreement; and
(iii) To the actual knowledge of such counsel after reasonable
inquiry, the Fund is not in violation of (A) any provision of the New
York Business Corporation Law and those laws, rules and regulations of
the State of New York and the United States of America that, in the
experience of such counsel, are normally applicable to entities such as
the Fund and transactions of the type contemplated by this Agreement,
but without having made any special investigation concerning any other
laws, rules or regulations; provided, that such laws, rules and
regulations do not include (1) the rules and regulations of the NASD,
(2) any federal or state securities or blue sky laws other than the 1933
Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder to the extent not excluded by item (3) below, (3) any
antifraud laws under the 1933 Act or the 1934 Act as they apply to the
Prospectus and the Registration Statement or (4) any law, rule or
regulation that may have become applicable to the Fund as a result of
the Underwriters' involvement with the transactions contemplated by this
Agreement or because of any facts specifically pertaining to the
Underwriters or (B) any order, judgment or decree of any New York or
federal executive, legislative, judicial, administrative or regulatory
body under the laws, rules and regulations referred to in clause (A) of
this paragraph and the NYSE.
(g) You shall have received on the Closing Date an opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for the Adviser, dated the Closing Date and addressed to you, to the effect that:
(i) The Adviser is a limited liability company duly organized and validly existing in good standing under the laws of the State of New York with full limited liability company power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement to either of them), it being understood that the opinion with respect to good standing is based solely upon such counsel's review of a certificate of the Secretary of State and a telephonic confirmation;
(ii) The Adviser is duly registered with the Commission as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules and Regulations from acting under the Investment Advisory Agreement for the Fund as contemplated by the Prospectus (or any amendment or supplement thereto).
(iii) The Adviser has limited liability company power and authority to enter into this Agreement and the Investment Advisory Agreement, and this Agreement and the Investment Advisory Agreement have been duly authorized, executed and delivered by the Adviser and each is a valid, legal and binding agreement of the Adviser, enforceable against the Adviser in accordance with its terms except to the extent that (A) enforcement hereof and thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, or (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) and (B) enforcement of rights to indemnity and contribution hereunder and thereunder may be limited by Federal or state securities laws or principles of public policy;
(iv) Neither the execution, delivery or performance of this Agreement or the Investment Advisory Agreement by the Adviser, compliance by the Adviser with the provisions hereof or thereof nor consummation by the Adviser of the transactions contemplated hereby or thereby conflicts or will conflict with, or constitutes or will constitute a breach of or default under, the certificate of incorporation or by-laws, or other organizational documents, of the Adviser or any contract or agreement to which the Adviser is a party which has been identified to such counsel by the Adviser as material or as one which could have an effect on the types of transactions contemplated by this Agreement (each, an "Material Adviser Agreement"), or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Adviser under any Material Adviser Agreement, nor will any such action result in any violation of any provision of the New York Business Corporation Law and those laws, rules and regulations of the State of New York and the United States of America that, in the experience of such counsel, are normally applicable to entities such as the Adviser and transactions of the type contemplated by this Agreement, but without having made any special investigation concerning any other laws, rules or regulations (collectively, "Applicable Adviser Laws"); provided, that the term "Applicable Adviser Laws" does not include (1) the rules and regulations of the NASD, (2) any federal or state securities or blue sky laws, (3) any antifraud laws or (4) any law, rule or regulation that may have become applicable to the Adviser as a result of the Underwriters' involvement with the transactions contemplated hereby or because of any facts specifically pertaining to the Underwriters;
(v) No consent, approval, license, authorization or validation of, or filing, recording or registration with, any New York or federal executive, legislative, judicial, administrative or regulatory body under Applicable Adviser Laws (each, a "Governmental Adviser Approval") is required on the part of the Adviser for the execution, delivery and performance by it of this Agreement and the Investment Advisory Agreement to which it is a party or the consummation by it of the transactions contemplated hereby and thereby except such Governmental Adviser Approvals as have been obtained;
(vi) To the actual knowledge of such counsel after reasonable inquiry, there are no legal or governmental proceedings pending or threatened against the Adviser or to which the Adviser or any of its properties is subject, which are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required or which could reasonably be expected to adversely affect the ability of the Adviser to perform its obligations under this Agreement or the Investment Advisory Agreement;
(vii) The obligations of the Adviser under this Agreement and the Investment Advisory Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations;
(viii) The Adviser has full limited liability company power and authority, and all necessary governmental authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental regulatory officials and bodies required under Applicable Adviser Law (except where the failure so to have any such authorizations, approvals, orders, licenses, certificates, franchises or permits, individually or in the aggregate, would not have a material adverse effect on the business, properties, operations or financial condition of the Adviser and its subsidiaries), to own its properties and to conduct its business, including specifically its business of acting as investment adviser to registered investment companies and as otherwise described in the Prospectus, and to perform its obligations under the Investment Advisory Agreement;
(ix) Such counsel shall also state that such counsel has been advised by the Adviser that it is not registered or qualified to conduct its business as a foreign corporation in any jurisdiction and that it believes there is no such jurisdiction where the nature of its properties or the conduct of its business requires such registration or qualification and where the failure to register or qualify would have a material adverse effect on the operations of the Adviser or on the ability of the Adviser to perform its obligations under this Agreement or the Investment Advisory Agreement; and
(x) Such counsel shall also state that they have participated in conferences with officers and employees of the Adviser and the Fund, representatives of the independent accountants for the Adviser and the Fund and the Underwriters and counsel for the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although they are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and have made no independent check or verification thereof, on the basis of the foregoing, no facts have come to their attention that would have led them to believe that the Registration Statement or any amendment or supplement thereto, at the time it became effective, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements contained therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date and as of the Closing Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except that they express no belief with respect to the financial statements, schedules and other financial information and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement.
(h) You shall have received on the Closing Date an opinion of Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date and addressed to you, with respect to such matters as you may reasonably request.
(i) You shall have received letters addressed to you and dated the date hereof and the Closing Date from PriceWaterhouseCoopers LLP, independent certified public accountants, substantially in the forms heretofore approved by you.
(j) (i) No order suspending the effectiveness of the registration
statement or the Registration Statement or prohibiting or suspending the use
of the Prospectus (or any amendment or supplement thereto) or any Prepricing
Prospectus or any sales material shall have been issued and no proceedings
for such purpose or for the purpose of commencing an enforcement action
against the Fund, the Adviser or, with respect to the transactions
contemplated by the Prospectus (or any amendment or supplement thereto) and
this Agreement, any Underwriter, may be pending before or, to the knowledge
of the Fund, the Adviser or any Underwriter or in the reasonable view of
counsel to the Underwriters, shall be threatened or contemplated by the
Commission at or prior to the Closing Date and that any request for
additional information on the part of the Commission (to be included in the
Registration Statement, the Prospectus or otherwise) be complied with to your
satisfaction; (ii) there shall not have been any change in the capital stock
of the Fund nor any material increase in the short-term or long-term debt of
the Fund (other than in the ordinary course of business) from that set forth
or contemplated in the Registration Statement or the Prospectus (or any
amendment or Supplement thereto); (iii) there shall not have been, subsequent
to the respective dates as of which information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), except
as may otherwise be stated in the Registration Statement and Prospectus (or
any amendment or supplement thereto), any material adverse change in the
condition (financial or other), business, prospects, properties, net assets
or results of operations of the Fund or the Adviser; (iv) the Fund shall not
have any liabilities or obligations, direct or contingent (whether or not in
the ordinary course of business), that are material to the Fund, other than
those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement to either of them) and other than liabilities for
payment for securities in accordance with the Fund's investment objective and
policies; and (v) all the representations and warranties of the Fund and the
Adviser contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by the chief executive officer and the chief financial
officer of each of the Fund and the Adviser (or such other officers as are
acceptable to you), to the effect set forth in this Section 9(j) and in
Section 9(k) hereof.
(k) That neither the Fund nor the Adviser shall have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date.
(l) The Fund shall have delivered and you shall have received evidence satisfactory to you that the Shares are rated at least Aaa by Moody's and AAA by S&P as of the Closing Date, and there shall not have been given any notice of any intended or potential downgrading, or of any review for a potential downgrading, in the rating accorded to the Shares by either Rating Agency.
(m) The Fund and the Adviser shall have furnished or caused to be furnished to you such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Fund or the Adviser and delivered to you or to counsel for the Underwriters, shall be deemed a representation and warranty by the Fund or the Adviser to each Underwriter as to the statements made therein.
10. EXPENSES. The Fund agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing or reproduction,
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Prepricing Prospectus, the
1940 Act Notification, the Prospectus and each amendment or supplement to any
of them (including, without limitation, the filing fees prescribed by the
1933 Act, the 1940 Act and the Rules and Regulations); (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and
charges for counting and packaging) of such copies of the Registration
Statement, each Prepricing Prospectus, the Prospectus, any sales material and
all amendments or supplements to any of them as may be reasonably requested
for use in connection with the offering and sale of the Shares; (iii) the
preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the original
issuance and sale of the Shares; (iv) the printing (or reproduction) and
delivery of this Agreement, any dealer agreements, the preliminary and
supplemental blue sky memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares;
(v) the registration of the Shares under the Exchange Act; (vi) the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of the several states (including the reasonable fees, expenses
and disbursements of counsel for the Underwriters relating to the
preparation, printing or reproduction, and delivery of the preliminary and
supplemental blue sky memoranda and such registration and qualification);
(vii) fees paid to the Rating Agencies; (viii) the transportation and other
expenses incurred by or on behalf of Fund representatives in connection with
presentations to prospective purchasers of the Shares; and (ix) the fees and
expenses of the Fund's accountants and the fees and expenses of counsel
(including local and special counsel) for the Fund and of the transfer agent.
Except as provided in this Section 10, the Underwriters agree to pay their own costs and expenses of the underwriting, including the fees and expenses of their counsel.
11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Fund, by notifying you, or by you, by notifying the Fund.
If any one or more of the Underwriters shall fail or refuse to purchase the Shares which it or they are obligated to purchase hereunder on the Closing Date, and the aggregate number of the Shares which such defaulting Underwriter or Underwriters are obligated but fail or refuse to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of such Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Salomon Smith Barney Inc., to purchase the Shares which such defaulting Underwriter or Underwriters are obligated, but fail or refuse, to purchase. If any one or more of the Underwriters shall fail or refuse to purchase the Shares which it or they are obligated to purchase on the Closing Date and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date and arrangements satisfactory to you and the Fund for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Fund are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Fund. In any such case which does not result in a termination of this Agreement either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Fund, purchases Shares which a defaulting Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 11 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter.
12. TERMINATION OF AGREEMENT. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Fund or the Adviser, by notice to the Fund or the Adviser, if at any time prior to the Closing Date (i) trading in any Fund's securities shall have been suspended by the Commission or the NYSE or trading in securities generally on the NYSE, the American Stock Exchange or the Nasdaq National Market shall have been suspended or limited or minimum prices shall have been established on the NYSE, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on financial markets is such as to make it, in your judgment, impracticable or inadvisable to commence or continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given to the Fund by telegram, telecopy or telephone and shall be subsequently confirmed by letter.
13. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in the last paragraph of the cover page and the statements in the first, third and fourth paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus, constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 8 hereof.
14. MISCELLANEOUS. Except as otherwise provided in Sections 5, 11 and 12 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Fund or the Adviser, at the office of the Fund at One Corporate Center, Rye, New York 10580-1422, Attention: Bruce N. Alpert; or (ii) if to you, care of Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several Underwriters, the Fund, the Adviser, their directors and officers, and the other controlling persons referred to in Section 8 hereof and their respective successors and assigns, to the extent provided herein, and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser.
15. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement among the Fund and the Adviser and the several Underwriters.
Very truly yours,
THE GABELLI EQUITY TRUST INC.
By:_____________________________
Title:
Name:
GABELLI FUNDS, LLC
By:_____________________________
Title:
Name:
Confirmed as of the date first
above written on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SALOMON SMITH BARNEY INC.
GABELLI & COMPANY, INC.
By SALOMON SMITH BARNEY INC.
By: _______________________________
Title:
Name:
SCHEDULE I
THE GABELLI EQUITY TRUST INC.
AUCTION AGENCY AGREEMENT
dated as of [ ], 2002
Relating to
Series C Auction Rate Cumulative Preferred Stock
of
AUCTION AGENCY AGREEMENT
This Auction Agency Agreement (this "Agreement"), dated as of
[ ], 2002, is between The Gabelli Equity Trust Inc. (the "Corporation") and
The Bank of New York, a New York banking corporation, as Auction Agent (as
defined below).
The Corporation proposes to issue an aggregate of 5,200 preferred shares, par value $0.001 per share, liquidation preference $25,000 per share, designated as Series C Auction Rate Cumulative Preferred Shares (the "Preferred Shares"), pursuant to the Articles Supplementary (as defined below).
The Corporation desires that the Auction Agent perform certain duties as agent in connection with each Auction (as defined below) (in such capacity, the "Auction Agent"), and as the transfer agent, registrar, dividend paying agent and redemption price disbursing agent with respect to the Preferred Shares (in such capacity, the "Paying Agent"), upon the terms and conditions of this Agreement, and the Corporation hereby appoints The Bank of New York as said Auction Agent.
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Corporation and the Auction Agent agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined By Reference to Articles Supplementary.
Capitalized terms not defined herein shall have the respective meanings specified in the Articles Supplementary.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or participant in, the Securities Depository that will act on behalf of a Bidder.
(b) "Agreement" shall mean this Agreement.
(c) "Articles Supplementary" shall mean the Articles Supplementary Creating and Fixing the Rights of the Series C Auction Rate Cumulative Preferred Stock.
(d) "Auction" shall have the meaning specified in Section 2.1 hereof.
(e) "Auction Procedures" shall mean the auction procedures constituting Article II of the Articles Supplementary as of the filing thereof.
(f) "Authorized Officer" of the Auction Agent shall mean each Vice President, Assistant Vice President and Assistant Treasurer of the Auction Agent assigned to the Dealing and Trading Group of its Corporate Trust Department and every other officer or employee of the Auction Agent designated as an "Authorized Officer" for purposes hereof in a written communication to the Corporation.
(g) "Broker-Dealer Agreement" shall mean each agreement between the Auction Agent and a Broker-Dealer substantially in the form attached hereto as Exhibit A.
(h) "Corporate Officer" shall mean the Chairman and Chief Executive Officer, the President, each Vice President (whether or not designated by a number or word or words added before or after the title "Vice President"), the Secretary, the Treasurer, each Assistant Vice President, each Assistant Secretary and each Assistant Treasurer of the Corporation and every other officer or employee of the Corporation designated as a "Corporate Officer" for purposes hereof in a notice to the Auction Agent.
(i) "Late Charge" has the meaning given in Section 2.8(a)(i)
(j) "Preferred Shares" shall mean the preferred shares, par value$.001 per share, of the Corporation designated as its "Series C Auction Rate Cumulative Preferred Shares" and bearing such further designation as to series as the Board of Directors, as the case may be, of the Corporation or any committee thereof shall specify.
(k) "Rate Multiple" has the meaning provided in Section 2.6.
(l) "Settlement Procedures" shall mean the Settlement Procedures attached hereto as Exhibit B.
(m) "U.S. Government Securities Dealers" has the meaning provided in Section 2.6(a)(v).
1.3 Rules of Construction.
Unless the context or use indicates another or different meaning or intent, the following rules shall apply to the construction of the Agreement:
(a) Words importing the singular number shall include the plural number and vice versa.
(b) The captions and headings herein are solely for convenience of reference and shall not constitute a part of the Agreement nor shall they affect its meaning, construction or effect.
(c) The words "hereof", "herein", "hereto" and other words of similar import refer to the Agreement as a whole.
(d) All references herein to a particular time of day shall be to New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement Procedures.
(a) The Board of Directors of the Corporation has adopted a resolution appointing The Bank of New York as Auction Agent for purposes of the Auction Procedures. The Auction Agent hereby accepts such appointment and agrees that, on each Auction Date, it shall follow the procedures set forth in this Section 2 and the Auction Procedures for the purpose of determining the Applicable Rate of the Preferred Shares for any Dividend Period after the initial Dividend Period. Each periodic operation of such procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and the Settlement Procedures are incorporated herein by reference in their entirety and shall be deemed to be a part hereof to the same extent as if such provisions were fully set forth herein.
2.2 Preparation for Each Auction; Maintenance of Registry of Beneficial Owners.
(a) Not later than seven days prior to the first Auction Date for the Preferred Shares subject to an Auction, the Corporation shall provide the Auction Agent with a list of the Broker-Dealers. Not later than seven days prior to any Auction Date for the Preferred Shares for which any change in such list of Broker- Dealers is to be effective, the Corporation will notify the Auction Agent in writing of such change and, if any such change involves the addition of a Broker-Dealer to such list, shall cause to be delivered to the Auction Agent for execution by the Auction Agent a Broker-Dealer Agreement in the form of Exhibit A signed by such Broker- Dealer; provided, however, that if the Corporation proposes to designate any Special Dividend Period of the Preferred Shares pursuant to Section 4 of Article I of the Articles Supplementary, not later than 11:00 A.M. on the Business Day immediately preceding the last Auction Date prior to the first day of such Dividend Period or by such later time or date, or both, as may be agreed to by the Auction Agent, the Corporation shall provide the Auction Agent with a list of the Broker-Dealers for the Preferred Shares and a manually signed copy of each Broker-Dealer Agreement or a new Schedule A to a Broker-Dealer Agreement (which Schedule A shall replace and supersede any previous Schedule A to such Broker-Dealer Agreement) with each Broker-Dealer. The Auction Agent and the Corporation shall have entered into a Broker-Dealer Agreement with each Broker-Dealer prior to the participation of any such Broker-Dealer in any Auction.
(b) In the event that any Auction Date for the Preferred Shares shall be changed after the Auction Agent shall have given the notice referred to in clause (vii) of paragraph (a) of the Settlement Procedures, the Auction Agent, by such means as the Auction Agent deems practicable, shall give notice of such change to the Broker-Dealers not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the old Auction Date.
(c) (i) The Auction Agent shall maintain a registry of persons that are Broker-Dealers, compiled initially on the date hereof, and that hold Preferred Shares for purposes of Auctions. The Auction Agent shall indicate thereon the identity of the Broker-Dealer that submitted the most recent Order in any Auction which resulted in such Existing Holder continuing to hold or purchasing the Preferred Shares. The Auction Agent shall keep such registry current and accurate based on the information provided to it from time to time by the Broker-Dealer. The Corporation shall provide or cause to be provided to the Auction Agent at or prior to the Date of Original Issue of the Preferred Shares a list of the initial Existing Holders of the Preferred Shares, the number of shares purchased by each such Existing Holder and the respective Broker-Dealer of each such Existing Holder or the affiliate thereof through which each such Existing Holder purchased such shares. The Auction Agent may rely upon, as conclusive evidence of the identities of the Existing Holders of Preferred Shares (A) such list, (B) the results of Auctions, (C) notices from any Broker-Dealer as described in the first sentence of Section 2.2(c)(iii) hereof and (D) the results of any procedures approved by the Corporation that have been devised for the purpose of determining the identities of Existing Holders in situations where Preferred Shares may have been transferred without compliance with any restriction on the transfer thereof set forth in the Auction Procedures.
(ii) In the event of any partial redemption of the Preferred Shares and the Auction Agent's receipt of written notice of such partial redemption thereof, the Auction Agent shall, at least two Business Days prior to the next Auction, request each Broker-Dealer to provide the Auction Agent with a list of Persons who such Broker-Dealer believes should remain Existing Holders after such redemption based upon inquiries of those Persons such Broker-Dealer believes are Beneficial Owners as a result of the most recent Auction and with respect to each such Person, the number of Preferred Shares such Broker-Dealer believes are owned by such Person after such redemption. In the absence of receiving any such information from any Broker-Dealer, the Auction Agent may continue to treat the Existing Holders listed in its registry as the beneficial owners of the number of Preferred Shares shown in such registry.
(iii) The Auction Agent shall be required to register a transfer of Preferred Shares from an Existing Holder of such Preferred Shares only if such transfer is to another Existing Holder, or other Person if permitted by the Corporation, and only if such transfer is made (A) pursuant to an Auction, (B) the Auction Agent has been notified in writing (I) in a notice substantially in the form of Exhibit C to the Broker-Dealer Agreements by a Broker-Dealer of such transfer or (II) in a notice substantially in the form of Exhibit D to the Broker-Dealer Agreements by the Broker-Dealer of any Existing Holder, or other Person if permitted by the Corporation, that purchased or sold such Preferred Shares in an Auction of the failure of such Preferred Shares to be transferred as a result of such Auction or (C) pursuant to procedures approved by the Corporation that have been devised for the purpose of determining the identities of Existing Holders in situations where Preferred Shares may have been transferred without compliance with any restriction on the transfer thereof set forth in the Auction Procedures. The Auction Agent is not required to accept any such notice for an Auction unless it is received by the Auction Agent by 3:00 P.M. on the Business Day preceding such Auction.
(d) The Auction Agent may, but shall have no obligation to, request the Broker-Dealers, as set forth in the Broker-Dealer Agreements, to provide the Auction Agent with a list of Persons who such Broker-Dealer believes should be Existing Holders based upon inquiries of those Persons such Broker-Dealer believes are Beneficial Owners as a result of the most recent Auction and with respect to each such Person, the number of Preferred Shares such Broker-Dealer believes to be owned by such Person. The Auction Agent shall keep confidential such registry of Existing Holders and shall not disclose the identities of the Existing Holders of such Preferred Shares to any Person other than the Corporation and the Broker-Dealer that provided such information; provided, however, that the Auction Agent reserves the right and is authorized to disclose any such information if (a) it is ordered to do so by a court of competent jurisdiction or a regulatory body, judicial or quasi-judicial agency or authority having the authority to compel such disclosure, (b) it is advised by its counsel that its failure to do so would be unlawful or (c) failure to do so would expose the Auction Agent to loss, liability, claim, damage or expense for which it has not received indemnity or security satisfactory to it.
2.3 Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the schedule set forth below. Such schedule may be changed by the Auction Agent with the consent of the Corporation, which consent shall not be unreasonably withheld. The Auction Agent shall give written notice of any such change to each Broker- Dealer. Such notice shall be given prior to the close of business on the Business Day immediately preceding the first Auction Date on which any such change shall be effective.
Time Event
---- -----
By 9:30 A.M. Auction Agent advises the
Corporation and
Broker-Dealers of the
applicable Maximum Rate and
the Reference Rate or
Treasury Index Rate, as the
case may be, used in
determining such Maximum Rate
as set forth in Section
2.6(b)(i) hereof.
9:30 A.M. - 1:00 P.M. Auction Agent assembles
information communicated to
it by Broker-Dealers as
provided in Section 2(a) of
the Auction Procedures.
Submission Deadline is 1:00 P.M.
Not earlier than 1:00 P.M. Auction Agent makes
determinations pursuant
to Section 4(a) of the
Auction Procedures.
By approximately 3:30 P.M. Auction Agent advises
Corporation of results of
Auction as provided in
Section 4(b) of the
Auction Procedures.
Submitted Bids and
Submitted Sell Orders are
accepted and rejected in
whole or in part and
Preferred Shares
allocated as provided in
Section 5 of the Auction
Procedures. Auction Agent
gives notice of Auction
results as set forth in
paragraph (a) of the
Settlement Procedures.
|
The Auction Agent shall follow the notification procedures set forth in paragraph (a) of the Settlement Procedures.
2.4 Notice of Auction Results.
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid or Sell Order was accepted or rejected in whole or in part and of the Applicable Rate for the next Dividend Period for the related Preferred Shares by telephone or through its auction processing system as set forth in paragraph (a) of the Settlement Procedures.
2.5 Broker-Dealers.
(a) Not later than 12:00 Noon on each Auction Date for
Preferred Shares, the Corporation shall pay to the Auction Agent an amount in
cash equal to the aggregate fees payable to the Broker-Dealers pursuant to
Section 2.8 of the Broker-Dealer Agreements. The Auction Agent shall apply
such moneys as set forth in Section 2.8 of each such Broker-Dealer Agreement.
(b) The Corporation shall obtain the consent of the Auction Agent prior to selecting any Person to act as a Broker-Dealer, which consent shall not be unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as set forth therein if so directed by the Corporation, provided that at least one Broker-Dealer Agreement would be in effect for the Preferred Shares after such termination.
(d) Subject to the Auction Agent's having consented to the selection of the relevant Broker-Dealer pursuant to Section 2.5(b) hereof, the Auction Agent shall from time to time enter into such Broker-Dealer Agreements in the form attached hereto as Exhibit A with one or more Broker-Dealers as the Corporation shall request, and shall enter into such schedules to any such Broker-Dealer Agreements as the Corporation shall request.
2.6 Information Concerning Rates.
(a) If there is any change in the credit rating of Preferred
Shares by the rating agency (or substitute or successor rating agencies),
referred to in the definition of "Maximum Rate," that results in any change
in the applicable percentage of the "AA" Financial Composite Commercial Paper
Rate used to determine the Maximum Rate for Preferred Shares (the "Rate
Multiple") after the date of the Request and Acceptance Letter, the
Corporation shall notify the Auction Agent in writing of such change in the
Rate Multiple prior to 12:00 Noon on the Business Day prior to the next
Auction Date succeeding such change. If the Corporation designates all or a
portion of any dividend on Preferred Shares to consist of net capital gains
or other income taxable for Federal income tax purposes, it may indicate, in
a notice in the form of Exhibit I hereto to the Auction Agent pursuant to
Section 2.6 hereof, the Rate Multiple to be in effect for the Auction Date on
which the dividend rate for such dividend is to be fixed. In determining the
Maximum Rate on any Auction Date as set forth in 2.6(a)(i) hereof, the
Auction Agent shall be entitled to rely on the last Rate Multiple for
Preferred Shares of which it has most recently received notice from the
Corporation (or, in the absence of such notice, the percentage determined by
reference to the definition of Rate Multiple), except that if the Corporation
shall have notified the Auction Agent of a Rate Multiple to be in effect for
an Auction Date in accordance with the preceding sentence, the Rate Multiple
in effect for the next succeeding Auction Date shall be, unless the
Corporation notifies the Auction Agent of a change in the Rate Multiple for
such succeeding Auction Date pursuant to this Section 2.6(a), the Rate
Multiple that was in effect on the first preceding Auction Date for Preferred
Shares with respect to which the dividend, the rate for which was fixed on
such Auction Date, did not include any net capital gain or other income
taxable for Federal income tax purposes.
(i) On each Auction Date, the Auction Agent shall determine the Maximum Rate. The Maximum Rate on any Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction Date immediately prior to the first day of any proposed Special Dividend Period designated by the Corporation pursuant to Section 4 of Article I of the Articles Supplementary, the product of (1) the Reference Rate on such Auction Date for the next Dividend Period and (2) the Rate Multiple on such Auction Date, unless the Preferred Shares have or had a Special Dividend Period (other than a Special Dividend Period of 28 calendar days or fewer) and an Auction at which Sufficient Clearing Bids existed has not yet occurred for a Standard Dividend Period after such Special Dividend Period, in which case the higher of:
(1) the dividend rate on Preferred Shares for the then-ending Dividend Period; and
(2) the product of (x) the higher of
(I) the Reference Rate on such Auction Date for a
Dividend Period equal in length to the then-ending
Dividend Period, if such then ending Dividend Period
was fewer than 184 calendar days, or the Treasury
Index Rate on such Auction Date for a Dividend
Period equal in length to the then-ending Dividend
Period, if such then ending Dividend Period was 184
calendar days or more, and (II) the Reference Rate
on such Auction Date for a Dividend Period equal in
length to such Special Dividend Period, if such
Special Dividend Period was fewer than 184 calendar
days, or the Treasury Index Rate on such Auction
Date for a Dividend Period equal in length to such
Special Dividend Period, if such Special Dividend
Period was 364 calendar days or more and (y) the
Rate Multiple on such Auction Date; or
(B) in the case of any Auction Date
which is the Auction Date immediately prior to the first
day of any proposed Special Dividend Period designated by
the Corporation pursuant to Section 4 of Article I of the
Articles Supplementary, the product of (1) the highest of
(x) the Reference Rate on such Auction Date for a Dividend
Period equal in length to the then-ending Dividend Period,
if such then-ending Dividend Period was fewer than 184
calendar days, or the Treasury Index Rate on such Auction
Date for a Dividend Period equal in length to the
then-ending Dividend Period of such Dividend Period, if
such then-ending Dividend Period was 184 calendar days
or more, (y) the Reference Rate on such Auction Date
for the Special Dividend Period for which the
Auction is being held if such Special Dividend Period is
fewer than 184 calendar days or the Treasury Index Rate on
such Auction Date for the Special Dividend Period for which
the Auction is being held if such Special Dividend Period
is 184 calendar days or more, and (z) the Reference Rate on
such Auction Date for Default Dividend Periods and (2) the
Rate Multiple on such Auction Date.
Not later than 9:30 A.M. on each Auction Date the Auction Agent shall notify the Corporation and the Broker-Dealers of the Maximum Rate and the "AA" Financial Composite Commercial Paper Rate and Treasury Index Rate, as the case may be, used to make such determination.
(ii) From and after a Default by the Corporation during any Dividend Period, until such failure is cured and a Late Charge is paid, in accordance with subparagraph (c)(iii) of Section 2 of Article I of the Articles Supplementary, on the first day of each Dividend Period the Auction Agent shall determine the Treasury Index Rate for such Dividend Period of 184 calendar days or more and the Reference Rate for Dividend Periods of more than 184 calendar days. Not later than 9:30 A.M. on each such first day, the Auction Agent shall notify the Corporation of the applicable Reference Rate and Treasure Index Rate.
(iii) If any "AA" Financial Composite Commercial Paper Rate or Treasure Index Rate, as the case may be, is not quoted on an interest or bond equivalent basis, as the case may be, the Auction Agent shall convert the quoted rate to the interest or bond equivalent thereof as set forth in the definition of such rate in the Articles Supplementary if the rate obtained by the Auction Agent is quoted on a discount basis, or if such rate is quoted on a basis other than an interest or bond equivalent or discount basis the Auction Agent shall convert the quoted rate to an interest or bond equivalent rate after consultation with the Corporation as to the method of such conversion.
(iv) If any "AA" Financial Composite Commercial Paper Rate is to be based on rates supplied by Commercial Paper Dealers and one or more of the Commercial Paper Dealers shall not provide a quotation for the determination of such "AA" Financial Composite Commercial Paper Rate, the Auction Agent shall immediately notify the Corporation so that the Corporation can determine whether to select a Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers to provide the quotation or quotations not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers. The Corporation shall promptly advise the Auction Agent of any such selection.
(v) If any Treasury Index Rate is to be based on rates supplied by at least three recognized dealers in U.S. Government Obligations selected by the Corporation (the "U.S. Government Securities Dealers") and one or more of the U.S. Government Securities Dealers shall not provide a quotation for the determination of such Treasury Rate, the Auction Agent shall immediately notify the Corporation so that the Corporation can determine whether to select a Substitute U.S. Government Securities Dealer or Substitute U.S. Government Securities Dealers to provide the quotation or quotations not being supplied by any U.S. Government Securities Dealer or U.S. Government Securities Dealers. The Corporation shall promptly advise the Auction Agent of any such selection.
2.7 Designation of Special Dividend Period.
(a) No designation is necessary for a Standard Dividend Period, which shall last seven calendar days.
(b) Pursuant to the Articles Supplementary, the Corporation may, at its option, designate a Special Dividend Period for the Preferred Shares in the manner described in Section 4 of Article I of the Articles Supplementary.
(i) If the Board of Directors proposes to designate any Dividend Period as a Special Dividend Period, (A) the Corporation shall deliver to the Auction Agent a notice of such proposed Special Dividend Period in the form of Exhibit D hereto not less than seven Business Days (or two Business Days in the event the duration of the Dividend Period prior to the Special Dividend Period is less than eight Business Days) nor more than 30 Business Days prior to the first day of the Special Dividend Period and (B) the Auction Agent on behalf of the Corporation shall deliver such notice by first-class mail, postage prepaid, to each Existing Holder of Preferred Shares at the address set forth for such Existing Holder in the records of the Auction Agent and to the Broker-Dealers as promptly as practicable after its receipt of such notice from the Corporation.
(ii) If the Corporation determines to designate such Dividend Period as a Special Dividend Period, (A) the Corporation shall deliver to the Auction Agent a notice of such determination in the form of Exhibit E hereto not later than 3:00 P.M. on the second Business Day immediately preceding the first day of such proposed Special Dividend Period and (B) the Auction Agent shall deliver such notice to the Broker- Dealers promptly on such second Business Day.
(iii) If the Corporation shall deliver to the Auction
Agent a notice not later than 3:00 P.M. on the second Business Day
immediately preceding the first day of such proposed Special
Dividend Period stating that the Corporation has determined not to
exercise its option to designate such Dividend Period as a Special
Dividend Period, in the form of Exhibit F hereto, or shall fail to
timely deliver either such notice or a notice in the form of Exhibit
E hereto, the Auction Agent shall deliver a notice in the form of
Exhibit F hereto to the Broker-Dealers promptly on such second
Business Day. If the Corporation fails to deliver either such notice
provided in this Section 2.7(b) hereof by 3:00 P.M., the Corporation
shall be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in this
Section 2.7(b)(iii), thereby resulting in a Standard Dividend
Period.
Such change in the length of any Dividend Period shall not occur if (1) an Auction for Preferred Shares shall not be held on such Auction Date for any reason or (2) an Auction for Preferred Shares shall be held on such Auction Date but Sufficient Clearing Bids for Preferred Shares shall not exist in such Auction.
2.8 Default.
(a) If:
(i) any Default shall have occurred with respect to
Preferred Shares during any Dividend Period thereof, but, prior to
12:00 Noon, New York City time, on the third Business Day next
succeeding the date on which such Default occurred, such Default
shall have been cured in accordance with Section 2.8(c) hereof and
the Corporation shall have paid to the Auction Agent a late charge
(a "Late Charge") equal to the sum of (1) if such Default consisted
of the failure timely to pay to the Auction Agent the full amount of
dividends with respect to any Dividend Period on such shares, an
amount computed by multiplying (x) 300% of the Reference Rate for the
Dividend Period during which such Default occurs on the Dividend
Payment Date for such Dividend Period by (y) a fraction, the
numerator of which shall be the number of days for which such
Default has not been cured in accordance with Section 2.8(c) hereof
(including the day such Default occurs and excluding the day such
Default is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate liquidation
preference of the outstanding Preferred Shares and (2) if such
Default consisted of the failure timely to pay to the Auction Agent
the Redemption Price of the Preferred Shares, if any, for which
Notice of Redemption has been given by the Corporation, an amount
computed by multiplying (x) 300% of the Reference Rate for the
Dividend Period during which such Default occurs on the redemption
date by (y) a fraction, the numerator of which shall be the number
of days for which such Default is not cured in accordance with
Section 2.8(c) hereof (including the day such Default occurs and
excluding the day such Default is cured) and the denominator of
which shall be 360, and applying the rate obtained against the
aggregate liquidation preference of the outstanding Preferred Shares
to the redeemed,
then the Corporation shall instruct the Auction Agent shall to, and the Auction Agent shall deliver a notice in the form of Exhibit G hereto by first class mail, postage prepaid, to the Broker-Dealers not later than one Business Day after its receipt of the payment from the Corporation curing such Default and such Late Charge.
(b) If any Default shall have occurred with respect to Preferred
Shares during any Dividend Period thereof, and, prior to 12:00 Noon, New York
City time, on the third Business Day next succeeding the date on which such
Default occurred, such Default shall not have been cured in accordance with
Section 2.8(c) hereof or the Corporation shall not have paid the applicable
Late Charge to the Auction Agent; then the Auction Agent shall deliver a
notice in the form of Exhibit H hereto to the Broker-Dealers not later than
one Business Day after the receipt of the payment from the Corporation curing
such Default and such Late Charge.
(c) A Default with respect to Preferred Shares shall have been cured (if such Default is not solely due to the willful failure to the Corporation to make the required payment to the Auction Agent) with respect to any Dividend Period if, within the respective time periods described immediately above, the Corporation shall have paid to the Auction Agent (i) all accumulated and unpaid dividends on the Preferred Shares and (ii) without duplication, the Redemption Price for the Preferred Shares, if any, for which Notice of Redemption has been mailed; provided, however, that the foregoing clause (ii) shall not apply to the Corporation's failure to pay the Redemption Price in respect of Preferred Shares when the related Redemption Notice provides that redemption of such shares is subject to one or more conditions precedent and each such condition precedent shall not have been satisfied at the time or times and in the manner specified in such Notice of Redemption.
2.9 Ownership of Shares of Preferred Shares.
Neither the Corporation nor any affiliate of the Corporation shall submit any Order in any Auction for Preferred Shares, except as set forth in the next sentence. Any Broker-Dealer that is an affiliate of the Corporation may submit Orders in Auctions, but only if such Orders are not for its own account. For purposes of this Section 2.9, a Broker-Dealer shall not be deemed to be an affiliate of the Corporation solely because one or more of the directors or executive officers of such Broker-Dealer or of any Person controlled by, in control of or under common control with such Broker-Dealer is also a director of the Corporation. The Auction Agent shall have no duty or liability with respect to the enforcement or otherwise of this Section 2.9.
2.10 Allocation of Taxable Income.
The Corporation may designate all or a portion of any dividend on Preferred Shares to consist of net capital gains or other income taxable for Federal income tax purposes and may deliver to the Auction Agent a notice in the form of Exhibit I hereto of such designation not later than the Dividend Payment Date next preceding the Auction Date on which the dividend rate for such dividend is to be fixed. The Auction Agent will deliver such notice, if given, to the Broker-Dealers on the Business Day following its receipt of such notice from the Corporation. Within two Business Days after any Auction Date involving the allocation of income taxable for Federal income tax purposes for which notice has so been given by the Corporation, the Auction Agent shall notify each Broker-Dealer as to the dollar amount per share of such taxable income and income exempt from Federal income taxation included in the related dividend.
2.11 Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Corporation, its agents, independent public accountants and counsel and the Broker-Dealers, access at reasonable times during normal business hours to review and make extracts or copies of all books, records, documents and other information concerning the conduct and results of Auctions (at no cost to the Auction Agent), provided that any such agent, accountant, counsel or Broker-Dealer shall furnish the Auction Agent with a letter from the Corporation requesting that the Auction Agent afford such person access. The Auction Agent shall maintain records relating to any Auction for a period of six years after such Auction, and such records shall, in reasonable detail, accurately and fairly reflect the actions taken by the Auction Agent hereunder.
3. The Auction Agent as Dividend and Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing
agent, shall pay to the Holders of Preferred Shares (i) on each Dividend
Payment Date, dividends on the Preferred Shares, (ii) on any date fixed for
redemption of Preferred Shares, the Redemption Price of the Preferred Shares
called for redemption and (iii) any Late Charge related to any payment of
dividends or Redemption Price, in each case after receipt of the necessary
funds from the Corporation with which to pay such dividends, Redemption Price
or Late Charge. The amount of dividends for any Dividend Period to be paid by
the Auction Agent to the Holders of Preferred Shares will be determined by
the Corporation as set forth in Section 2 of Article I of the Articles
Supplementary. The Redemption Price of any shares to be paid by the Auction
Agent to the Holders will be determined by the Corporation as set forth in
Section 3 of Article I of the Articles Supplementary. The Corporation shall
notify the Auction Agent in writing of a decision to redeem Preferred Shares
at least one Business Day prior to the date a notice of redemption is
required to be mailed to the Holders of the shares to be redeemed by
paragraph (b) of Section 3 of Article I of the Articles Supplementary and
shall notify the Auction Agent in writing on or prior to the 10th day
preceding a Mandatory Redemption Date. Such notice by the Corporation to the
Auction Agent shall contain the information required by paragraph (b) of
Section 3 of Article I of the Articles Supplementary to be stated in the
notice of redemption required to be mailed by the Corporation to such
Holders.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Stock or Shares Certificates.
Upon the Date of Original Issue of Preferred Shares, one or more certificates representing all of the Preferred Shares issued on such date shall be issued by the Corporation and, at the request of the Corporation, registered in the name of Cede & Co. and countersigned by the Auction Agent.
4.2 Registration of Transfer of Shares.
Preferred Shares shall be registered solely in the name of the Securities Depository or its nominee.
4.3 Removal of Legend on Restricted Shares.
All requests for removal of legends on Preferred Shares indicating restrictions on transfer shall be accompanied by an opinion of counsel stating that such legends may be removed and such shares freely transferred, such opinion to be delivered under cover of a letter from a Corporate Officer authorizing the Auction Agent to remove the legend on the basis of said opinion.
4.4 Lost Stock or Share Certificates.
The Auction Agent shall issue and register replacement certificates for certificates represented to have been lost, stolen or destroyed upon the fulfillment of such requirements as shall be deemed appropriate by the Corporation and the Auction Agent, subject at all times to provisions of law, the By-Laws of the Corporation governing such matters and resolutions adopted by the Corporation with respect to lost securities. The Auction Agent shall not have any liability for loss incurred by the Corporation or by any other person as a result of the receipt or acceptance of fraudulent, forged or invalid certificates or securities (or certificates or securities which are otherwise not freely transferable or deliverable without encumbrance in any relevant market). The Auction Agent may issue new certificates in exchange for and upon the cancellation of mutilated certificates. Any request by the Corporation to the Auction Agent to issue a replacement or new certificate pursuant to this Section 4.4 shall be deemed to be a representation and warranty by the Corporation to the Auction Agent that such issuance will comply with such provisions of law and the By-Laws and resolutions of the Corporation.
4.5 Disposition of Cancelled Certificates; Record Retention.
The Auction Agent shall retain all stock or share certificates which have been cancelled in transfer or exchange and all accompanying documentation in accordance with applicable rules and regulations of the Securities and Exchange Commission for two calendar years. The Corporation shall also undertake to furnish to the Securities and Exchange Commission and to the Board of Governors of the Federal Reserve System, upon demand, at either the principal office or at any regional office, complete, correct and current hard copies of any and all such records.
4.6 Stock or Record Books.
For so long as the Auction Agent is acting as the transfer agent for Preferred Shares pursuant to the Agreement, it shall maintain a stock or record book containing a list of the Holders of the Preferred Shares. In case of any request or demand for the inspection of the stock or record books of the Corporation or any other books in the possession of the Auction Agent, the Auction Agent will notify the Corporation and secure instructions as to permitting or refusing such inspection; provided, however, the Auction Agent shall allow inspection of such books and records in its possession without the consent of the Corporation by its lawyers, accountants, regulators, auditors and other parties the Auction Agent deems necessary in order to carry out the normal operation of its business. The Auction Agent reserves the right, however, to exhibit the stock or record books or other books to any Person if (a) it is ordered to do so by a court of competent jurisdiction or a regulatory body, judicial or quasi-judicial agency or authority having the authority to compel such disclosure, (b) it is advised by its counsel that its failure to do so would be unlawful or (c) failure to do so would expose the Auction Agent to loss, liability, claim, damage or expense for which it has not received indemnity or security satisfactory to it.
4.7 Return of Funds.
Any funds deposited with the Auction Agent hereunder by the Corporation for any reason, including but not limited to redemption of Preferred Shares, that remain unpaid after ninety days shall be repaid to the Corporation upon the written request of the Corporation.
5. Representations and Warranties.
5.1 Representations and Warranties of the Corporation
The Corporation represents and warrants to the Auction Agent that:
(a) the Corporation is duly organized and existing business Corporation in good standing under the laws of the State of its incorporation and has full corporate power or all requisite power to execute and deliver the Agreement and to authorize, create and issue the Preferred Shares, and the Preferred Shares when issued, will be duly authorized, validly issued, fully paid and nonassessable;
(b) the Agreement has been duly and validly authorized, executed and delivered by the Corporation and constitutes the legal, valid and binding obligation of the Corporation;
(c) the form of the certificate evidencing the Preferred Shares complies or will comply with all applicable laws of the State of its incorporation;
(d) when issued, the Preferred Shares will have been duly registered under the Securities Act of 1933, as amended, and no further action by or before any governmental body or authority of the United States or of any state thereof is required in connection with the execution and delivery of the Agreement or will have been required in connection with the issuance of Preferred Shares;
(e) the execution and delivery of the Agreement and the issuance and delivery of the Preferred Shares do not and will not conflict with, violate or result in a breach of, the terms, conditions or provisions of, or constitute a default under, the Articles of Incorporation (as amended by the Articles Supplementary) or the By-Laws of the Corporation, any law or regulation, any order or decree of any court or public authority having jurisdiction, or any mortgage, indenture, contract, agreement or undertaking to which the Corporation is a party or by which it is bound the effect of which conflict, violation, default or breach would be material to the Corporation or the Corporation and its subsidiaries taken as a whole; and
(f) no taxes are payable upon or in respect of the execution of the Agreement or the issuance of the Preferred Shares.
5.2 Representations and Warranties of the Auction Agent.
The Auction Agent represents and warrants to the Corporation that:
(i) The Auction Agent is duly organized and is validly existing as a banking corporation in good standing under the laws of the State of New York and has the corporate power to enter into and perform its obligations under this Agreement; and
(ii) this Agreement has been duly and validly authorized, executed and delivered by the Auction Agent and constitutes the legal, valid and binding obligation of the Auction Agent, enforceable against the Auction Agent in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equitable principles.
6. The Auction Agent.
6.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Corporation hereunder and owes no fiduciary duties to any Person except if provided by this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Auction Agent.
(c) In the absence of gross negligence or willful misconduct on its part, the Auction Agent shall not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under the Agreement. The Auction Agent shall not be liable for any error of judgment resulting from the use or reliance on a source of information used in good faith unless the Auction Agent shall have been grossly negligent in the determination, calculation or declaration thereunder. The Auction Agent shall not be liable for any error of judgment made in good faith unless the Auction Agent shall have been grossly negligent in ascertaining (or failing to ascertain) the pertinent facts.
6.2 Rights of the Auction Agent.
(a) The Auction Agent may conclusively rely and shall be fully protected in acting or refraining from acting upon any communication authorized hereby and upon any written instruction, notice, request, direction, consent, report, certificate, share certificate or other instrument, paper or document believed in good faith by it to be genuine. The Auction Agent shall not be liable for acting upon any telephone communication authorized hereby which the Auction Agent believes in good faith to have been given by the Corporation or by a Broker-Dealer. The Auction Agent may record telephone communications with the Corporation or with the Broker-Dealers or both.
(b) The Auction Agent may consult with counsel of its choice and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk its own funds or otherwise incur or become exposed to financial liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights hereunder either directly or by or through agents or attorneys and shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder.
(e) The Auction Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions or utilities, communications or computer (software and hardware) services, it being understood that the Auction Agent shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.
(f) The Auction Agent shall not be: (i) required to, and does not, make any representations or have any responsibilities as to the validity, accuracy, value or genuineness of any signatures or endorsements, other than its own; (ii) obligated to take any legal action hereunder that might, in its judgment, involve any expense or liability, unless it has been furnished with indemnity satisfactory to the Auction Agent; and (iii) responsible for or liable in any respect on account of the identity, Corporation or rights of any Person (other than itself and its agents and attorneys) executing or delivering or purporting to execute or deliver any document under this Agreement or any Broker-Dealer Agreement.
6.3 Compensation, Expenses and Indemnification.
(a) The Corporation shall pay the Auction Agent an annual fee as compensation for all services rendered by it under the Agreement and the Broker- Dealer Agreements as the Corporation and the Auction Agent have agreed to from time to time.
(b) The Corporation shall reimburse the Auction Agent upon its request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by the Auction Agent in accordance with any provision of the Agreement and the Broker-Dealer Agreements (including the compensation and the reasonable expenses and disbursements of its agents and counsel), except any expense or disbursement attributable to its negligence or bad faith. In no event shall the Auction Agent be responsible or liable for special, indirect or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit), even if the Auction Agent has been advised of the likelihood of such loss or damage and regardless of the form of action.
(c) To the extent, if any, that a court of competent jurisdiction would enforce such agreement as not contrary to law or public policy, the Corporation hereby agrees to keep fully indemnified, on an after-tax basis, the Auction Agent (in its capacity as Auction Agent and, if applicable, in its capacity as transfer agent, registrar, dividend paying agent and redemption price disbursing agent and any other capacity contemplated by this Agreement) and its officers, directors, employees and agents for and hold them harmless against any loss, liability or expense incurred without gross negligence or willful misconduct on their part, arising out of or in connection with this Agreement and any Broker-Dealer Agreements, including the costs and expenses of defending itself against any such claim or liability in connection with its exercise or performance of any of its rights or duties hereunder and thereunder (which costs and expenses include the costs and expenses of the enforcement of this provision).
6.4 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or adequacy of the Agreement, the Broker-Dealer Agreements or the Preferred Shares except that the Auction Agent hereby represents that the Agreement has been duly authorized, executed and delivered by the Auction Agent and constitutes a legal and binding obligation of the Auction Agent.
7. Miscellaneous.
7.1 Term of Agreement.
(a) The term of the Agreement is unlimited unless it shall be terminated as provided in this Section 7.1. The Corporation may terminate the Agreement at any time by so notifying the Auction Agent, provided that the Corporation has entered into an agreement in substantially the form of the Agreement with a successor Auction Agent. The Auction Agent may terminate the Agreement upon written notice to the Corporation on the date specified in such notice, which date shall be no earlier than 30 days after the date of delivery of such notice.
(b) Except as otherwise provided in this paragraph (b), the respective rights and duties of the Corporation and the Auction Agent under the Agreement with respect to the Preferred Shares shall cease upon termination of the Agreement. The Corporation's representations, warranties, covenants and obligations to the Auction Agent under Sections 5 and 6.3 hereof shall survive the termination of the Agreement. Upon termination of the Agreement, the Auction Agent shall, at the Corporation's request, promptly deliver to the Corporation copies of all books and records maintained by it with respect to Preferred Shares in connection with its duties hereunder.
7.2 Communications.
Except for (i) communications authorized to be by telephone pursuant to the Agreement or the Auction Procedures and (ii) communications in connection with Auctions (other than those expressly required to be in writing), all notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given to such party, addressed to it, at its address or telecopy number set forth below:
If to the Corporation, The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1422
Attention: Bruce N. Alpert
Telecopier No.: 914-921-5100
Telephone No.: 212-921-5158
If to the Auction Agent, The Bank of New York
5 Penn Plaza
13th Floor
New York, New York 10001
Attention: Dealing and Trading Group -
Auction Desk
Telephone No.: (212) 328-7676
Telecopier No.: (212) 328-8237
(212) 328-8238
(212) 328-8239
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Each such notice, request or communication shall be effective when delivered at the address specified herein. Communications shall be given on behalf of the Corporation by a Corporate Officer and on behalf of the Auction Agent by telephone (confirmed by telecopy or in writing) by an Authorized Officer.
7.3 Entire Agreement.
The Agreement contains the entire agreement between the parties relating to, and superseding any prior agreement between the parties relating to, the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or implied, between the parties relating to the subject matter hereof except for agreements relating to the compensation of the Auction Agent.
7.4 Benefits.
Nothing herein, express or implied, shall give to any Person, other than the Corporation, the Auction Agent and their respective successors and assigns, any benefit of any legal or equitable right, remedy or claim hereunder.
7.5 Amendment; Waiver.
(a) The Agreement shall not be deemed or construed to be modified, amended, rescinded, cancelled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of the party to be charged.
(b) Failure of either party hereto to exercise any right or remedy hereunder in the event of a breach hereof by the other party shall not constitute a waiver of any such right or remedy with respect to any subsequent breach.
7.6 Successors and Assigns.
The Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the respective successors and assigns of each of the Corporation and the Auction Agent.
7.7 Severability.
If any clause, provision or section hereof shall be ruled invalid or unenforceable by any court of competent jurisdiction, the invalidity or unenforceability of such clause, provision or section shall not affect any of the remaining clauses, provisions or sections hereof.
7.8 Disclosure of Information.
The Auction Agent agrees that it will not disclose or use any "non- public personal information" about the Fund's shareholders other than such uses or disclosures as are permitted by Regulation S-P under Section 504 of the Gramm Leach Biley Act ("Regulation S-P"). "Nonpublic personal information" about a shareholder shall mean: (i) personally identifiable financial information; (ii) any list, description, or other grouping of consumers that is derived from using any personally identifiable information that is not publically available; and (iii) any other information that a Customer or the Transfer Agent is prohibited from using or disclosing pursuant to Regulation S-P.
7.9 Governing Law; Jurisdiction; and Waiver of Trial by Jury.
This Agreement shall be interpreted and construed in accordance with the internal substantive laws (and not the choice of law rules) of the State of New York. The parties agree that all actions and proceedings arising out of this Auction Agency Agreement or any transactions contemplated hereby shall be brought in the State of New York and, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such State. Each of the parties hereto also irrevocably waives all right to trial by jury in any action, proceeding or counterclaim arising out of this agreement or the transaction contemplated hereby.
THE GABELLI EQUITY TRUST INC.
THE BANK OF NEW YORK
Title
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
Exhibit B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures expected to be followed in connection with the settlement of each Auction and will be incorporated by reference in the Auction Agent Agreement and each Broker- Dealer Agreement. Nothing contained in this Appendix constitutes a representation by the Trust that in each Auction each party referred to herein will actually perform the procedures described herein to be performed by such party.
(a) On each Auction Date, the Auction Agent shall notify by telephone or through its auction processing system the Broker-Dealers that participated in the Auction held on such Auction Date and submitted an order on behalf of any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker- Dealer") submitted a Bid or Sell Order on behalf of an Existing Holder, the number of shares, if any, of Preferred Shares to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker- Dealer") submitted a Bid on behalf of a Potential Holder, the number of shares, if any, of Preferred Shares to be purchased by such Potential Holder;
(v) if the aggregate number of Preferred Shares to be sold by all Existing Holders on whose behalf such Broker-Dealer submitted a Bid or a Sell Order exceeds the aggregate number of Preferred Shares to be purchased by all Potential Holders on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Buyer's Broker-Dealers (and the name of the Agent Member with the Securities Depository, if any, of each such Buyer's Broker- Dealer) acting for one or more purchasers of such excess number of Preferred Shares and the number of such shares to be purchased from one or more Existing Holders on whose behalf such Broker-Dealer acted by one or more Potential Holders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all Potential Holders on whose behalf such Broker- Dealer submitted a Bid exceeds the aggregate number of Preferred Shares to be sold by all Existing Holders on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more Seller's Broker Dealers (and the name of the Agent Member, if any, of each such Seller's Broker-Dealer) acting for one or more sellers of such excess number of Preferred Shares and the number of such shares to be sold to one or more Potential Holders on whose behalf such Broker-Dealer acted by one or more Existing Holders on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the Preferred Shares.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing Holder or Potential Holder shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer, instruct each Potential Holder on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Holder's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the number of Preferred Shares to be purchased pursuant to such Bid against receipt of such shares and advise such Potential Holder of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer, instruct each Existing Holder on whose behalf such Broker-Dealer submitted a Sell Order that was accepted, in whole or in part, to instruct such Existing Holder's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the number of Preferred Shares to be sold pursuant to such Order against payment therefor and advise any such Existing Holder that will continue to hold Preferred Shares of the Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Existing Holder on whose behalf such Broker-Dealer submitted a Hold Order of the Applicable Rate for the next succeeding Dividend Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Holder on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to
(a) above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf
of a Potential Holder or an Existing Holder shall, in such manner and at such
time or times as in its sole discretion it may determine, allocated any funds
received by it pursuant to (b)(i) above and any Preferred Shares received by
it pursuant to (b)(ii) above among the Potential Holders, if any, on whose
behalf such Broker-Dealer submitted Bids, the Existing Holders, if any, on
whose behalf such Broker-Dealer submitted Bids that were accepted or Sell
Orders, and any Broker-Dealer or Broker- Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent
Member of the Securities Depository shall instruct its Agent Member
to (A) pay through the Securities Depository to the Agent Member of
the Existing Holder delivering shares to such Broker- Dealer
pursuant to (b)(ii) above the amount necessary to purchase such
shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or its
Agent Member) identified to such Seller's Broker-Dealer pursuant to
(a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the Securities Depository shall instruct its Agent Member to (A) pay through the Securities Depository to a Seller's Broker-Dealer (or its Agent Member) identified pursuant to (a) (vi) above the amount necessary to purchase the shares to be purchased pursuant to (b) (i) above against receipt of such shares, and (B) deliver such shares through the Securities Depository to the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall instruct the Securities Depository to execute the transactions described under (b) (i) or (ii) above, and the Securities Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d) (ii) above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d) (iii) above, and the Securities Depository shall execute such transactions.
(f) If an Existing Holder selling Preferred Shares in an Auction fails to deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential Holder on behalf of which it submitted a Bid that was accepted a number of whole Preferred Shares that is less than the number of shares that otherwise was to be purchased by such Potential Holder. In such event, the number of Preferred Shares to be so delivered shall be determined solely by such Broker- Dealer. Delivery of such lesser number of shares shall constitute good delivery. Notwithstanding the foregoing terms of this paragraph (f), any delivery or non- delivery of shares which shall represent any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or non-delivery in accordance with the provisions of the Auction Agent Agreement and the Broker- Dealer Agreements.
EXHIBIT C
THE GABELLI EQUITY TRUST INC.
NOTICE OF AUCTION DATE FOR
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for the Corporation's Preferred Shares is scheduled to be _______________, 20___ and the next Dividend Payment Date for the Corporation's Preferred Shares will be __________________, 20___.
[A Default in respect of the Preferred Shares currently exists. If, prior to 12:00 noon, New York City time, on the fifth Business Day preceding the next scheduled Auction Date of the Preferred Shares, such Default is not cured or the applicable Late Charge is not paid, the next Auction will not be held. Notice of the next Auction for the Preferred Shares will be delivered when such Default is cured and the applicable Late Charge is paid.(1)]
THE GABELLI EQUITY TRUST INC.
(1) Include this language if a Default exists.
EXHIBIT D
THE GABELLI EQUITY TRUST INC.
NOTICE OF PROPOSED CHANGE OF
LENGTH OF DIVIDEND PERIOD OF
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
The Gabelli Equity Trust Inc. (the "Corporation") may exercise its option to designate the Dividend Period of its Preferred Shares commencing [the first day of the Special Dividend Period] as a Special Dividend Period.
By 3:00 P.M. on the second Business Day preceding the first day of such proposed Special Dividend Period, the Corporation will notify ___________________ of either (a) its determination to exercise such option, designating the length of such Special Dividend Period or (b) its determination not to exercise such option.
THE GABELLI EQUITY TRUST INC.
Dated: __________, 20__
EXHIBIT E
THE GABELLI EQUITY TRUST INC.
NOTICE OF CHANGE OF LENGTH OF DIVIDEND PERIOD
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that (the "Corporation") has determined to designate the Dividend Period of its Preferred Shares commencing on [the first day of the Special Dividend Period] as a Special Dividend Period.
The Special Dividend Period will be __________ calendar days.
The Auction Date for the Special Dividend Period is the Business Day immediately preceding the first day of such Special Dividend Period.
As a result of the Special Dividend Period designation, the amount of dividends payable on Preferred Shares during the Special Dividend Period will be based on a 360-day year.
The Special Dividend Period shall not commence if (a) an Auction for Preferred Shares shall not be held on such Auction Date for any reason or (b) an Auction for Preferred Shares shall be held on such Auction Date but Sufficient Clearing Bids for such shares shall not exist in such Auction.
The scheduled Dividend Payment Dates for the Preferred Shares during such Special Dividend Period will be _________________________.
[Special Redemption Provisions, if any]
Attached hereto is a Preferred Shares Basic Maintenance Report showing that, as of the third Business Day immediately preceding such proposed Special Dividend Period, Moody's Eligible Assets (if Moody's is rating such Preferred Shares) and S&P Eligible Assets (if S&P is rating such Preferred Shares) each have an aggregate Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount as of such Business Day (assuming for purposes of the foregoing calculation that (i) the Maximum Rate is the Maximum Rate on such Business Day as if such Business Day were the Auction Date for the proposed Special Dividend Period, and (ii) the Moody's Discount Factors applicable to Moody's Eligible Assets are determined by reference to the first Moody's Exposure Period longer than the Moody's Exposure Period then applicable to the Corporation).
THE GABELLI EQUITY TRUST INC.
Dated: __________, 20__
EXHIBIT F
THE GABELLI EQUITY TRUST INC.
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF DIVIDEND PERIOD OF
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that The Gabelli Equity Trust Inc. (the "Corporation") has determined not to exercise its option to designate a Special Dividend Period of its Preferred Shares and the next succeeding Dividend Period will be a Standard Dividend Period of seven calendar days.
THE GABELLI EQUITY TRUST INC.
Dated: __________, 20___
EXHIBIT G
THE GABELLI EQUITY TRUST INC.
NOTICE OF CURE OF DEFAULT ON
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that The Gabelli Equity Trust Inc. (the "Corporation") has cured its Default and paid the applicable Late Charge with respect to its Preferred Shares. The dividend rate on the shares of Preferred Shares for the current Dividend Period is _____________% per annum, the Dividend Payment Date for the current Dividend Period is scheduled to be _______________, 20___ and the next Auction Date is scheduled to be _______________, 20___.
THE GABELLI EQUITY TRUST INC.
Dated: __________, 20___
EXHIBIT H
THE GABELLI EQUITY TRUST INC.
NOTICE OF CURE OF DEFAULT ON
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that The Gabelli Equity Trust Inc. (the "Corporation") has cured its Default and paid the applicable Late Charge with respect to its Preferred Shares. The next Auction Date for the Preferred Shares is scheduled to be on _________________, 20___.
THE GABELLI EQUITY TRUST INC.
Dated: __________, 20___
EXHIBIT I
THE GABELLI EQUITY TRUST INC.
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME](1)
DIVIDEND FOR
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares ")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable
on ________________, 20____ for The Gabelli Equity Trust's Preferred Shares
will be determined by the Auction to be held on _______________, 20___. Up to
[$ A ](2) [$ B ](3) per share of the dividend payable on such date as
determined by such Auction will consist of [capital gains](2) [ordinary
income taxable for Federal income tax purposes](3). If the dividend amount
payable on such date as determined by such Auction is less than [$ A ](2) [$
B ](3) per share, the entire amount of the dividend will consist of [capital
gains](2) [ordinary income taxable for Federal income tax purposes](3). [To
the extent such dividend amount exceeds [$ A ] per share, any excess up to [$
B ] per share will consist of ordinary income taxable for Federal income tax
purposes.](4) Accordingly, the aforementioned composition of the dividend
payable on _______________, 20___ should be considered in determining Orders
to be submitted with respect to the Auction to be held on ________________,
20__. The Rate Multiple in effect for such Auction will be ____%.
THE GABELLI EQUITY TRUST INC.
(1) Include language with respect to capital gains, taxable ordinary income or both, depending on the character of the designation to be made with respect to the dividend(s).
(2) Include bracketed material if a portion of the dividend will be designated capital gains.
(3) Include bracketed material if a portion of the dividend will be designated ordinary income taxable for Federal income tax purposes and no portion of the dividend will be designated capital gains.
(4) Include bracketed material if a portion of the dividend will be designated capital gains and a portion will be designated ordinary income taxable for Federal income tax purposes.
A = the maximum amount of capital gains allocated to the Preferred Shares to be included in such dividend, divided by the number of Preferred Shares.
B = the maximum amount of ordinary income taxable for Federal income tax purposes allocated to the Preferred Shares to be included in such dividend, divided by the number of shares.
BROKER-DEALER AGREEMENT
among
THE BANK OF NEW YORK
as Auction Agent
Dated as of June [ ], 2002
Relating to
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK OF
THE GABELLI EQUITY TRUST INC.
BROKER-DEALER AGREEMENT dated as of June [ ], 2002 (this "Agreement"), among (i) The Bank of New York, a New York banking corporation, as auction agent (the "Auction Agent") (not in its individual capacity but solely as agent) pursuant to authority granted to it in the Auction Agency Agreement, dated as of June [ ], 2002, (the "Auction Agency Agreement") between the The Gabelli Equity Trust Inc., (the "Corporation") and the Auction Agent and (ii) each broker-dealer whose name appears on the signature page hereof, as broker-dealer (together with its successors and assigns as such hereinafter referred to as "BD").
The Corporation intends to issue shares of Series C Auction Rate Cumulative Preferred Stock, par value $0.001 per share, liquidation preference $25,000 per share (the "Preferred Shares") pursuant to the Corporation's Articles Supplementary, as defined below. The shares of Preferred Shares shall be issued in book-entry form through the facilities of the Securities Depository. References to "Preferred Shares" in this Agreement shall refer only to the beneficial interests in the Preferred Shares unless the context otherwise requires.
The Auction Procedures require the participation of a Broker-Dealer.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Auction Agent and BD agree as follows:
1. Definitions and Rules of Construction
1.1 Terms Defined by Articles Supplementary. Capitalized terms not defined herein shall have the respective meanings specified in the Articles Supplementary.
1.2 Terms Defined Herein. As used herein and in the Settlement Procedures, the following terms shall have the following meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or participant in, the Securities Depositary that will act on behalf of a Bidder.
(b) "Agreement" with respect to the Corporation shall mean this Agreement as may be amended in writing with written consent of the Corporation.
(c) "Articles Supplementary" shall mean the Articles Supplementary Creating and Fixing the Rights of the Series C Auction Rate Cumulative Preferred Stock, as the same may be amended, supplemented or modified from time to time.
(d) "Auction" shall have the meaning specified in Section 2.1 hereof.
(e) "Auction Procedures" shall mean the auction procedures constituting Article II of the form of Articles Supplementary as of the filing thereof.
(f) "Authorized Officer" of the Auction Agent shall mean each Vice President, Assistant Vice President and Assistant Treasurer of the Auction Agent assigned to the Dealing and Trading Group of its Corporate Trust Department and every other officer or employee of the Auction Agent designated as an "Authorized Officer" for purposes hereof in a written communication to the Corporation.
(g) "Corporate Officer" shall mean the Chairman and Chief Executive Officer, the President, each Vice President (whether or not designated by a number or word or words added before or after the title "Vice President"), the Secretary, the Treasurer, each Assistant Vice President, each Assistant Secretary and each Assistant Treasurer of the Corporation and every other officer or employee of the Corporation designated as a "Corporate Officer" for purposes hereof in a notice to the Auction Agent.
(h) "Late Charge" has the meaning given in Section 2.7(a).
(i) "Preferred Shares" shall mean the preferred shares, par value $.001 per share, of the Corporation designated as its "Series C Auction Rate Cumulative Preferred Stock" and bearing such further designation as to series as the Board of Directors, as the case may be, of the Corporation or any committee thereof shall specify.
(j) "Settlement Procedures" shall mean the Settlement Procedures attached to the Auction Agency Agreement as Exhibit B.
1.3 Rules of Construction. Unless the context or use indicates another or different meaning or intent, the following rules shall apply to the construction of this Agreement:
(a) Words importing the singular number shall include the plural number and vice versa.
(b) The captions and headings herein are solely for convenience of reference and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto," and other words of similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New York City time.
(e) Section 1 and 2 hereof shall be read in conjunction with the Articles Supplementary and in the event of any conflict with the Articles Supplementary, the Articles Supplementary shall take precedence.
1.4 Warranties of BD. BD hereby represents and warrants that this Broker-Dealer Agreement has been duly authorized, executed and delivered by BD and that, assuming the due authorization, execution and delivery hereof by the Auction Agent, this Broker-Dealer Agreement constitutes a valid and binding agreement of BD, enforceable against it in accordance with its terms. BD's representations and warranties in this Section 1.4 shall survive the termination of this Agreement.
2. The Auctions
2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement Procedures.
(a) On each Auction Date, the provisions of the Auction Procedures will be followed by the Auction Agent for the purpose of determining the Applicable Rate for the Preferred Shares for the next Dividend Period. Each periodic implementation of such procedures is hereinafter referred to as an "Auction."
(b) All of the provisions contained in the Auction Procedures and the Settlement Procedures are incorporated herein by reference in their entirety and shall be deemed to be a part of this Agreement to the same extent as if such provisions were fully set forth herein.
(c) BD agrees to act as, and assumes the obligations of and limitations and restrictions placed upon, a Broker-Dealer under this Agreement. BD understands that other Persons meeting the requirements specified in the definition of "Broker-Dealer" contained in Section 13 of Part I of the Articles Supplementary may execute a Broker-Dealer Agreement and participate as Broker-Dealers in Auctions.
(d) BD acknowledges and agrees that each provision of the Auction Procedures that requires BD to perform an obligation or procedure is hereby incorporated herein by reference and that this Agreement shall constitute the Corporation's instruction, and BD hereby agrees, to perform such obligations and procedures without further request by or instructions from the Corporation.
(e) BD may participate in Auctions for its own account if it is not an affiliate of the Corporation, unless the Corporation notifies all Broker-Dealers that they may no longer do so, in which case BD may continue to submit Hold or Sell Orders for its own account. If BD is an affiliate of the Corporation, it may participate in Auctions, but not for its own account.
2.2 Preparation for Each Auction.
(a) Not later than 9:30 a.m. on each Auction Date for the Preferred Shares, the Auction Agent shall advise BD by telephone or other electronic means of the Maximum Rate, Reference Rate and Treasury Index Rate.
(b) BD shall cause the Maximum Rate to be communicated as promptly as practicable to its customers who hold or may be interested in acquiring Preferred Shares.
(c) As promptly as practicable after determining each
Auction Date, but not later than 9:15 a.m. on the Business Day preceding
such Auction Date, the Auction Agent shall notify BD, by such means as the
Auction Agent deems practicable, of the scheduled date of such Auction
Date. If the Auction Date for any Auction shall be changed after the
Auction Agent has given such notice or the notice referred to in clause
(vii) of paragraph (a) of the Settlement Procedures, the Auction Agent, by
such means as the Auction Agent deems practicable, shall give notice of
such change to BD not later than the earlier of (x) 9:15 a.m. on the
Business Day preceding the new Auction Date, and (y) 9:15 a.m. on the
original Auction Date. Thereafter, BD shall promptly notify customers of BD
that are Existing Holders of such change in the Auction Date.
(d) If required by applicable law, or requested by the Auction Agent, BD shall provide a list of Existing Holders based upon inquiries of those Persons such Broker-Dealer believes are Beneficial Owners as a result of the most recent Auction to the Auction Agent promptly after any date so requested by the Auction Agent. The Auction Agent shall keep confidential any such information, including information received as to the identity of Bidders in any Auction, and shall not disclose any such information so provided to any Person other than the other parties hereto, provided that the Auction Agent reserves the right to disclose any such information if (a) it is ordered to do so by a court of competent jurisdiction or a regulatory, judicial or quasi-judicial agency, (b) it is advised by its counsel that its failure to do so would be unlawful or (c) failure to do so would expose the Auction Agent to loss, liability, claim, damage or expense for which it has not received indemnity satisfactory to it.
(e) BD agrees to maintain a list of customers relating to the Preferred Shares and to use its best efforts, subject to existing laws and regulations, to contact the customers on such list whom BD believes may be interested in participating in the Auction on each Auction Date, as a Potential Holder, for the purposes set forth in the Auction Procedures. Nothing herein shall require BD to submit an Order for any customer in any Auction.
(f) The Auction Agent's registry of Existing Holders of Preferred Shares shall be conclusive and binding on BD. BD may inquire of the Auction Agent between 3:00 P.M. on the Business Day preceding an Auction for Preferred Shares and 9:30 A.M. on the Auction Date for such Auction to ascertain the number of Preferred Shares in respect of which the Auction Agent has determined BD to be an Existing Holder. If BD believes it is the Existing Holder of fewer Preferred Shares than specified by the Auction Agent in response to BD's inquiry, BD may so inform the Auction Agent of that belief. BD shall not, in its capacity as Existing Holder of Preferred Shares, submit Orders in such Auction in respect of Preferred Shares covering in the aggregate more than the number of Preferred Shares specified by the Auction Agent in response to BD's inquiry.
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Auction Agent shall conduct Auctions in accordance with the schedule set forth below. Such schedule may be changed at any time by the Auction Agent with the consent of the Corporation, which consent shall not be unreasonably withheld. The Auction Agent shall give written notice of any such change to BD which shall have the right to review such change. Such notice shall be received prior to the close of business on the Business Day immediately preceding the first Auction Date on which any such change shall be effective.
Time Event
---- -----
By 9:30 a.m. Auction Agent advises the Corporation
and the Broker-Dealer of the applicable
Maximum Rate, the Reference Rate and
Treasury Index Rate as set forth in
Section 2.2(a) hereof.
9:30 a.m. - 1:00 p.m. Auction Agent assembles information
communicated to it by Broker-Dealer as
provided in Section 2(a) of the Auction
Procedures. Submission Deadline is 1:00
p.m.
Not earlier than Auction Agent makes determinations pursuant
1:00 p.m. to 4(a) of the Auction Procedures.
By approximately Auction Agent advises the Corporation of
3:30 p.m. results of Auction as provided in Section
4(b) of the Auction Procedures.
Submitted Bids and Submitted Sell
Orders are accepted and rejected in
whole or in part and Preferred Shares
are allocated as provided in Section 5
of the Auction Procedures. Auction
Agent gives notice of Auction results
as set forth in paragraph (a) of the
Settlement Procedures.
|
(b) BD may designate one or more individuals in its organization who will coordinate its procedures in connection with Auctions and purchases and sales of Preferred Shares.
(c) BD agrees to handle its customers' order in accordance with its duties under applicable securities laws and rules.
(d) To the extent that pursuant to Section 5 of the Auction Procedures of the Corporation, BD continues to hold, sell or purchase a number of shares that is fewer than the number of shares in an Order submitted by BD to the Auction Agent in which BD designated itself as an Existing Holder or Potential Holder in respect of customer Orders, BD shall make appropriate pro rata allocations among its customers for which it submitted Orders of similar tenor. If as a result of such allocations, any Existing Holder would be entitled or required to sell, or any Existing Holder would be entitled or required to purchase, a fraction of a Preferred Share on any Auction Date, BD shall, in such manner as it shall determine in its sole discretion, round up or down the number of Preferred Shares to be purchased or sold on such Auction Date by any Existing Holder or Potential Holder on whose behalf BD submitted an Order so that the number of shares so purchased or sold by each such Existing Holder or Potential Holder on such Auction Date shall be whole shares.
(e) BD shall submit Orders to the Auction Agent in writing in substantially the form attached hereto as Exhibit A prior to 1:00 p.m. on each Auction Date. BD shall submit separate Orders to the Auction Agent for each Potential Holder or Existing Holder on whose behalf BD is submitting an Order and shall not net or aggregate the Orders of Potential Holders or Existing Holders on whose behalf BD is submitting Orders. Any Order submitted by BD to the Auction Agent prior to the Submission Deadline on any Auction Date shall be irrevocable.
(f) BD shall deliver to the Auction Agent a written notice, substantially in the form attached hereto as Exhibit B, of transfers of Preferred Shares made through BD by an Existing Holder to another Person other than pursuant to an Auction and a written notice, substantially in the form attached hereto as Exhibit C, of the failure of any Preferred Shares to be transferred to or by any Person that purchased or sold Preferred Shares through BD pursuant to an Auction. The Auction Agent is not required to accept any notice delivered pursuant to the terms of the foregoing sentence with respect to an Auction unless it is received by the Auction Agent by 3:00 p.m. on the Business Day next preceding the applicable Auction Date.
2.4 Notices.
(a) On each Auction Date, the Auction Agent shall notify BD by telephone or facsimile (or other electronic means acceptable to both parties) of the results of the Auction as set forth in paragraph (a) of the Settlement Procedures. By approximately 11:30 A.M. on the Business Day next succeeding such Auction Date, the Auction Agent shall notify BD in writing of the disposition of all Orders submitted by BD in the Auction held on such Auction Date.
(b) BD shall notify each Existing Holder or Potential
Holder on whose behalf BD has submitted an Order as set forth in paragraph
(b) of the Settlement Procedures and take such other action as is required
of BD pursuant to the Settlement Procedures.
2.5 Designation of Special Dividend Period.
(a) If the Corporation delivers to its Auction Agent a notice of the Auction Date for the Preferred Shares of the Corporation for a Dividend Period thereof that next succeeds a Special Dividend Period in the form of Exhibit C to the Auction Agency Agreement, the Auction Agent shall deliver such notice to BD as promptly as practicable after its receipt of such notice from the Corporation.
(b) If the Board of Directors of the Corporation proposes to designate any Dividend Period as a Special Dividend Period and the Corporation delivers to its Auction Agent a notice of such proposed Special Dividend Period in the form of Exhibit D to the Auction Agency Agreement, such Auction Agent shall deliver such notice to BD as promptly as practicable after its receipt of such notice from the Corporation.
(c) If the Board of Directors of the Corporation determines to designate such Dividend Period as a Special Dividend Period, and the Corporation delivers to its Auction Agent a notice of such Special Dividend Period in the form of Exhibit E to the Auction Agency Agreement not later than 3:00 P.M. on the second Business Day next preceding the first day of such Dividend Period, such Auction Agent shall deliver such notice to BD promptly after being notified by the Corporation on such second Business Day.
(d) If the Corporation shall deliver to its Auction Agent a notice not later than 3:00 P.M. on the second Business Day immediately preceding the first day of any Dividend Period stating that the Corporation has determined not to exercise its option to designate such Dividend Period as a Special Dividend Period, in the form of Exhibit F to the Auction Agency Agreement, or shall fail to timely deliver either such notice or a notice in the form of Exhibit E to the Auction Agency Agreement, such Auction Agent shall deliver a notice in the form of Exhibit F to the Auction Agency Agreement to BD promptly after being notified by the Corporation on such second Business Day.
2.6 Allocation of Taxable Income.
If the Corporation delivers to its Auction Agent a notice in the form of Exhibit I to the Auction Agency Agreement designating all or a portion of any dividend on Preferred Shares of the Corporation to consist of net capital gains or other income taxable for Federal income tax purposes, and BD is a Broker-Dealer for Preferred Shares, such Auction Agent shall deliver such notice to BD on the Business Day following its receipt of such notice from the Corporation. On or prior to the Auction Date referred to in such notice, BD will contact each of its customers that is a Existing Holder of Preferred Shares or a Potential Holder of Preferred Shares interested in submitting an Order in the Auction to be held on such Auction Date, and BD will notify such Existing Holders and Potential Holders of the contents of such notice. BD will be deemed to have notified such Existing Holders and Potential Holders if, for each of them, (i) BD makes a reasonable effort to contact such Existing Holder or Potential Holder by telephone, and (ii) upon failing to contact such Existing Holder or Potential Holder by telephone BD mails written notification to such Existing Holder or Potential Holder at the mailing address indicated in the account records of BD.
The Auction Agent for the Preferred Shares shall be required to notify BD within two Business Days after each Auction of the Auction Agent's receipt of notice from the Corporation that such Auction involves an allocation of income taxable for Federal income tax purposes as to the dollar amount per share of such taxable income and income exempt from Federal income taxation included in the related dividend.
2.7 Default.
(a) If: (i) any Default shall have occurred with respect to Preferred Shares of the Corporation during any Dividend Period thereof, but, prior to 12:00 Noon, New York City time, on the third Business Day next succeeding the date on which such Default occurred, such Default shall have been cured in accordance with Section 2.8 of the Auction Agency Agreement and the Corporation shall have paid to the Auction Agent the late charge (the "Late Charge") as described in Section 2.8 of the Auction Agency Agreement, then such Auction Agent shall deliver a notice in the form of Exhibit G to the Auction Agency Agreement by first-class mail, postage prepaid, to BD not later than one Business Day after its receipt of the payment from the Corporation curing such Default and such Late Charge.
(b) If any Default shall have occurred with respect to Preferred Shares of the Corporation during any Dividend Period thereof, and, prior to 12:00 Noon, New York City time, on the third Business Day next succeeding the date on which such Default occurred, such Default shall not have been cured as described in Section 2.8 of the Auction Agency Agreement or the Corporation shall not have paid to the Auction Agent the applicable Late Charge described in Section 2.8 of the Auction Agency Agreement; then such Auction Agent shall deliver a notice in the form of Exhibit H to the Auction Agency Agreement to the Broker-Dealers not later than one Business Day after the receipt of the payment from the Corporation curing such Default and Late Charge.
2.8 Service Charge to Be Paid to BD.
(a) No later than 12:00 noon on each Dividend Payment Date, the Auction Agent after each Auction will pay a service charge from funds provided by the Corporation to each Broker-Dealer on the basis of the purchase price of Preferred Shares placed by such Broker-Dealer at such Auction. The service charge shall be (i) in the case of any Dividend Period of less than 365 days, the product of (A) a fraction, the numerator of which is the number of days in such Dividend Period and the denominator of which is 365, times (B) 1/4 of 1%, times (C) $25,000 times (D) the aggregate number of Preferred Shares placed by such Broker-Dealer at such Auction and (ii) in the case of any Dividend Period of 365 days or more, the amount determined by mutual consent of the Corporation and any such Broker-Dealers and shall be based upon a selling concession that would be applicable to an underwriting of fixed or variable rate Preferred Shares with a similar final maturity or variable rate dividend period, respectively, at the commencement of the Dividend Period with respect to such Auction. For the purpose of this Section 2.8(a), Preferred Shares will be considered "placed" by a Broker-Dealer if such shares were (I) the subject of Hold orders deemed to have been submitted to the Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its customers who are Beneficial Owners or (II) the subject of an order submitted by such Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in such Existing Holder continuing to hold such shares as a result of the Auction, (B) a Submitted Bid of a Potential Holder that resulted in such Potential Holder purchasing such shares as a result of the Auction or (C) a valid Hold Order.
(b) If the Corporation determines to change the rate at which the Broker-Dealer Fee accrues, the Corporation shall mail to the Auction Agent a notice thereof within two Business Days of such change. Any change in the Broker-Dealer fee rate shall be effective on the Auction Date next succeeding the Auction Agent's receipt of notice of such change.
2.9 Settlement.
(a) If any Existing Holder selling Preferred Shares in an Auction fails to deliver such Preferred Shares (by authorized book-entry), the BD of any Person that was to have purchased Preferred Shares in such Auction may deliver to such Person a number of Preferred Shares that is less than the number of Preferred Shares that otherwise were to be purchased by such Person. In such event, the number of Preferred Shares to be so delivered shall be determined by BD. Delivery of such lesser number of Preferred Shares shall constitute good delivery. Upon the occurrence of any such failure to deliver Preferred Shares, BD shall deliver to the Auction Agent the notice required by Section 2.3(f) hereof. Notwithstanding the foregoing provisions of this Section 2.9(a), any delivery or non delivery of Preferred Shares which represents any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or non-delivery in accordance with the terms of Section 2.3(f) hereof. The Auction Agent shall have no duty or liability with respect to enforcement of this Section 2.9(a).
(b) Neither the Auction Agent nor the Corporation shall have any responsibility or liability with respect to the failure of an Existing Holder, a Potential Holder or an Agent Member or any of them to deliver Preferred Shares or to pay for Preferred Shares sold or purchased pursuant to the Auction Procedures or otherwise.
(c) Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event BD is
an Existing Holder with respect to Preferred Shares and the Auction
Procedures provide that BD shall be deemed to have submitted a Sell Order
in an Auction with respect to such shares if BD fails to submit an Order in
that Auction with respect to such shares, BD shall have no liability to any
Person for failing to sell such shares pursuant to such a deemed Sell Order
if (i) such shares were transferred by the beneficial owner thereof without
notification of such transfer in compliance with the Auction Procedures or
(ii) BD has indicated to the Auction Agent pursuant to Section 2.2(f) of
this Agreement that, according to BD's records, BD is not the Existing
Holder of such shares.
(d) Notwithstanding any provision of the Auction Procedures or the Settlement Procedures to the contrary, in the event an Existing Holder of Preferred Shares with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for such shares that was accepted in whole or in part, or submitted or is deemed to have submitted a Sell Order for such shares that was accepted in whole or in part, fails to instruct its Agent Member to deliver such shares against payment therefore, partial deliveries of Preferred Shares that have been made in respect of Potential Holders' Submitted Bids for Preferred Shares that have been accepted in whole or in part shall constitute good delivery to such Potential Holders.
3. The Auction Agent
3.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for the Corporation hereunder and owes no duties, fiduciary or otherwise, to any Person other than by reason of the Auction Agency Agreement.
(b) The Auction Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement and the Auction Agency Agreement, and no implied covenants or obligations shall be read into this Agreement, the Auction Agency Agreement, Auction Procedures or the Settlement Procedures against the Auction Agent.
(c) In the absence of gross negligence or willful misconduct on its part, the Auction Agent shall not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under the Agreement. The Auction Agent shall not be liable for any error of judgment resulting from the use or reliance on a source of information used in good faith unless the Auction Agent shall have been grossly negligent in the determination, calculation or declaration thereunder. The Auction Agent shall not be liable for any error of judgment made in good faith unless the Auction Agent shall have been grossly negligent in ascertaining (or failing to ascertain) the pertinent facts.
(d) The Auction Agent shall not be: (i) required to, and does not, make any representations or have any responsibilities as to the validity, accuracy, value or genuineness of any signatures or endorsements, other than its own; (ii) obligated to take any legal action hereunder that might, in its judgment, involve any expense or liability, unless it has been furnished with indemnity satisfactory to the Auction Agent; and (iii) responsible for or liable in any respect on account of the identity, Corporation or rights of any Person (other than itself and its agents and attorneys) executing or delivering or purporting to execute or deliver any document under this Agreement or any Broker-Dealer Agreement.
(e) The Auction Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control; it being understood that the Auction Agent shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.
3.2 Rights of the Auction Agent.
(a) The Auction Agent may conclusively rely and shall be fully protected in acting or refraining from acting upon any communication authorized by this Agreement and upon any written instruction, notice, request, direction, consent, report, certificate, share certificate or other instrument, paper or document believed by it to be genuine. The Auction Agent shall not be liable for acting upon any communication authorized by this Agreement (including, but not limited to, any made by telephone, telecopier or other means of electronic communication acceptable to the parties hereto) which the Auction Agent believes in good faith to have been given by the Corporation or by BD. The Auction Agent may record telephone communications with BD.
(b) The Auction Agent may consult with counsel of its own choice, and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk its own funds or otherwise incur or become exposed to financial liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights hereunder either directly or by or through agents or attorneys and shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care.
(e) The Auction Agent shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, it being understood that the Auction Agent shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.
3.3 Auction Agent's Disclaimer. The Auction Agent makes no representation as to, and shall have no liability with respect to, the correctness of the recitals in, or the validity, adequacy or accuracy of, this Agreement, the Auction Agency Agreement, the Auction Procedures, the offering material used in connection with the offer and sale of the Preferred Shares or any other agreement or instrument executed in connection with the transactions contemplated herein or in any thereof.
4. Duties and Responsibilities of BD
(a) BD undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement, the Auction Agency Agreement or Settlement Procedures against BD.
(b) In the absence of gross negligence or willful misconduct on its part, BD shall not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under this Agreement. BD shall not be liable for any error resulting from the use or reliance on a source of information used in good faith and without gross negligence to make any determination, calculation or declaration hereunder. BD shall not be liable for any error of judgment made in good faith unless BD shall have been grossly negligent in ascertaining or failing to ascertain the pertinent facts.
(c) BD shall not be: (i) required to, and does not, make any representations or have any responsibilities as to the validity, accuracy, value or genuineness of any signatures or endorsements, other than its own; (ii) obligated to take any legal action hereunder that might, in its judgment, involve any expense or liability, unless it has been furnished with indemnity satisfactory to BD; and (iii) responsible for or liable in any respect on account of the identity, trust or rights of any Person (other than itself and its agents and attorneys) executing or delivering or purporting to execute or deliver any document under this Agreement or any Broker-Dealer Agreement.
(d) BD shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, Internet or communications services; acts of civil or military authority; or governmental actions; it being understood that BD shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.
5. Miscellaneous
5.1 Termination. (a) Any party may terminate this Agreement at any time upon five (5) days written notice to the other parties, which notice may be given by facsimile as provided in Section 5.3 hereof. This Agreement shall automatically terminate upon the redemption of all outstanding Preferred Shares or upon termination of the Auction Agency Agreement.
(b) BD represents that it (or if BD does not act as Agent Member, one of its affiliates) shall make all dividend payments on the Preferred Shares available in same-day funds on each Dividend Payment Date to customers that use BD or affiliate as Agent Member.
5.2 Agent Member. BD is, and shall remain for the term of this Agreement, a member of, or participant in, the Securities Depository (or an affiliate of such a member or participant).
5.3 Communications. Except for (i) communications authorized to be by telephone pursuant to this Agreement or the Auction Procedures and (ii) communications in connection with the Auctions (other than those expressly required to be in writing), all notices, requests and other communications to any party hereunder shall be in writing (for the purposes of this Agreement, telecopy or other means of electronic communication acceptable to the parties shall be deemed to be in writing) and shall be given to such party, addressed to it, at its address, telecopy number set forth below and, where appropriate reference the particular Auction to which such notice relates:
If to BD, ___________________________
addressed: ___________________________
___________________________
Attention: ________________
Telephone No.: ____________
Facsimile No.: _____________
If to the Auction The Bank of New York
Agent, addressed: 5 Penn Plaza
13th Floor
New York, New York 10001
Attention: Dealing and Trading Group - Auction Desk
Telephone No.: (212) 328-7676
Telecopier No.: (212) 328-8237
If to the Corporation, The Gabelli Equity Trust Inc.
addressed: One Corporate Center
Rye, New York 10580-1422
Attention: Bruce N. Alpert
Telecopier No.: 914-921-5100
Telephone No.: 212-921-5158
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or such other address or facsimile number as such party may hereafter specify for such purpose by notice to the other parties. Each such notice, request or communication shall be effective when delivered at the address specified herein. Communications shall be given on behalf of BD by a BD Officer, on behalf of the Auction Agent by an Authorized Officer and on behalf of the Corporation by a Corporate Officer. Telephone communications may be recorded.
5.4 Entire Agreement. This Agreement contains the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, endorsements, promises, agreements or understandings, oral, written or inferred, between the parties relating to the subject matter hereof.
5.5 Benefits. Nothing in this Agreement, express or implied, shall give to any person, other than the Auction Agent, the Corporation and BD and their respective successors and permitted assigns, any benefit of any legal or equitable right, remedy or claim under this Agreement.
5.6 Amendment; Waiver.
(a) This Agreement shall not be deemed or construed to be modified, amended, rescinded, cancelled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of each of the parties hereto.
(b) Failure of any party to this Agreement to exercise any right or remedy hereunder in the event of a breach of this Agreement by any other party shall not constitute a waiver of any such right or remedy with respect to any subsequent breach.
5.7 Successors and Assigns. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the respective successors and permitted assigns of each of the parties hereto. This Agreement may not be assigned by any party hereto absent the prior written consent of the other parties.
5.8 Severability. If any clause, provision or section of this Agreement shall be ruled invalid or unenforceable by any court of competent jurisdiction, the invalidity or unenforceability of such clause, provision or section shall not affect any remaining clause, provision or section hereof.
5.9 Execution in Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.
5.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW, OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF NEW YORK). THE PARTIES AGREE THAT ALL ACTIONS AND PROCEEDINGS ARISING OUT OF THIS BROKER-DEALER AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED HEREBY SHALL BE BROUGHT IN THE COURTS LOCATED IN THE BOROUGH OF MANHATTAN, CITY OF NEW YORK, STATE OF NEW YORK. EACH PARTY WAIVES ANY OBJECTION THAT IT MAY HAVE THAT SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN THE COURTS LOCATED IN THE BOROUGH OF MANHATTAN, CITY OF NEW YORK AND STATE OF NEW YORK WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME. EACH OF THE PARTIES HERETO ALSO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the date first above written.
THE BANK OF NEW YORK
as Auction Agent
[ ] as Broker-Dealer
Title:
Exhibit A
To BROKER-DEALER
AGREEMENT
AUCTION BID FORM
(Submit only one Order on this Order Form)
THE GABELLI EQUITY TRUST INC.
Series C Auction Rate Cumulative Preferred Stock ("Preferred Shares")
To: The Bank of New York Date of Auction ___________
5 Penn Plaza
13th Floor
New York, New York 10001
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Attention: Dealing and Trading Group - Auction Desk
Telephone No.: (212) 328-7676
Telecopier No.: (212) 328-8237
The undersigned Broker-Dealer submits the following Order on behalf of the Bidder listed below:
Name of Bidder: __________________________________
Bidder placed the Order listed below covering the number of shares indicated (complete only one blank):
_________________ number of Preferred Shares now held by
Bidder (an Existing Holder), and the Order is a (check one):
|_| Hold Order; or
|_| Bid at a rate of ____%; or
|_| Sell Order;
-- or -
_________________ number of Preferred Shares not now held by Bidder (a Potential Holder), and the Order is a Bid at a rate of ______%
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Order Forms.
(2) If one or more Bids covering in the aggregate more than the outstanding number of Preferred Shares held by any Existing Holder are submitted, such Bids shall be considered valid in the order of priority set forth in the Auction Procedures.
(3) A Hold or Sell Order may be placed only by an Existing Holder covering a number of Preferred Shares not greater than the number of Preferred Shares currently held by such Existing Holder.
(4) Potential Holders may make Bids only, each of which must specify a rate. If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate specified.
(5) Bids may contain no more than three figures to the right of the decimal point (.001 of 1%).
(6) An Order must be submitted in whole Preferred Shares with an aggregate liquidation preference of $25,000.
Name of Broker-Dealer: ____________________ By: _______________________________________
Exhibit B
To BROKER-DEALER
AGREEMENT
(To be used only for transfers made other than pursuant to an Auction)
TRANSFER FORM
THE GABELLI EQUITY TRUST INC.
Series C Auction Rate Cumulative Preferred Stock ("Preferred Shares")
We are (check one):
|_| the Existing Holder named below; or
|_| the Broker-Dealer for such Existing Holder; or
|_| the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder will transfer ___ Preferred Shares to ____________________.
GABELLI EQUITY TRUST INC.
______________________________________ _______________________________________
______________________________________ _______________________________________
By: _______________________________
Name:
Title:
______________________________________ _______________________________________
______________________________________ _______________________________________
(Name of Existing Holder)
______________________________________ _______________________________________
______________________________________ _______________________________________
(Name of Broker-Dealer)
______________________________________ _______________________________________
______________________________________ _______________________________________
(Name of Agent Member)
______________________________________ _______________________________________
______________________________________ _______________________________________
By: _______________________________
Name:
|
Title:
Exhibit C
To BROKER-DEALER
AGREEMENT
(To be used only for failures to deliver Preferred Shares sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
THE GABELLI EQUITY TRUST INC.
Series C Auction Rate Cumulative Preferred Stock ("Preferred Shares")
Complete either I. or II.
I. We are a Broker-Dealer for ______________ (the "Purchaser"), which purchased ____ Preferred Shares in the Auction held on ______________ from the seller of such Preferred Shares.
II. We are a Broker-Dealer for _____________ (the "Seller"), which sold ____ Preferred Shares in the Auction held on ____________________ to the purchaser of such Preferred Shares.
We hereby notify you that (check one):
__________ the Seller failed to deliver such Preferred Shares to the
Purchaser; or
__________ the Purchaser failed to make payment to the Seller upon
delivery of such Preferred Shares.
Name: ________________________________
(Name of Broker-Dealer)
______________________________________ _______________________________________
______________________________________ _______________________________________
By: __________________________________
Printed Name:
|
Title:
Capitalized terms used in this letter, unless otherwise defined herein, shall have the meanings set forth in the Articles Supplementary Creating and Fixing the Rights of the Series C Auction Rate Cumulative Preferred Stock, as the same may be amended, supplemented or modified from time to time.
(Name of Purchaser)
By: __________________________________
Name:
Title:
Address: _____________________________
Dated:
June ___, 2002
The Gabelli Equity Trust Inc.
One Corporate Center
Rye, New York 10580-1434
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933 (the "Act") of the Series C Auction Rate Cumulative Preferred Stock, $.001 par value per share (the "Series C Preferred Stock"), of The Gabelli Equity Trust Inc., a Maryland corporation (the "Fund"), on its Registration Statement on Form N-2 (Registration Nos. 333-86554 and 811-4700) filed with the Securities and Exchange Commission (together with all amendments thereto, the "Registration Statement"), we have examined such corporate records, certificates and documents as we deemed necessary for the purpose of this opinion. Based on that examination, we advise you that in our opinion the Series C Preferred Stock to be offered by the Fund, when issued and sold under the circumstances contemplated in the Registration Statement, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement. In giving our consent, we do not thereby admit
that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission thereunder. The opinion expressed herein is limited to
the matters set forth in this letter and no other opinion should be
inferred beyond the matters expressly stated.
Very truly yours,
Miles & Stockbridge P.C.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-2 of our report dated February 15, 2002, relating to the financial statements and financial highlights of The Gabelli Equity Trust Inc. which appear in the December 31, 2001 Annual Report to Shareholders of The Gabelli Equity Trust Inc. which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights", "Experts", "Counsel and Independent Accountants" and "Financial Statements" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP New York, New York June 24, 2002 |