[X] Registration Statement under the Securities Act of 1933
[X] Pre-Effective Amendment No. 4
[ ] Post-Effective Amendment No.
and/or
One Corporate Center
Rye, New York 10580-1434
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 422-3554
Copies to:
Richard T. Prins, Esq. James McKee, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, The Gabelli Convertible and Income Simpson Thacher & Bartlett
Meagher & Flom LLP Securities Fund Inc. 425 Lexington Avenue
Four Times Square One Corporate Center New York, New York 10017
New York, New York 10036 Rye, New York 10580-1422 (212) 455-2000
(212) 735-3000 (914) 921-5100
|
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 .
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Amount Being Offering Price Offering Registration
Title of Securities Registered Per Share Price (1) Fee(2)
------------------- ---------- --------- --------- ------
Series B __% Cumulative 1,000,000 Shares $25 $25,000,000 $0.00
Preferred Stock
Series C Auction Rate 1,000 Shares $25,000 $25,000,000 $0.00
Preferred Stock
|
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $4,045 previously paid.
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
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; Summary;
Underwriting
6. Selling Shareholders.......... Not Applicable
7. Use of Proceeds............... Use of Proceeds; Investment Objective and
Policies
8. General Description of the
Registrant.................. Outside Front Cover Page; Summary; The
Fund; Investment Objective and Policies;
Risk Factors & Special Considerations; How
the Fund Manages Risk; Description of
Series B Preferred and Series C Auction
Rate Preferred; Anti-takeover Provisions
of the Charter and By-Laws
9. Management.................... Outside Front Cover Page; Summary; Manage-
ment 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; Summary;
Investment Objective and Policies;
Description of Series B Preferred and
Series C Auction Rate Preferred;
Description of Capital Stock and Other
Securities; Taxation
11. Defaults and Arrears on Senior
Securities.................. Not Applicable
12. Legal Proceedings............. Not Applicable
13. Table of Contents of the
Statement of Additional
Information................. Table of Contents of the Statement of
Additional Information
PART B Location in Statement of
Additional Information
-------------------------------------------------------------------
14. Cover Page.................... Outside Front Cover Page
15. Table of Contents............. Outside Front Cover Page
16. General Information and
History..................... The Fund
17. Investment Objective and
Policies.................... Investment Objective 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
|
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 March 13, 2003
PROSPECTUS [GABELLI LOGO]
The Gabelli
Convertible and Income Securities Fund Inc.
|
1,000,000 Shares, Series B % Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
The Gabelli Convertible and Income Securities Fund Inc., or the Fund, is a diversified, closed-end management investment company that has an investment objective of a high level of total return on its assets. The Fund's investments are selected by its Investment Adviser, Gabelli Funds, LLC. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation. Under normal circumstances the Fund will invest at least 80% of its total assets in securities that are convertible into or represent the right to acquire common stock, and in other debt or equity securities that are expected to periodically accrue or generate income for their holders.
This prospectus describes shares of the Fund's Series B % Cumulative Preferred Stock (the "Series B Preferred"), liquidation preference $25 per share. Dividends on shares of Series B Preferred issued within 30 days of the original Series B Preferred issue date are cumulative from such original issue date at the annual rate of % of the liquidation preference of $25 per share and are payable quarterly on March 26, June 26, September 26 and December 26 in each year, commencing on , 2003.
This prospectus also describes shares of the Fund's Series C Auction Rate Cumulative Preferred Stock (the "Series C Auction Rate Preferred"), liquidation preference $25,000 per share. The dividend rate for the Series C Auction Rate Preferred will vary from dividend period to dividend period. The annual dividend rate for the initial dividend period for the Series C Auction Rate Preferred will be % of the liquidation preference of $25,000 per share. The initial dividend period is from the date of issuance through , 2003. For subsequent dividend periods, the Series C Auction Rate Preferred will pay dividends based on a rate set at auction, usually held weekly.
Per Share of Per Share of Series
Series B Preferred Total Auction Rate Preferred Total
------------------ ----- ---------------------- -----
Public Offering Price(1) $ $ $ $
Underwriting Discount(2) $ $ $ $
Proceeds to the Fund
(before expenses)(3) $ $ $ $
|
The shares of Series B Preferred and/or Series C Auction Rate Preferred being offered by this prospectus are 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 any shares of Series B Preferred or Series C Auction Rate Preferred will be made in book-entry form through the facilities of The Depository Trust Company on or about , 2003.
Gabelli & Company, Inc.
, 2003
(Continued from previous page)
Application has been made to list the Series B Preferred on the New York Stock Exchange. If offered, trading of the Series B Preferred on the New York Stock Exchange is expected to commence within 30 days of the date of this prospectus. Prior to this offering, there has been no public market for the Series B Preferred. See "Underwriting."
The Series C Auction Rate Preferred will not be listed on an exchange. Investors may only buy or sell Series C Auction Rate 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 the Series C Auction Rate Preferred and a secondary market may not provide you with liquidity.
The net proceeds of the offering, which are expected to be , will be invested in accordance with the Fund's investment objective and policies. See "Investment Objective and Polices" beginning on page 25.
The Fund expects that dividends paid on the Series B Preferred and Series C Auction Rate Preferred will consist of long-term capital gains (consisting of 20% federal tax rate capital gains from the sale of assets held longer than 12 months), ordinary income (including net investment income and short-term capital gains), and, in certain circumstances, a return of capital. Over the past one, three and five fiscal years ending December 31, 2002, the distributions of taxable income by the Fund consisted of 0.00%, 31.37%, and 31.75% long-term capital gains. No assurance can be given, however, as to what percentage, if any, of the dividends paid on the Series B Preferred or Series C Auction Rate Preferred will consist of long-term capital gains, which are taxed at lower rates for individuals than ordinary income.
Neither the Series B Preferred nor the Series C Auction Rate Preferred may be issued unless it is rated Aaa by Moody's Investors Service, Inc. ("Moody's"). In addition, the Series C Auction Rate Preferred may not be issued unless it is also rated AAA by Fitch, Inc. ("Fitch"). In order to keep these ratings, the Fund will be required to maintain a minimum discounted asset coverage with respect to its outstanding Series B Preferred and Series C Auction Rate Preferred under guidelines established by each of Moody's and Fitch. See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Rating Agency Guidelines." The Fund is also required to maintain a minimum asset coverage by the Investment Company Act of 1940, as amended (the "1940 Act"). If the Fund fails to maintain any of these minimum asset coverage requirements, the Fund can require, at its option, consistent with its Charter and the requirements of the 1940 Act, that some or all of its outstanding preferred stock, including the Series B Preferred or Series C Auction Rate Preferred, be sold back to it (redeemed). Otherwise, prior to , 2008 the Series B Preferred will be redeemable at the option of the Fund only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. Subject to certain notice and other requirements (including those set forth in Section 23(c) of the 1940 Act), the Fund, at its option, may redeem (i) the Series B Preferred beginning on , 2008 and (ii) the Series C Auction Rate Preferred following the initial dividend period (so long as the Fund has not designated a non-call period). In the event the Fund redeems Series B Preferred such redemption will be for cash at a redemption price equal to $25 per share plus accumulated but unpaid dividends (whether or not earned or declared). In the event the Fund redeems Series C Auction Rate Preferred, such redemptions will be for cash, generally at a redemption price equal to $25,000 per share plus accumulated but unpaid dividends (whether or not earned or declared), though in limited circumstances the Fund's board of directors may also declare a redemption premium.
This prospectus concisely sets forth important information about the Fund that you should know before deciding whether to invest in Series B Preferred or Series C Auction Rate Preferred. You should read this prospectus and retain it for future reference.
The Fund has also filed with the Securities Exchange Commission a Statement of Additional Information, dated March, 2003 (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 75 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).
Certain persons participating in the offering of Series B Preferred, in the event they are offered, may engage in transactions that stabilize, maintain or otherwise affect the market price of the Series B Preferred, including the entry of stabilizing bids, syndicate covering transactions or the imposition of penalty bids. For a description of these activities, see "Underwriting."
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
----
Summary ..........................................................1
Tax Attributes of Preferred Stock Dividends......................19
Financial Highlights.............................................22
Use of Proceeds..................................................24
The Fund.........................................................24
Capitalization...................................................25
Investment Objective and Policies................................25
Risk Factors and Special Considerations..........................34
How the Fund Manages Risk........................................42
Management of the Fund...........................................44
Portfolio Transactions...........................................46
Dividends and Distributions......................................46
Description of Series B Preferred and Series C Auction
Rate Preferred...................................................48
The Auction of Series C Auction Rate Preferred...................60
Description of Capital Stock and Other Securities................64
Taxation.........................................................66
Anti-takeover Provisions of the Charter and By-Laws..............69
Custodian, Transfer Agent, Auction Agent and Dividend-
Disbursing Agent.................................................70
Underwriting.....................................................71
Legal Matters....................................................73
Experts..........................................................73
Additional Information...........................................74
Special Note Regarding Forward-Looking Statements................74
|
Table of Contents of SAI.........................................75 Appendix A......................................................A-1
SUMMARY
This is only a summary. You should review the more detailed information contained in this prospectus and the SAI.
The Fund................ The Fund is a closed-end, diversified, management
investment company. Prior to March 31, 1995, the
Fund operated as an open-end, diversified,
management investment company. The Fund was
incorporated in Maryland on December 19, 1988. The
Fund's outstanding shares of common stock, par value
$.001 per share, are listed and traded on the NYSE.
As of December 31, 2002, the sum of the net assets
of the Fund plus the liquidation value of the Fund's
outstanding preferred stock ($15 million) was
approximately $108.8 million. As of December 31,
2002, the Fund had outstanding 11,113,431 shares of
common stock and 600,000 shares of 8% Cumulative
Preferred Stock, liquida tion preference $25 per
share (the "Series A Preferred"). The Fund redeemed
all of its outstanding Series A Preferred on
February 11, 2003.
The Offering............ The Fund offers by this prospectus, in the
aggregate, $50 million of preferred stock of either
Series B Preferred or Series C Auction Rate
Preferred, or a combination of both such series. The
Series B Preferred and/or Series C Auction Rate
Preferred are being offered by Salomon Smith Barney
Inc. and Gabelli & Company, Inc. as underwriters.
Upon issuance, the Series B Preferred and the Series
C Auction Rate Preferred will have equal seniority
with respect to dividends and liquidation prefer
ence.
Series B Preferred. The Fund is offering 1,000,000
shares of % Series B Cumulative Preferred, par value
$.001 per share, liquidation preference $25 per
share, at a purchase price of $25 per share.
Dividends on the shares of Series B Preferred will
accumulate from the date on which such shares are
issued; provided, however, that any shares of Series
B Preferred issued within 30 days of the original
issue date of the series will accumulate dividends
from the series' original date of issue. Appli
cation has been made to list the Series B Preferred
on the New York Stock Exchange.
Series C Auction Rate Preferred. The Fund is offering
1,000 shares of Series C Auction Rate Cumulative
Preferred, par value $.001 per share, liquidation
preference $25,000 per share, 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 Auction
Rate Preferred is issued.
The Series C Auction Rate Preferred will not be
listed on an exchange. Instead, investors may buy or
sell Series C Auction Rate 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 B Preferred or Series
C Auction Rate 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 preferred stock
shares in book-entry form. An investor's
broker-dealer, in turn, will maintain records of
that investor's beneficial ownership of preferred
stock.
Investment Objective.... The investment objective of the Fund is to seek a
high level of total return on its assets. The Fund
will seek to achieve this objective through a
combination of current income and capital
appreciation by investing primarily in convertible
and other income producing securities. Under normal
circumstances the Fund will invest at least 80% of
the value of its total assets (taken at current
value) in "convertible securities," i.e., securities
(bonds, debentures, notes, stocks and other similar
securities) that are convertible into common stock
or other equity securities, and "income
securities," i.e., nonconvertible debt or equity
securities having a history of regular payments or
accrual of income to holders. No assurance can be
given that the Fund will achieve its investment
objective. See "Investment Objective and Policies."
Dividends
and Distributions....... Series B Preferred. Dividends on the Series B
Preferred, at the annual rate of % of its $25 per
share liquidation preference, are cumulative from
the Series B Preferred's original issue date for any
shares issued within 30 days of such original issue
date and are payable, when, as and if declared by
the Board of Directors of the Fund, out of funds
legally available therefor, quarterly on March 26,
June 26, September 26 and December 26 in each year,
commencing on , 2003. Any Series B Preferred issued
later than 30 days following the original issue date
will accumulate dividends from the date such shares
are issued.
Series C Auction Rate Preferred. The holders of
Series C Auction Rate Preferred are entitled to
receive cash dividends stated at annual rates of its
$25,000 per share liquidation preference, 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 Auction Rate
Preferred.
Dividend
Initial Payment Date Number of
Dividend for Initial Days of Initial
Rate Dividend Period Dividend Period
Series C ---- --------------- ---------------
Auction Rate
Preferred..... % , 2003
For subsequent dividend periods, the Series C
Auction Rate Preferred will pay dividends based on a
rate set at auctions, normally held weekly. In most
instances, dividends are payable weekly, on the
first business day following the end of the divi-
dend 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 the end of the dividend period. The Fund may,
subject to certain conditions, designate special
dividend periods of more (or less) than seven days.
The dividend payment date for any such special
dividend period will be set out in the notice
designating a special dividend period. Dividends on
shares of Series C Auction Rate Preferred will be
cumulative from the date such shares are issued and
will be paid out of legally available funds.
In no event will the dividend rate set at auction
for the Series C Auction Rate Preferred exceed the
then-maximum rate. The maximum 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 Auction Rate Preferred by
Moody's and Fitch or (ii) in the case of a dividend
period of longer than 184 days, the applicable
percentage of the Treasury Index Rate.
Moody's Fitch Applicable
Credit Rating Credit Rating 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%
|
See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Dividends on the Series C Auction Rate Preferred -- Maximum Rate." For example, calculated as of September 30, 2002 and December 31, 2002, respectively, the maximum rate for the Series C Auction Rate Preferred (assuming a rating of Aa3 or above by Moody's and AA- or above by Fitch) would have been approximately 2.57% and 1.92%, for dividend periods of 90 days, and approximately 2.90% and 2.57% for dividend periods of two years.* There is no minimum applicable rate with respect to 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 Basic Maintenance Amount (as defined in the applicable rating agency guidelines). See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Dividends on the Series C Auction Rate Preferred" and "The Auction of Series C Auction Rate Preferred."
Preferred Stock Dividends. Under current law, all preferred stock of the Fund must have the same seniority as to the payment of dividends. Accordingly, no full dividend will be declared or paid on any series of preferred stock of the Fund for any dividend period, or part thereof, unless full cumulative dividends due through the most recent dividend payment dates therefor for all series of outstanding preferred stock of the Fund are declared and paid. If full cumulative dividends due have not been declared and paid on all outstanding shares of preferred stock of the Fund ranking on a parity with the Series B Preferred and/or Series C Auction Rate Preferred as to the payment of dividends, any dividends being paid on the shares of such preferred stock (including any outstanding Series B Preferred and Series C Auction Rate Preferred) will be paid as nearly pro rata as possible in proportion to the respective amounts of dividends accumulated but unpaid on each such series of preferred stock on the relevant dividend payment date.
In the event that for any calendar year the total distributions on shares of the Fund's preferred stock exceed the Fund's net investment income and net capital gain allocable to those shares, the excess distributions will generally be treated as a tax-free return of capital (to the extent of the stockholder's tax basis in his or her shares). The amount treated as a tax-free return of capital will reduce a stockholder's adjusted basis in his or her shares of preferred stock, thereby increasing the stockholder's potential gain or reducing his or her potential loss on the sale of the shares.
Common Stock. In order to allow its holders of common stock to realize a predictable, but not assured, level of cash flow and some liquidity periodically on their investment without having to sell shares, the Fund has adopted a policy, which may be modified at any time by its Board of Directors, of paying distributions on its common stock of 8% of average quarter-end net assets attributable to common stock. For the fiscal year ending December 31, 2002, 64% of the distributions paid by the Fund with respect to its common stock consisted of a return of capital. The Fund had not previously returned capital as part of distributions on its common stock since 1995, the year the Fund began operating as a closed-end fund. The Fund's Board of Directors monitors and reviews the Fund's common stock distribution policy on a regular basis.
See "Dividends and Distributions."
Auction Procedures...... You may buy, sell or hold Series C Auction Rate
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 as set forth in this prospectus or
the SAI.
The auctions determine the dividend rate for the
Series C Auc tion Rate Preferred, but each dividend
rate will not be higher than the then-maximum rate.
See "Description of the Series B Preferred and
Series C Auction Rate Preferred -- Dividends on the
Series C Auction Rate Preferred."
If you own shares of Series C Auction Rate
Preferred, you may instruct your broker-dealer to
enter one of three kinds of order in the auction
with respect to your shares: sell, bid and hold.
If you enter a sell order, you indicate that you
want to sell Series C Auction Rate 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,
which must specify a dividend rate, you indicate
that you want to sell Series C Auction Rate
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 Auction Rate Preferred,
no matter what the next dividend period's rate will
be.
You may enter different types of orders for
different portions of your Series C Auction Rate
Preferred. You may also enter an order to buy
additional Series C Auction Rate Preferred. All
orders must be for whole shares. All orders you
submit are irrevocable. There is a fixed number of
Series C Auction Rate 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, the rating
of the Series C Auction Rate Preferred and general
economic conditions including current interest
rates. If you own Series C Auction Rate Preferred
and submit a bid for them higher than the then-
maximum 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 Auction Rate 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 Auction Rate
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 the dividend rate you specify. If you bid for
shares you do not already own at a rate higher than
the then-maximum rate, your bid will not be
considered.
Broker-dealers will submit orders from existing and
potential holders of Series C Auction Rate 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 Auction
Rate Preferred. A broker-dealer's failure to submit
orders for Series C Auction Rate 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. The Fund
may not submit an order in any auction.
The auction agent after each auction for the Series
C Auction Rate 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 (i) a fraction, the
numerator of which is the number of days in such
dividend period and the denominator of which is 365,
times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of Series C Auction Rate
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 Auction Rate Preferred placed by the
broker-dealers at the auction agreed to by the Fund
and the broker-dealers.
If the number of Series C Auction Rate Preferred
shares subject to bid orders by potential holders
with a dividend rate equal to or lower than the
then-maximum rate is at least equal to the number of
Series C Auction Rate 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
hold ers, would result in existing and potential
holders owning all the Series C Auction Rate
Preferred available for purchase in the auction.
If the number of Series C Auction Rate Preferred
shares subject to bid orders by potential holders
with a dividend rate equal to or lower than the
then-maximum rate is less than the number of Series
C Auction Rate Preferred shares subject to sell
orders, then the auction is considered to be a
failed auction, and the dividend rate will be the
maximum 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 Auction Rate Preferred for
which they submitted sell orders.
The auction agent will not consider a bid above the
then-maximum rate. The purpose of the maximum rate
is to place an upper limit on dividends with respect
to the Series C Auction Rate 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 Series C Auction
Rate 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 Auction
Rate 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 then-current "AA" Financial Composite
Commercial Paper Rate.
The auction procedures include a pro rata allocation
of Series C Auction Rate Preferred shares for
purchase and sale. This allocation process may
result in an existing holder selling, or a potential
holder buying, fewer shares than the number of
Series C Auction Rate Preferred shares in its order.
If this happens, 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.
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 Auction Rate 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 autho-
rized or obligated by law to close.
The first auction for Series C Auction Rate
Preferred will be held on , 2003, the business day
preceding the dividend payment date for the initial
dividend period. Thereafter, except during special
dividend periods, auctions for Series C Auction Rate
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 Auction Rate 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 will be extended by seven days (or a
multiple thereof if necessary because of such
unforeseen event or events), the applicable rate for
such period will be the applicable rate for the
then-current dividend period so extended and the
dividend payment date for such dividend period will
be the first business day immediately succeeding the
end of such period. See "The Auction of Series C
Auction Rate Preferred."
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 differ
ential currently can be as great as 18.6%, the
difference between 38.6% on ordinary income and
short-term capital gains and 20.0% on long-term
capital gains. In accordance with the current view
of the Internal Revenue Service, the Fund intends to
allocate its net long-term capital gain and ordinary
income (including net short-term capital gain and
investment income) proportionately between its
common stock and preferred stock. Over the past one,
three and five fiscal years ending December 31,
2002, the distributions of taxable income by the
Fund consisted of 0.00%, 31.37%, and 31.75%
long-term capital gains. If the Fund is able in
future years to pay a portion of its distribu tions
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 B Preferred and/or Series C
Auction Rate Preferred dividends than if the Fund
did not distribute long-term capital gains. See "Tax
Attributes of Preferred Stock Dividends." No
assurance can be given as to what, if any, portion
of the Fund's dividends in future years will consist
of long-term capital gains.
Rating and Asset
Coverage Requirements... Series B Preferred. Before it can be issued, the
Series B Preferred must receive a rating of Aaa
from Moody's Investors Service, Inc. The Fund's
Articles Supplementary, setting forth the rights and
preferences of the Series B Preferred, contain
certain tests that the Fund must satisfy to obtain
and maintain a rating of Aaa from Moody's on the
Series B Preferred. See "Description of the Series B
Preferred and Series C Auction Rate Preferred --
Rating Agency Guidelines."
Series C Auction Rate Preferred. Before it can be
issued, the Series C Auction Rate Preferred must
receive both a rating of Aaa from Moody's and a
rating of AAA from Fitch. As with the Series B
Preferred, the Articles Supplementary of the Fund
setting forth the rights and preferences of the
Series C Auction Rate Preferred contain certain
tests that the Fund must satisfy to obtain and
maintain a rating of Aaa from Moody's and AAA from
Fitch. See "Description of the Series B Preferred
and Series C Auction Rate Preferred -- Rating Agency
Guidelines."
Asset Coverage Requirements. Under the asset
coverage tests to which each of the Series B
Preferred and/or Series C Auction Rate Preferred is
subject, the Fund is required to maintain (i) assets
having in the aggregate a discounted value greater
than or equal to a Basic Maintenance Amount (as
defined under "Description of the Series B
Preferred and Series C Auction Rate Preferred --
Rating Agency Guidelines") for each such series
calculated pursuant to 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 1940 Act) with
respect to all outstanding preferred stock of the
Fund, including the Series B Preferred and the
Series C Auction Rate Preferred. See "Description of
the Series B Preferred and Series C Auction Rate
Preferred -- Asset Maintenance Requirements."
The Fund estimates that if the shares offered hereby
had been issued and sold as of February 14, 2003,
the asset coverage under the 1940 Act would have
been approximately 290% immediately following such
issuance and sale (after giving effect to the
deduction of the underwriting discounts and esti-
mated offering expenses for such shares of
$1,500,000). The asset coverage would have been
computed as follows:
value of Fund assets less liabilities not
constituting senior secu rities ($144,898,943) /
senior securities representing indebted ness plus
liquidation preference of each class of preferred
stock ($50,000,000), expressed as a percentage =
290%.
The Articles Supplementary for each of the Series B
Preferred and the Series C Auction Rate Preferred,
which contain the technical provisions of the
various components of the asset coverage tests, have
been filed as exhibits to this registration
statement and may be obtained through the web site
of the SEC (http://www.sec.gov).
Mandatory
Redemption.............. The Series B Preferred and the Series C Auction Rate
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. If the Fund redeems
preferred stock mandatorily, it may, but is not
required to, redeem a sufficient number of shares of
preferred stock so that after the redemption the
Fund exceeds the asset coverage required by each of
the applicable rating agency guidelines and the 1940
Act by 10%.
With respect to the Series B Preferred, any such
redemption will be made for cash at a redemption
price equal to $25 per share plus accumulated and
unpaid dividends (whether or not earned or declared)
to the redemption date.
With respect to the Series C Auction Rate Preferred,
any such redemption will be made for cash at a
redemption price equal to $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
Auction Rate Preferred having a dividend period of
more than one year, any applicable redemption
premium determined by the Board of Directors. See
"Description of the Series B Preferred and Series C
Auction Rate Preferred -- Redemption -- Mandatory Re-
demption."
In the event of a mandatory redemption, such
redemption will be made from the Series B Preferred,
the Series C Auction Rate Preferred or other
preferred stock of the Fund in such proportions as
the Fund may determine, subject to the limitations
of the 1940 Act and Maryland law.
Optional Redemption..... Subject to the limitations of the 1940 Act and
Maryland law, the Fund may, at its option, redeem
the Series B Preferred and/or the Series C Auction
Rate Preferred as follows:
Series B Preferred. Commencing on , 2008 and at any
time thereafter, the Fund at its option may redeem
the Series B Preferred, in whole or in part, for
cash at a redemption price per share equal to $25
plus accumulated and unpaid dividends (whether or
not earned or declared) to the redemption date. If
fewer than all of the shares of the Series B
Preferred are to be redeemed, any such redemption of
Series B Preferred shares will be made pro rata in
accordance with the number of such shares held.
Prior to , 2008 the Series B Preferred will be
subject to optional redemption by the Fund at the
redemption price only to the extent necessary for
the Fund to continue to qualify for tax treatment as
a regulated investment company. See "Description of
the Series B Preferred and Series C Auction Rate
Preferred -- Redemption -- Optional Redemption of
the Series B Preferred."
Series C Auction Rate Preferred. The Fund generally
may redeem Series C Auction Rate Preferred, in whole
or in part, at any time other than during a non-call
period. The Fund may declare a non-call period
during a dividend period of more than seven days. If
fewer than all of the shares of the Series C Auc-
tion Rate Preferred are to be redeemed, any such
redemption of Series C Auction Rate Preferred shares
will be made pro rata in accordance with the number
of such shares held. See "Descrip tion of the Series
B Preferred and Series C Auction Rate Preferred --
Redemption -- Optional Redemption of the Series C
Auction Rate Preferred."
The redemption price per Series C Auction Rate
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, plus, in the case of Series C
Auction Rate Preferred having a dividend period of
more than one year, any redemption premium
applicable during such dividend period. See
"Description of the Series B Preferred and Series C
Auction Rate Preferred -- Redemption -- Optional
Redemption of the Series C Auction Rate Preferred."
Voting Rights........... At all times, holders of shares of the Fund's
preferred stock outstanding (including the Series B
Preferred and/or Series C Auction Rate Preferred),
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 then constitute a majority of
the directors until all cumulative dividends on all
shares of preferred stock have been paid or provided
for. Holders of outstanding shares of Series B
Preferred, Series C Auction Rate Preferred and any
other preferred stock will vote separately as a
class on certain other matters, as required under
the applicable Articles Supplementary, the 1940 Act
and Maryland law. Except as otherwise indicated in
this prospectus and as otherwise required by
applicable law, holders of Series B Preferred and/or
Series C Auction Rate 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 B Preferred and Series C Auction Rate
Preferred -- Voting Rights."
Liquidation
Preference.............. The liquidation preference of each share of Series B
Preferred is $25. The liquidation preference of the
Series C Auction Rate Preferred is $25,000 per
share. Upon liquidation, preferred stock
shareholders will be entitled to receive the
liquidation preference with respect to their shares
of preferred stock plus an amount equal to
accumulated but unpaid dividends with respect to
such shares (whether or not earned or declared) to
the date of distribution. See "Description of the
Series B Preferred and Series C Auction Rate
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 objective and
policies. See "Use of Proceeds."
Listing of the Series B
Preferred............... Prior to its being offered, there has been no public
market for the Series B Preferred. Following its
issuance (if issued), the Series B Preferred is
expected to be listed on the New York Stock
Exchange. However, during an initial period which is
not expected to exceed 30 days after the date of
its initial issuance, the Series B Preferred will
not be listed on any securities exchange.
Limitation on Secondary
Market Trading of the
Series C Auction Rate
Preferred............... The Series C Auction Rate Preferred will not be
listed on an exchange. Broker-dealers may, but are
not obliged to, maintain a secondary trading market
in Series C Auction Rate Preferred outside of
auctions. There can be no assurance that a secondary
market will provide owners with liquidity. You may
transfer Series C Auction Rate 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.
Special Characteristics
and Risks............... Risk is inherent in all investing. Therefore, before
investing in Series B Preferred or Series C Auction
Rate Preferred you should consider the risks
carefully.
Series B Preferred. Primary risks associated with an
investment in the Series B Preferred include:
The market price for the Series B Preferred will be
influenced by changes in interest rates, the
perceived credit quality of the Series B Preferred
and other factors.
During an initial period which is not expected to
exceed 30 days after the date of its issuance, the
Series B Preferred will not be listed on any
securities exchange. During such period, the
underwriters intend to make a market in the Series B
Preferred; however, they have no obligation to do
so. Consequently, the Series B Preferred may be
illiquid during such period. No assurances can be
provided that listing on any securities exchange or
market making by the underwriters will result in the
market for Series B Preferred being liquid at any
time.
Series C Auction Rate Preferred. Primary risks
associated with an investment in Series C Auction
Rate Preferred, include:
If an auction fails, you may not be able to sell
some or all of your Series C Auction Rate Preferred.
The Fund is not obliged to redeem your Series C
Auction Rate Preferred if an auction fails. The
underwriters are not required to make a market in
the Series C Auction Rate Preferred. No
broker-dealer is obligated to maintain a secondary
market for the Series C Auction Rate Preferred apart
from the auctions.
You may receive less than the price you paid for
your Series C Auction Rate Preferred if you sell
them outside of the auction, especially when market
interest rates are rising.
In connection with the sale of the Series C Auction
Rate Pre ferred, 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 Auction Rate Preferred or obtain the equiva-
lent of a fixed rate for the Series C Auction Rate
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. See
"How the Fund Manages Risk -- Interest Rate
Transactions."
Both the Series B Preferred and Series C Auction
Rate Pre ferred. An investment in either the Series
B Preferred or Series C Auction Rate Preferred also
includes the following primary risks:
A rating agency could downgrade or withdraw the
rating assigned to the Series B Preferred and/or
Series C Auction Rate Preferred, which would likely
have an adverse effect on the liquidity and market
value of these preferred shares. The present credit
rating does not eliminate or mitigate the risks of
investing in these preferred shares.
The Fund may mandatorily redeem your Series B
Preferred and/or Series C Auction Rate Preferred to
meet regulatory or rating agency requirements or may
voluntarily redeem your Series B Preferred and/or
Series C Auction Rate Preferred. Subject to such
redemptions, these preferred shares are perpetual.
The Fund may not meet the asset coverage
requirements or earn sufficient income from its
investments to pay dividends on the Series B
Preferred and/or Series C Auction Rate Preferred.
The Series B Preferred and/or Series C Auction Rate
Preferred are not obligations 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 B
Preferred and/or Series C Auction Rate Preferred for
the full redemption price.
The value of the Fund's investment portfolio may
decline, reducing the asset coverage for the Series
B Preferred and/or Series C Auction Rate 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 invests a significant portion of its assets
in convertible securities. Many convertible
securities are not investment grade, that is, not
rated within the four highest categories by Moody's
and Standard & Poor's Ratings Services. To the
extent that the convertible securities and any other
fixed income securities owned by the Fund are rated
lower than investment grade, or are not rated, there
would be a greater risk as to the timely repayment
of the principal of, and timely payment of interest
or dividends on, those securities. Convertible debt
securities (which generally are rated lower than
investment grade) and fixed income securities that
are rated lower than investment grade, or not rated
but of similar quality, are commonly described as
"junk bonds." See "Risk Factors and Special
Considerations -- Asset Class Risks."
The Fund may invest up to 25% of its total assets in
securities of foreign issuers. The Fund may also
purchase sponsored American Depository Receipts or
U.S. denominated securities of foreign issuers,
which will not be included in the Fund's 25% foreign
securities limitation. Investing in securities of
foreign companies and foreign governments, which are
generally 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 Consider ations -- Foreign
Securities."
The Investment Adviser (as hereinafter defined) is
dependent upon the expertise of Mr. Mario J. Gabelli
in providing advisory services with respect to the
Fund's investments. 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 -- Dependence on
Key Personnel."
Federal Income Tax
Considerations.......... The Fund has qualified and intends to remain
qualified for federal income tax purposes as a
regulated investment company. Qualification
requires, among other things, compliance by the Fund
with certain distribution requirements. Statutory
limita tions 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" for a more
complete discussion of these and other federal
income tax considerations.
Management
and Fees................ Gabelli Funds, LLC serves as the Fund's investment
adviser and is compensated for its services and its
related expenses at an annual rate of 1.00% of the
Fund's average weekly net assets. 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 Fund's outstanding
Series B Pre ferred or Series C Auction Rate
Preferred, as the case may be, 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 B Preferred, the stated annual dividend
rate of such series and (ii) in the case of the
Series C Auction Rate Preferred, the dividend rate
for the Series C Auction Rate Preferred at the
beginning of such year (including the anticipated
cost of a swap or cap if the Fund hedges its Series
C Auction Rate Preferred dividend obligations), in
every case prorated during the year such series is
issued and the final year such series is
outstanding. See "Management of the Fund."
Repurchase of Common
Stock and Anti-takeover
Provisions.............. The Fund is authorized to repurchase up to 500,000
shares of its common stock in the open market when
the common stock is trading at a discount of 10% or
more (or such other percentage as the Fund's Board
of Directors may determine from time to time) from
net asset value. Such repurchases are subject to
certain notice and other requirements including
those set forth in Rule 23c-1 under the 1940 Act.
See "Description of Capital Stock and Other
Securities - Common Stock." Through December 31,
2002, the Fund has repurchased in the open market
305,200 shares of its common stock under this
authorization. See "Description of Capital Stock and
Other Securities -- Common Stock." Certain
provisions of the Fund's charter (the "Charter")
and the Fund's by-laws (the "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 75% of the outstanding shares
of the Fund and the vote of a majority (as defined
in the 1940 Act) of the holders of preferred shares,
voting as a single class, are necessary to authorize
the conversion of the Fund from a closed-end to an
open-end investment company. 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 stock
at a premium to the prevailing market price. See
"Anti-takeover Provisions of the Charter and
By-Laws."
Custodian, Transfer
Agent, Auction Agent
and Dividend-
Disbursing Agent........ State Street Bank and Trust Company (the
"Custodian"), located at 150 Royall Street, Canton,
MA 02021, 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, N.A., located at P.O. Box
43025, Providence, RI 02940-3025, serves as the
Fund's dividend disbursing agent, as agent under
the Fund's automatic dividend reinvestment and
voluntary cash purchase plan, and as transfer agent
and registrar with respect to the common stock of
the Fund.
Series B Preferred. EquiServe will also serve as the
transfer agent, registrar, dividend and paying agent
and redemption agent with respect to the Series B
Preferred.
Series C Auction Rate Preferred. The Bank of New
York will serve as the auction agent, transfer
agent, registrar, dividend paying agent and
redemption agent with respect to the Series C
Auction Rate Preferred.
Interest Rate
Transactions............ In connection with the sale of the Series C Auction
Rate 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 Auction Rate Preferred or obtain the equiva-
lent of a fixed rate for the Series C Auction Rate
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 Auction Rate 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, the Fund 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 Auction Rate 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 Auction Rate
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, at its option, consistent with its Charter
and the requirements of the 1940 Act, and in certain
circumstances will be required to, mandatorily
redeem some or all of these shares (including the
Series C Auction Rate 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 Auction Rate Preferred in a notional
amount in excess of the outstanding amount of the
Series C Auction Rate Preferred. The Fund will
monitor any such swap with a view to ensuring that
the Fund remains in compliance with all applicable
regulatory investment policy and tax requirements.
|
See "How the Fund Manages Risk -- Interest Rate Transactions" for additional information.
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 (including short-term capital gain). The Fund operates as a regulated investment company under the Internal Revenue Code of 1986, as amended, (the "Code") and distributions by a regulated investment company generally retain their character as capital gain or ordinary income when received by individual investors who hold its preferred or common stock. Thus, dividends paid by the Fund to holders of the Series B Preferred or Series C Auction Rate Preferred may, for federal income tax purposes, consist of varying proportions of long-term capital gain, ordinary income and/or returns of capital.
Capital gain on assets held longer than 12 months generally is currently taxable to individuals at a maximum rate of 20.0% (or 18.0% for capital assets that have been held for more than five years, the holding period of which began after December 31, 2000). Net investment income, which includes short- term capital gain of the Fund, is 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 the Series B Preferred or Series C Auction Rate Preferred would, under current federal income tax law, realize a tax advantage on their investment to the extent that distributions by the Fund to its stockholders are composed of long-term capital gain which is taxed at a lower rate than ordinary income. In contrast, preferred stock dividends distributed by corporations that are not regulated investment companies are generally taxed, for federal income tax purposes, as ordinary income.
Over the past one, three and five fiscal years ending December 31, 2002, the distributions of taxable income by the Fund consisted of 0.00%, 31.37%, and 31.75% long-term capital gains. The fiscal year ending December 31, 2002 was the first year since the Fund's reorganization in 1995 as a closed-end fund for which its distributions of taxable income failed to include a portion of long-term capital gain. Given current market conditions, there is no assurance that over the next several years the percentage of its taxable distributions that consist of long-term capital gain will again approach historical levels. An investment by an individual in the common stock or preferred stock of a regulated investment company whose dividends consist of a larger percentage of long-term capital gain would be expected to realize a proportionately higher tax advantage as compared to dividends on the Series B Preferred or Series C Auction Rate Preferred.
Corporate taxpayers are subject to a 35% tax on capital gain and ordinary income dividends. In addition, corporate taxpayers that are eligible for the dividends received deduction on dividends that constitute ordinary income will not be able to utilize that deduction with respect to Fund dividends that constitute long-term capital gain, and so may incur a tax disadvantage by holding stock in the Fund.
The Bush Administration has announced a proposal to reduce or eliminate the tax on dividends; however, many details of the proposal (including how the proposal would apply to dividends paid by a regulated investment company) have not been specified. Moreover, the prospects for this proposal are unclear. Accordingly, it is not possible to evaluate how this proposal might affect the taxation of the Fund's stockholders.
The federal income tax characteristics of the Fund and the taxation of its stockholders are described more fully under "Taxation."
The following tables show examples of the pure ordinary income equivalent yield that would be generated by the stated dividend rate on the Series B Preferred and Series C Auction Rate Preferred, respectively, 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 Internal Revenue Service revenue ruling requiring the proportionate allocation of types of income among the 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 B Preferred
------------------
Series B Preferred Series B Preferred
Illustrative Annual Illustrative Annual
Dividend Rate Dividend Rate
------------------- -------------------
5.75% 6.25% 5.75% 6.25%
Percentage of Series B Preferred
Stated Annual Dividend Comprised of
----------------------------------- Tax Equivalent Yield for an Tax Equivalent Yield for an
Long-Term Ordinary Individual in the 38.6% Individual in the 30.0%
Capital Gains Income federal Income Tax Bracket1 federal Income Tax Bracket1
------------- ------ --------------------------- ---------------------------
33.3% 66.7% 6.33% 6.88% 6.02% 6.55%
30.0% 70.0% 6.27% 6.82% 6.00% 6.52%
20.0% 80.0% 6.10% 6.63% 5.91% 6.43%
10.0% 90.0% 5.92% 6.44% 5.83% 6.34%
0.0% 100.0% 5.75% 6.25% 5.75% 6.25%
|
Series C Auction Rate Preferred
-------------------------------
Series C Auction Rate Series C Auction Rate
Preferred Illustrative Annual Preferred Illustrative Annual
Dividend Rate* Dividend Rate*
----------------------------- -----------------------------
1.00% 1.50% 1.00% 1.50%
Percentage of Series C Auction Rate Pre-
ferred Share Illustrative Annual Dividend
Comprised of
------------------------------------------
Tax Equivalent Yield for
Tax Equivalent Yield for an an Individual in the 30.0%
Long-Term Ordinary Individual in the 38.6% federal Income Tax
Capital Gains Income federal Income Tax Bracket1 Bracket1
------------- ------ ------------------------------ ---------------------------
33.3% 66.7% 1.10% 1.65% 1.05% 1.57%
30.0% 70.0% 1.09% 1.64% 1.04% 1.56%
20.0% 80.0% 1.06% 1.59% 1.03% 1.54%
10.0% 90.0% 1.03% 1.55% 1.01% 1.52%
0.0% 100.0% 1.00% 1.50% 1.00% 1.50%
|
* Actual dividend rates for the Series C Auction Rate Preferred will be determined based upon the results of periodic auctions. See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Dividends on the Series C Auction Rate Preferred."
(1) Annual taxable income levels for individuals corresponding to the 2003 federal marginal tax brackets are as follows:
2003 Federal Income Tax Bracket+ Single Joint ------------ ------ ----- 38.6% over $311,950 over $311,950 35.0% over $143,500 - $311,950 over $174,700 - $311,950 30.0% over $68,800 - $143,500 over $114,650 - $174,700 27.0% over $28,400 - $68,800 over $47,450 - $114,650 15.0% over $6,000 - $28,400 over $12,000 - $47,450 10.0% up to and including $6,000 up to and including $6,000 |
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.
+ The Economic Growth and Tax Relief Reconciliation Act of 2001 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 below sets forth the per share operating performance and ratios for the periods presented. The financial information was derived from and should be read in conjunction with the Financial Statements of the Fund and Notes thereto, which are incorporated by reference into this prospectus and the SAI. The financial information for each of the five years ended December 31, 2002 has been audited by PricewaterhouseCoopers LLP, independent accountants, whose unqualified report on such Financial Statements is incorporated by reference into the SAI.
Year Ended December 31,
Selected data for a Fund common share ------------------------------------------------------
outstanding throughout each period: 2002 2001 2000 1999 1998 1997
------------------------------------------------------
Operating performance:
Net asset value, beginning of period................. $9.92 $10.02 $11.40 $11.45 $11.48 $11.08
------------------------------------------------------
Net investment income................................ 0.49 0.68 0.72 0.51 0.53 0.49
Net realized and unrealized gain (loss) on
investments......................................... (0.76) 0.32 (0.52) 0.77 0.65 1.23
----- ---- ----- ---- ---- ----
Total from investment operations..................... (0.27) 1.00 0.20 1.28 1.18 1.72
------------------------------------------------------
Distributions to preferred stock shareholders:
Net investment income................................ (0.28) (0.18) (0.13) (0.11) (0.13) (0.08)
Net realized gain on investments..................... -- (0.12) (0.17) (0.19) (0.17) (0.11)
------------------------------------------------------
Total distributions to preferred stock
shareholders........................................ (0.28) (0.30) (0.30) (0.30) (0.30) (0.19)
------------------------------------------------------
Net increase (decrease) in net assets attributable
to common stock shareholders resulting
from operations...................................... (0.55) 0.70 (0.10) 0.98 0.88 1.53
------------------------------------------------------
Distributions to common stock shareholders:
Net investment income................................ (0.27) (0.48) (0.57) (0.39) (0.39) (0.40)
Net realized gain on investments..................... -- (0.33) (0.73) (0.64) (0.53) (0.56)
Paid in capital...................................... (0.48) -- -- -- -- --
------------------------------------------------------
Total distributions to common stock
shareholders........................................ (0.75) (0.81) (1.30) (1.03) (0.92) (0.96)
------------------------------------------------------
Capital share transactions:
Increase in net asset value from common share
transactions........................................ 0.02 0.01 0.02 -- 0.01 0.01
Decrease in net asset value from shares issued in
rights offering..................................... (0.20) -- -- -- -- --
Preferred share offering costs charged to
paid-in capital..................................... 0.00 -- -- -- -- (0.18)
------------------------------------------------------
Total capital share transactions..................... (0.18) 0.01 0.02 0.00 0.01 (0.17)
------------------------------------------------------
Net asset value attributable to common stock
shareholders, end of period.......................... $8.44 $9.92 $10.02 $11.40 $11.45 $11.48
======================================================
Net asset value total return(+)...................... (7.0)% 7.0% 0.0% 9.4% 8.3% 13.5%
======================================================
Market value, end of period.......................... $8.55 $10.90 $ 9.13 10.56 $11.25 $10.31
------------------------------------------------------
Total investment return(++).......................... (14.2)% 29.1% (1.7)% 3.2% 18.4% 22.2%
======================================================
Ratios and supplemental data:
Net assets including liquidation value of pre-
ferred shares, end of period (in 000's)............. $108,774 $110,074 $108,066 $120,179 $120,726 $122,382
Net assets attributable to common shares, end of
period (in 000's)................................... $ 93,774 $ 80,074 $ 78,066 $ 90,179 $ 90,726 $ 92,382
Ratio of net investment income to average net
assets attributable to common shares*............... 5.32% 6.58% 6.49% 4.35% 4.54% 4.23%
Ratio of operating expenses to average net assets
attributable to common shares* (a).................. 1.58% 1.46% 1.48% 1.80% 1.83% 1.68%
Ratio of operating expenses to average total net
assets including liquidation value of
preferred shares (c).............................. 1.15% 1.07% 1.10% 1.36% 1.38% 1.39%
Portfolio turnover rate.............................. 56% 59% 169% 175% 149% 243%
Cumulative Preferred Stock:
8.00% Cumulative Preferred Stock Liquidation
value, end of period (in 000's)..................... $ 15,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Total shares outstanding (in 000's).................. 600 1,200 1,200 1,200 1,200 1,200
Liquidation preference per share..................... $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00 $ 25.00
Average market value (b)............................. $ 25.83 $ 25.80 $ 24.31 $ 25.36 $ 26.84 $ 25.69
Asset coverage....................................... 725% 367% 360% 401% 402% 408%
Asset coverage per share............................. $ 181.29 $ 91.72 $ 90.05 $ 100.15 $ 100.60 $ 101.99
|
Year Ended December 31,
1996+ 1995+ 1994+ 1993+
---------- ---------- ---------- ---------
Operating Performance:
Net asset value, beginning of period.......................... $ 11.01 $ 10.60 $ 11.52 $ 11.45
---------- ---------- ---------- ---------
Net investment income......................................... 0.49 0.53 0.69 0.76
Net realized and unrealized gain (loss)
on securities.............................................. 0.31 1.03 (0.71 0.74
---------- ---------- ---------- ---------
Total from investment operations.............................. 0.80 1.56 (0.02) 1.50
---------- ---------- ---------- ---------
Distributions to common stock shareholders:
Net investment income......................................... (0.49) (0.53) (0.69) (0.76)
Net realized gain on investments.............................. (0.24) (0.56) (0.21) (0.67)
Distributions in excess of net investment income.............. -- (0.02) -- --
Distributions in excess of net realized gains................. -- (0.01) -- --
Paid-in capital............................................... -- (0.03) -- --
---------- ---------- ---------- ----------
Total distributions........................................... (0.73) (1.15) (0.90) (1.43)
---------- ---------- ---------- ----------
Net asset value, end of period................................ $ 11.08 $ 11.01 $ 10.60 $ 11.52
========== ========== ========== =========
Total Net Asset Value Return ++ (d)........................... 8.4% 15.0% (0.2)% 13.1%
Market value, end of period................................... $ 9.25 $ 10.75 -- --
========== ========== ========== =========
Total Investment Return ++(e)................................. (7.3)% 12.3% -- --
Ratios and supplemental data:
Net assets, end of period (in thousands)...................... $ 89,659 $ 89,137 $ 112,090 $ 108,674
Ratio of operating expenses to average net assets (f)......... 1.45% 1.56% 1.31% 1.38%
Ratio of net investment income (loss) to average net assets... 4.33% 4.60% 4.77% 4.58%
Portfolio turnover rate....................................... 114% 140% 67% 45%
|
+ Based on net asset value per share, adjusted for reinvestment of distributions.
++ Based on market value per share, adjusted for reinvestment of distributions.
+ No preferred stock outstanding during this period.
++ Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of distributions.
* The expense ratio and net investment income ratio do not reflect the effect of dividend payments to preferred shareholders.
(a) The ratio of operating expenses to average net assets attributable to common stock for the fiscal year ended December 31, 1997 does not include a reduction of expenses for custodian fee credits on cash balances maintained with the custodian. Including the custodian fee credit, the ratio of operating expenses to average net assets attributable to common stock for the year would have been 1.67%.
(b) Based on weekly prices.
(c) Amounts are attributable to both common and preferred stock assets.
(d) Based on net asset value per share, adjusted for reinvestment of all distributions.
(e) Based on net asset value per share through March 31, 1995, the date of conversion of the Fund to closed-end status, and market value thereafter, adjusted for reinvestment of all distributions.
(f) Includes, for 1995, a current period expense associated with the conversion of the Fund to closed-end Status. Without the conversion expense, this ratio would have been 1.28% in 1995.
The following table provides information about the Fund's Series A Preferred since its issuance in May 1997. The Fund redeemed all of its outstanding shares of Series A Preferred on February 11, 2003. 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
------------ ----------- --------- --------- ---------------
2002 600,000 $181.29 $25.00 $25.83
2001 1,200,000 $91.72 $25.00 $25.80
2000 1,200,000 $90.05 $25.00 $24.31
1999 1,200,000 $100.15 $25.00 $25.36
1998 1,200,000 $100.60 $25.00 $26.84
1997 1,200,000 $101.99 $25.00 $25.69
|
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 number of shares of Series A Preferred outstanding on that date. Involuntary Liquidation Preference Per Share refers to the amount holders of Series A Preferred are entitled to receive per share in the event of liquidation of the Fund 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 on the NYSE each week during the relevant year.
USE OF PROCEEDS
The net proceeds of the offering are estimated at $ after deduction of the underwriting discounts and estimated offering expenses payable by the Fund. The Investment Adviser expects that it will initially invest the proceeds of the offering in high quality short-term income securities in accor dance with the Fund's investment guidelines. Thereafter, the Fund intends to reallocate all or a portion of the offering proceeds to other long-term income or convertible securities in accordance with the Fund's investment guidelines as suitable investment opportunities become available.
THE FUND
The Fund was incorporated in Maryland on December 19, 1988 as an open-end, diversified, management investment company. The Fund converted to closed-end status after receiving stockholder approval of its Charter on February 21, 1995 and filing of the Charter in Maryland on March 31, 1995. The Fund's common stock is traded on the New York Stock Exchange under the symbol "GCV." The Fund's Series A Preferred, all of which was redeemed by the Fund on February 11, 2003, previously traded on the New York Stock Exchange under the symbol "GCV Pr."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as of February 14, 2003, and its adjusted capitalization assuming the Series B Preferred and/or Series C Auction Rate Preferred offered in this prospectus had been issued as of that date.
As of February 14, 2003
Actual As Adjusted
------ -----------
(Unaudited)
Preferred stock, $0.001 par value, 1,000,000,000 shares authorized.*
(The "Actual" column reflects the Fund's outstanding capitalization
as of February 14, 2003; the "As Adjusted" column assumes the
issuance of an additional 1,000,000 shares of Series B Preferred,
liquidation preference $25 per share, and 1,000 shares of Series C
Auction Rate Preferred, liquidation preference $25,000 per share) $ 0 $ 50,000,000
Common stock, $.001 par value per share; 1,000,000,000 shares
authorized*, 11,113,431 shares outstanding................. 11,113 11,113
Paid-in surplus**............................................. 104,240,469 102,740,469
Undistributed net investment income........................... 171,637 171,637
Accumulated net realized loss from investment
transactions............................................... (1,280,802) (1,280,802)
Net unrealized depreciation................................... (6,743,474) (6,743,474)
_______________ _________________
Net assets applicable to common shareholders.................. $96,398,943 $94,898,943
_______________ _________________
Net assets, plus liquidation preference of preferred stock.... $96,398,943 $144,898,943
=============== =================
|
* The total number of shares of capital stock of all classes authorized. The Board of Directors is authorized to classify or reclassify these one billion shares.
** As adjusted paid-in surplus reflects a reduction for the sales load and estimated offering cost of the Series B Preferred and/or Series C Auction Rate Preferred issuance of $1,500,000.
As used in this prospectus, unless otherwise noted, the Fund's "managed assets" include the aggregate net asset value of the common shares plus assets attributable to outstanding shares of its preferred stock, with no deduction for the liquidation preference of such shares of preferred stock. For financial reporting purposes, however, the Fund is required to deduct the liquidation preference of its outstanding preferred stock from "managed 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 OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of total return on its assets. The Fund seeks to achieve its investment objective through a combination of current income and capital appreciation. There is no assurance that this objective will be achieved. It is, however, a fundamental policy of the Fund and cannot be changed without stockholder approval. Under normal circumstances the Fund will invest at least 80% of the value of its total assets (taken at current value) in "convertible securities," i.e., securities (bonds, debentures, notes, stocks and other similar securities) that are convertible into common stock or other equity securities, and "income securities," i.e., nonconvertible debt or equity securities having a history of regular payments or accrual of income to holders. Securities received upon conversion of a convertible security will not be included in the calculation of the percentage of Fund assets invested in convertible securities but may be retained in the Fund's portfolio to permit orderly disposition or to establish long-term holding periods for federal income tax purposes. The Fund expects to continue its practice of focusing on convertible securities to the extent attractive opportunities are available.
The Fund may invest up to 20% of its total assets (taken at current value and subject to any restrictions appearing elsewhere in this Registration Statement) in any combination and quantity of securities that do not generate any income, such as common stocks that do not pay dividends. In selecting any of the foregoing securities for investment, the factors that will be considered by the Investment Adviser include the Investment Adviser's evaluation of the underlying value of the assets and business of the issuers of the securities, the potential for capital appreciation, the price of the securities, the issuer's balance sheet characteristics and the perceived skills and integrity of the issuer's management.
During periods when it is deemed necessary for temporary defensive purposes, the Fund may invest without limit in high quality money market instruments, including commercial paper of domestic and foreign corporations, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks and obligations issued or guaranteed by the United States government, its instrumentalities or agencies and, subject to statutory limitations, unaffiliated money market mutual funds, unless an exemptive order permits the Fund to invest in affiliated money market funds. The yield on these securities will, as a general matter, tend to be lower than the yield on other securities to be purchased by the Fund. See " -- Investment Practices -- Temporary Defensive Investments."
Investment Methodology of the Fund
In selecting securities for the Fund, the Investment Adviser normally will consider the following factors, among others:
o 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;
o the interest or dividend income generated by the securities;
o the potential for capital appreciation of the securities and any underlying common stocks;
o the prices of the securities relative to any underlying common stock;
o the prices of the securities relative to other comparable securities;
o whether the securities are entitled to the benefits of sinking funds or other protective conditions or covenants;
o the existence of any anti-dilution protections or guarantees of the security; and
o the diversification of the Fund's portfolio as to issuers.
The Investment Adviser's investment philosophy with respect to debt and equity securities seeks to identify assets that are selling in the public market at a discount to their private market value. The Investment Adviser defines private market value as the value informed purchasers are willing to pay to acquire assets with similar characteristics. The Investment Adviser also normally evaluates the issuers' free cash flow and long-term earnings trends. Finally, the Investment Adviser looks for a catalyst, something indigenous to the company, its industry or country that will surface additional value.
Investment Practices
Convertible Securities. A convertible security is a bond, debenture, note, stock or other similar security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stream of income with generally higher yields than those of common stock of the same or similar issuers. Convertible securities are senior in rank to common stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.
The Fund believes that the characteristics of convertible securities make them appropriate investments for an investment company seeking a high level of total return on its assets. These characteristics include the potential for capital appreciation if the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value, relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were not convertible. During periods of rising interest rates, it is possible that the potential for capital gain on a convertible security may be less than that of a common stock equivalent if the yield on the convertible security is at a level that causes it to sell at a discount.
Every convertible security may be valued, on a theoretical basis, as if it did not have a conversion privilege. This theoretical value is determined by the yield it provides in comparison with the yields of other securities of comparable character and quality that do not have a conversion privilege. This theoretical value, which may change with prevailing interest rates, the credit rating of the issuer and other pertinent factors, often referred to as the "investment value," represents the security's theoretical price support level.
"Conversion value" is the amount a convertible security would be worth in market value if it were to be exchanged for the underlying equity security pursuant to its conversion privilege. Conversion value fluctuates directly with the price of the underlying equity security, usually common stock. If, because of low prices for the common stock, the conversion value is substantially below the investment value, the price of the convertible security is governed principally by the factors described in the preceding paragraph. If the conversion value rises near or above its investment value, the price of the convertible security generally will rise above its investment value and, in addition, will sell at some premium over its conversion value. This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion privilege. Accordingly, the conversion value of a convertible security is subject to equity risk, that is, the risk that the price of an equity security will fall due to general market and economic conditions, perceptions regarding the industry in which the issuer participates or the issuing company's particular circumstances. If the appreciation potential of a convertible security is not realized, its conversion value premium may not be recovered.
In its selection of convertible securities for the Fund, the Investment Adviser will not emphasize either investment value or conversion value, but will consider both in light of the Fund's overall investment objective. See "Convertible Securities" in the Statement of Additional Information. The Fund may convert a convertible security that it holds:
o when necessary to permit orderly disposition of the investment when a convertible security approaches maturity or has been called for redemption;
o to facilitate a sale of the position;
o if the dividend rate on the underlying common stock increases above the yield on the convertible security; or
o whenever the Investment Adviser believes it is otherwise in the best interests of the Fund.
Convertible securities are generally not investment grade, that is, not rated within the four highest categories by S&P and Moody's. To the extent that such convertible securities and other nonconvertible debt securities, which are acquired by the Fund consistent with the factors considered by the Investment Adviser as described in this prospectus, are rated lower than investment grade or are not rated, there would be a greater risk as to the timely repayment of the principal of, and timely payment of interest or dividends on, those securities. It is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody's or, if unrated, are of comparable quality as determined by the Investment Adviser. Those securities and securities rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the financial press as "junk bonds" and may include securities of issuers in default. "Junk bonds" are considered by the rating agencies to be predominantly speculative and may involve major risk exposure to adverse conditions. See "Risk Factors and Special Considerations -- Asset Class Risks." Securities rated BBB by S&P or Baa by Moody's, in the opinion of the rating agencies, also have speculative characteristics. Securities need not meet a minimum rating standard in order to be acceptable for investment by the Fund. See "Appendix A -- Description of Corporate Bond Ratings."
The Fund's investments in securities of issuers in default will be limited to not more than 5% of the total assets of the Fund. Further, the Fund will invest in securities of issuers in default only when the Investment Adviser believes that such issuers will emerge from bankruptcy and the value of such securities will appreciate. By investing in securities of issuers in default the Fund bears the risk that such issuers will not emerge from bankruptcy or that the value of such securities will not appreciate.
The Fund has no independent limit on the amount of its net assets it may invest in unregistered and otherwise illiquid securities and other investments. The current intention of the Investment Adviser is not to invest in excess of 15% of the Fund's net assets in illiquid convertible securities or income securities. Common stockholders will be notified if the Investment Adviser changes its intention. Investments in unregistered or otherwise illiquid securities entail certain risks related to the fact that they cannot be sold publicly in the United States without registration under the Securities Act. See "Risk Factors and Special Considerations -- Asset Class Risks."
Income Securities. Although it is the Fund's policy to invest in convertible securities to the extent attractive opportunities are available, the Fund may also invest in income securities other than convertible securities that are expected to periodically accrue or generate income for their holders. Such income securities, which as of the date of this Prospectus constitute approximately 35% of the Fund's portfolio, include (i) fixed income securities such as bonds, debentures, notes, stock, short-term discounted Treasury Bills or certain securities of the U.S. government sponsored instrumentalities, as well as money market mutual funds that invest in those securities, which, in the absence of an applicable exemptive order, will not be affiliated with the Investment Adviser, and (ii) common stocks of issuers that have historically paid periodic dividends. Fixed income securities obligate the issuer to pay to the holder of the security a specified return, which may be either fixed or reset periodically in accordance with the terms of the security. Fixed income securities generally are senior to an issuer's common stock and their holders generally are entitled to receive amounts due before any distributions are made to common stockholders. Common stocks, on the other hand, generally do not obligate an issuer to make periodic distributions to holders.
The market value of fixed income securities, especially those that provide a fixed rate of return, may be expected to rise and fall inversely with interest rates and in general is affected by the credit rating of the issuer, the issuer's performance and perceptions of the issuer in the market place. The market value of callable or redeemable fixed income securities may also be affected by the issuer's call and redemption rights. In addition, it is possible that the issuer of fixed income securities may not be able to meet its interest or principal obligations to holders. Further, holders of non-convertible fixed income securities do not participate in any capital appreciation of the issuer.
The Fund may also invest in obligations of government sponsored instrumentalities. Unlike non-U.S. government securities, obligations of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association, are supported by the "full faith and credit" of the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities if it is not obligated to do so by law.
The Fund also may invest in common stock of issuers that have historically paid periodic dividends or otherwise made distributions to common stockholders. Unlike fixed income securities, dividend payments generally are not guaranteed and so may be discontinued by the issuer at its discretion or because of the issuer's inability to satisfy its liabilities. Further, an issuer's history of paying dividends does not guarantee that it will continue to pay dividends in the future. In addition to dividends, under certain circumstances the holders of common stock may benefit from the capital appreciation of the issuer.
Special Investment Methods.
Options. On behalf of the Fund, the Investment Adviser may, subject to guidelines of the Board of Directors, purchase or sell (i.e., write) options on securities, securities indices and foreign currencies that are listed on a national securities exchange or in the U.S. over-the-counter ("OTC") markets as a means of achieving additional return or of hedging the value of the Fund's portfolio. The Fund may write covered call options on common stock that it owns or has an immediate right to acquire through conversion or exchange of other securities in an amount not to exceed 25% of total assets or invest up to 10% of its total assets in the purchase of put options on common stocks that the Fund owns or may acquire through the conversion or exchange of other securities that it owns. The Fund may not write covered call options in an amount exceeding 25% of the value of its total assets. The Fund's investment in OTC options is limited to 5% of its total assets.
A call option is a contract that gives the holder of the option the right, in return for a premium paid, to buy from the writer (seller) of the call option the security underlying the option at a specified exercise price at any time during the term of the option. The writer of the call option has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price during the option period.
A put option is a contract that gives the holder of the option the right, in return for the premium paid, to sell to the writer (seller) of the put option the underlying security at a specified price during the term of the option. The writer of the put, who receives the premium, has the obligation to buy the underlying security upon exercise, at the exercise price during the option period.
If the Fund has written an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously written. There can be no assurance that a closing purchase transaction can be effected when the Fund so desires.
An exchange traded option may be closed out only on an exchange that 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.
The Fund will not purchase options if, as a result, the aggregate cost of all outstanding options exceeds 10% of the Fund's total assets. See "Investment Practices -- Derivative Instruments" in the SAI.
Futures Contracts and Options Thereon. On behalf of the Fund, the Investment Adviser may, subject to guidelines of the Board of Directors, purchase and sell financial futures contracts and options thereon which are traded on a commodities exchange or board of trade for certain hedging, yield enhancement and risk management purposes, in accordance with regulations of the Commodity Futures Trading Commission ("CFTC"). These futures contracts and related options may be on debt securities, financial indices, securities indices, U.S. government securities and foreign currencies. A financial futures contract is an agreement to purchase or sell an agreed amount of securities or currencies at a set price for delivery in the future.
Under the CFTC regulations, the Investment Adviser on behalf of the Fund
(i) may purchase and sell futures contracts and options thereon for bona fide
hedging purposes, as defined under CFTC regulations, without regard to the
percentage of the Fund's assets committed to margin and option premiums, and
(ii) may enter into non-hedging transactions, provided that, immediately
thereafter, the sum of the amount of the initial margin deposits on the Fund's
existing futures positions and option premiums does not exceed 5% of the
market value of the Fund's total assets.
Forward Currency Exchange Contracts. Subject to guidelines of the Board of Directors, the Fund may enter into forward foreign currency exchange contracts to protect the value of its portfolio against future changes in the level of currency exchange rates. The Fund may enter into such contracts on a spot, i.e., cash, basis at the rate then prevailing in the currency exchange market or on a forward basis, by entering into a forward contract to purchase or sell currency. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract. The Fund's dealings in forward contracts will be limited to hedging involving either specific transactions or portfolio positions, and the amount the Fund may invest in forward currency contracts is limited to the amount of its aggregate investments in foreign currencies. The Fund will only enter into forward currency contracts with parties that it believes to be creditworthy.
Short Sales Against the Box. The Fund may from time to time make short sales of securities it owns or has the right to acquire through conversion or exchange of other securities it owns. A short sale is "against the box" to the extent that the Fund contemporaneously owns or has the right to obtain at no added cost securities identical to those sold short. In a short sale, the Fund does not immediately deliver the securities sold or receive the proceeds from the sale. The Fund may not make short sales or maintain a short position if it would cause more than 25% of the Fund's total assets, taken at market value, to be held as collateral for such sales.
To secure its obligations to deliver the securities sold short, the Fund will deposit in escrow in a separate account with its custodian an equal amount to the securities sold short or securities convertible into, or exchangeable for, such securities. The Fund may close out a short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund may want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short.
The Fund may make a short sale in order to hedge against market risks when it believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into, or exchangeable for, such security, or when the Fund does not want to sell the security it owns. Such short sale transactions may be subject to special tax rules, one of the effects of which may be to accelerate income to the Fund. Additionally, the Fund may use short sales in conjunction with the purchase of a convertible security when it is determined that a convertible security can be bought at a small conversion premium and has a yield advantage relative to the underlying common stock sold short.
Repurchase Agreements. The Fund may enter into repurchase agreements with primary government securities dealers recognized by the Federal Reserve Bank of New York and member banks of the Federal Reserve System that furnish collateral at least equal in value or market price to the amount of their repurchase obligation. In a repurchase agreement, the Fund purchases a debt security from a seller that undertakes to repurchase the security at a specified resale price on an agreed future date. Repurchase agreements are generally for one business day but may have a duration of up to a week. 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 to 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. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. The Board of Directors will monitor the creditworthiness of the contra party to the repurchase agreements.
If the financial institution that is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities. To increase income, the Fund may lend its
portfolio securities to securities broker-dealers or financial institutions if
(i) the loan is collateralized in accordance with applicable regulatory
requirements and (ii) no loan will cause the value of all loaned securities to
exceed 33% of the value of the Fund's total assets.
If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over the value of the collateral. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in collateral should the borrower of the securities fail financially. While these loans of portfolio securities will be made in accordance with guidelines approved by the Board of Directors, there can be no assurance that borrowers will not fail financially. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund. If the other party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. See "Special Investment Methods -- Loans of Portfolio Securities" in the SAI.
Leverage. As provided in the 1940 Act and subject to compliance with the Fund's investment objective, policies and restrictions, the Fund is permitted to issue additional preferred stock or debt so long as the Fund's total assets immediately after such issuance, less certain ordinary course liabilities, exceed 300% of the amount of the debt outstanding and exceed 200% of the sum of the amount of preferred stock and debt outstanding. Such debt or preferred stock may be convertible in accordance with SEC staff guidelines that may permit the Fund to obtain leverage at attractive rates. The Fund currently has authorized the issuance of 2,000,000 shares of preferred stock. The Fund redeemed all of its outstanding preferred stock on February 11, 2003, and currently has no shares of preferred stock outstanding. The Fund does not currently intend to offer shares of preferred stock or senior securities representing indebtedness in addition to the Series B Preferred and/or Series C Auction Rate Preferred described by this prospectus. However, the Fund will consider from time to time whether to do so and may issue additional such securities were the Board of Directors to conclude that such an offering would be consistent with the Fund's Charter and applicable law, and in the best interest of existing common stockholders.
Corporate Reorganizations. The Fund may invest without limit in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or similar reorganization proposal has been announced if, in the judgment of the Investment Adviser, there is a reasonable prospect of capital appreciation significantly greater than the added portfolio turnover expenses inherent in the short term nature of such transactions. The principal risk is that such offers or proposals may not be consummated within the time and under the terms contemplated at the time of the investment, in which case, unless such offers or proposals are replaced by equivalent or increased offers or proposals that are consummated, the Fund may sustain a loss.
Warrants and Rights. The Fund may invest without limit in warrants or rights (other than those acquired in units or attached to other securities) that entitle the holder to buy equity securities at a specific price for a specific period of time but will do so only if such equity securities are deemed appropriate by the Investment Adviser for inclusion in the Fund's portfolio.
Other Investment Companies. The Fund may invest up to 5% of its total assets in no more than 3% of the securities of any one investment company including small business investment companies and may invest up to 10% of its total assets in the securities of other investment companies in the aggregate. The purchase of securities in investment companies will result indirectly in the payment of duplicative management fees by the Fund. The Fund will not purchase the securities of affiliated investment companies.
Foreign Securities. The Fund may invest up to 25% of its total assets in securities of foreign issuers, which are generally denominated in foreign currencies. See "Risk Factors and Other Considerations -- Foreign Securities."
The Fund may purchase sponsored American Depository Receipts ("ADRs") or U.S. denominated securities of foreign issuers, which will not be included in this foreign securities limitation. ADRs are receipts issued by United States banks or trust companies in respect of securities of foreign issuers held on deposit for use in the United States securities markets.
When Issued, Delayed Delivery Securities and Forward Commitments. The Fund may enter into forward commitments for the purchase of securities. Such transactions may include purchases on a "when issued" or "delayed delivery" basis. 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 the Fund will only enter into a forward commitment with the intention of actually acquiring the security, the Fund may sell the security before the settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market fluctuation, and no interest (or dividends) accrues to the Fund prior to the settlement date. The Fund will maintain a segregated account of cash or liquid high-grade debt securities with the Fund's custodian in an aggregate amount at least equal to the amount of its forward commitments as long as the obligation to purchase continues.
Temporary Defensive Investments. During temporary defensive periods and during periods when the Fund's normal asset allocation is not optimal, the Fund may invest more heavily in securities of U.S. government sponsored instrumentalities and in money market mutual funds that invest in those securities, which, in the absence of an exemptive order, are not affiliated with the Investment Adviser. Obligations of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association, are supported by the "full faith and credit" of the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities if it is not obligated to do so by law. During temporary defensive periods, the Fund may be less likely to achieve its investment objective.
Further information on the investment objective and policies of the Fund are set forth in the SAI.
Investment Restrictions. The Fund has adopted certain investment restrictions as fundamental policies of the Fund. Under the 1940 Act, a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act. The Fund's investment restrictions are more fully discussed under "Investment Restrictions" in the SAI.
Portfolio Turnover. The Fund will buy and sell securities to accomplish its investment objective. The investment policies of the Fund may lead to frequent changes in investments, particularly in periods of rapidly fluctuating interest or currency exchange rates. The portfolio turnover may be higher than that of other investment companies.
Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or securities sold by the average monthly value of securities owned during the year (excluding securities whose maturities at acquisition were one year or less).
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 the Series B Preferred or Series C Auction Rate Preferred. The market value for the Series B Preferred and/or Series C Auction Rate Preferred will be influenced by changes in interest rates, the perceived credit quality of the Series B Preferred or Series C Auction Rate Preferred and other factors. The Series B Preferred and/or Series C Auction Rate Preferred are subject to redemption under specified circumstances and investors may not be able to reinvest the proceeds of any such redemption in an investment providing the same or a better rate than that of the Series B Preferred or Series C Auction Rate Preferred. Subject to such circumstances, the Series B Preferred and/or Series C Auction Rate Preferred are perpetual.
The credit rating on the Series B Preferred or Series C Auction Rate 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 B Preferred or Series C Auction Rate Preferred. A reduction or withdrawal of the credit rating would likely have an adverse effect on the market value of the Series B Preferred or Series C Auction Rate Preferred.
The Series B Preferred and the Series C Auction Rate Preferred are not obligations of the Fund. The Series B Preferred and/or Series C Auction Rate 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 B Preferred and/or Series C Auction Rate Preferred for the full redemption price. In addition, the Fund has adopted a policy (which it may modify) of distributing 8% of average quarter-end net assets attributable to common stock. In the event investment returns do not provide sufficient amounts to fund such distributions, the Fund may be required to return capital as part of such distributions, which may have the effect of decreasing the asset coverage per share with respect to the Fund's outstanding Series B Preferred and Series C Auction Rate Preferred. For the year ending December 31, 2002, 64% of the distributions paid by the Fund with respect to its common stock constituted a return of capital.
Leverage Risk. The Fund uses financial leverage for investment purposes by issuing preferred stock. It is currently anticipated that, taking into account the Series B Preferred and/or Series C Auction Rate Preferred being offered in this prospectus, the amount of leverage will represent approximately 35% 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 objective 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 B Preferred and/or Series C Auction Rate 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 assets attributable to outstanding shares of its preferred stock, with no deduction for the liquidation preference of such shares of preferred stock), when the Fund's total return at least equals the dividend rate on the preferred stock (rather than only on the basis of net assets attributable to the common stock) the fee may be higher when leverage is utilized, giving the Investment Adviser an incentive to utilize leverage.
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 B Preferred and/or Series C Auction Rate Preferred) to the extent necessary 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.
Ratings and Asset Coverage Risk. While it is a condition to the closing of the offering that Moody's assigns a rating of Aaa to the Series B Preferred and/or Series C Auction Rate Preferred and that Fitch assigns a rating of AAA to the Series C Auction Rate Preferred, the ratings do not eliminate or necessarily mitigate the risks of investing in Series B Preferred or Series C Auction Rate Preferred. The credit rating on the Series B Preferred or Series C Auction Rate Preferred could be reduced or withdrawn while an investor holds shares, which would likely have an adverse effect on the market value of the Series B Preferred or Series C Auction Rate Preferred. A reduction or withdrawal of the credit ratings on the Series C Auction Rate Preferred may also make your Series C Auction Rate Preferred shares less liquid at an auction or in the secondary market.
In addition, if a rating agency rating the Series C Auction Rate Preferred at the Fund's request downgrades the Series C Auction Rate Preferred, the maximum rate on the Series C Auction Rate Preferred will increase. See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Rating Agency Guidelines" for a description of the asset maintenance tests the Fund must meet. In addition, should the rating on the Fund's preferred stock be lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred stock.
Special Risks of the Series B Preferred
Illiquidity Prior to Exchange Listing. Prior to the offering, there has been no public market for the Series B Preferred. In the event the Series B Preferred are issued, prior application will have been made to list the Series B Preferred on the New York Stock Exchange. However, during an initial period, which is not expected to exceed 30 days after the date of its initial issuance, the Series B Preferred will not be listed on any securities exchange. During such period, the underwriters intend to make a market in the Series B Preferred, though, they have no obligation to do so. Consequently, an investment in the Series B Preferred may be illiquid during such period.
Special Risks of the Series C Auction Rate Preferred
Interest Rate Risk. In connection with the sale of the Series C Auction Rate 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 Auction Rate Preferred or obtain the equivalent of a fixed rate for the Series C Auction Rate 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. See "How the Fund Manages Risk -- Interest Rate Transactions."
Auction Risk. You may not be able to sell your Series C Auction Rate Preferred at an auction if the auction fails, i.e., if there is more Series C Auction Rate Preferred offered for sale than there are buyers for those shares. Also, if you place orders (place a hold order) at an auction to retain Series C Auction Rate Preferred only at a specified rate that exceeds the rate set at the auction, you will not retain your Series C Auction Rate Preferred. Additionally, if you place a hold order without specifying a rate below which you would not wish to continue to hold your shares and the auction sets a below-market rate, you will 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 Auction Rate Preferred, which could also affect the liquidity of your investment. See "Description of the Series B Preferred and Series C Auction Rate Preferred" and "The Auction of Series C Auction Rate Preferred."
Secondary Market Risk. If you try to sell your Series C Auction Rate Preferred between auctions, 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 Auction Rate Preferred are not required to maintain this market, and the Fund is not required to redeem Series C Auction Rate Preferred if either an auction or an attempted secondary market sale fails because of a lack of buyers. The Series C Auction Rate Preferred is not registered on a stock exchange or the NASDAQ stock market. If you sell your Series C Auction Rate 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 or during a special dividend period.
Asset Class Risks
Credit Risk for Convertible Securities and Fixed Income Securities. Many convertible securities are not investment grade, that is, not rated within the four highest categories by S&P and Moody's. To the extent that the Fund's convertible securities and any other fixed income securities are rated lower than investment grade or are not rated, there would be a greater risk as to the timely repayment of the principal of, and timely payment of interest or dividends on, those securities. It is expected that not more than 50% of the Fund's portfolio will consist of securities rated CCC or lower by S&P or Caa or lower by Moody's or, if unrated, are of comparable quality as determined by the Investment Adviser.
Securities rated BB or lower by S&P or Ba or lower by Moody's are often referred to in the financial press as "junk bonds" and may include securities of issuers in default. "Junk bonds" are considered by the rating agencies to be predominantly speculative and may involve major risk exposures such as:
o greater volatility and credit risk;
o vulnerability to economic downturns and changes in interest rates;
o sensitivity to adverse economic changes and corporate developments;
o additional expenses to pursue recovery from issuers that default;
o redemption or call provisions that may be exercised at inopportune times;
o difficulty in accurately valuing or disposing of such securities;
o subordination to other debt of the issuer; and
o junk bonds are generally unsecured.
Convertible securities and other income securities need not meet a minimum rating standard in order to be acceptable for investment by the Fund. See "Appendix A -- Description of Corporate Bond Ratings."
In addition, securities ratings are relative and subjective and not absolute standards of quality. They are based largely on an issuer's historical financial condition and the rating agency's analysis at the time of the rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition.
Dilution Risk for Convertible Securities. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund's holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared, or the issuer enters into another type of corporate transaction that has a similar effect.
Illiquid Securities. The Fund has no limit on the amount of its net assets it may invest in unregistered and otherwise illiquid investments. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act. Unregistered securities generally can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund's proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund's inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible.
Unregistered convertible securities or the securities obtained upon conversion normally may be resold publicly under certain volume and other restrictions beginning one year following the acquisition of the securities obtained upon conversion and without any restrictions beginning two years after the acquisition of the securities obtained upon conversion. Unregistered securities that are freely salable among qualified institutional investors under special rules adopted by the Securities and Exchange Commission (the "SEC") may be treated as liquid if they satisfy institutional liquidity standards established by the Board of Directors. The continued liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly, the Board of Directors will monitor their liquidity.
Interest Rate Risk for Fixed Income Securities. The primary risk associated with fixed income securities is interest rate risk. A decrease in interest rates will generally result in an increase in the value of a fixed income security, while increases in interest rates will generally result in a decline in its value. This effect is generally more pronounced for fixed rate securities than for securities whose income rate is periodically reset. Market interest rates recently have declined significantly below historical average rates, which may increase the risk that these rates will rise in the future.
Further, while longer term fixed rate securities may pay higher interest rates than shorter term securities, longer term fixed rate securities, like fixed rate securities, also tend to be more sensitive to interest rate changes and, accordingly, tend to experience larger changes in value as a result of interest rate changes.
Distribution Risk for Equity Income Securities. In selecting equity income securities in which the Fund will invest, the Investment Adviser will consider the issuer's history of making regular periodic distributions (i.e., dividends) to its equity holders. An issuer's history of paying dividends, however, does not guarantee that the issuer will continue to pay dividends in the future. The dividend income stream associated with equity income securities generally is not guaranteed and will be subordinate to payment obligations of the issuer on its debt and other liabilities. Accordingly, in the event the issuer does not realize sufficient income in a particular period both to service its liabilities and to pay dividends on its equity securities, it may forgo paying dividends on its equity securities. In addition, because in most instances issuers are not obligated to make periodic distributions to the holders of their equity securities, such distributions or dividends generally may be discontinued at the issuer's discretion.
Equity Risk. The principal risk of investing in equity securities is equity risk. Equity risk is the risk that the price of an equity security will fall due to general market and economic conditions, perceptions regarding the industry in which the issuer participates or the issuing company's particular circumstances. Common stock in which the Fund will invest or receive upon conversion of convertible securities is subject to such equity risk. In the case of convertible securities, it is the conversion value of a convertible security that is subject to the equity risk; that is, if the appreciation potential of a convert ible security is not realized, the premium paid for its conversion value may not be recovered. See "Investment Objective and Policies -- Investment Practices -- Convertible Securities."
Ratings Risk. The rating received by the Fund on its outstanding preferred stock, or on any other senior security that it may issue, is an assessment by the applicable rating agency of the capacity of the Fund to satisfy its obligations on its outstanding senior securities. However, an AAA, Aaa or similar rating on the Fund's outstanding preferred stock does not eliminate or mitigate the risks associated with investing in the Fund's preferred or common stock. In addition, should the rating on the Fund's preferred stock be lowered or withdrawn by the relevant rating agency, the Fund may also be required to redeem all or part of its outstanding preferred stock. If the Fund were required to redeem its outstanding preferred stock (in whole or part) as a result of the change in or withdrawal of the rating, the common stock of the Fund will lose the benefits associated with a leveraged capital structure.
Prepayment Risks on Government Sponsored Mortgage-Backed Securities. The yield and maturity characteristics of government sponsored mortgage-backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations may generally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. Prepayment risks include the following:
o the relationship between prepayments and interest rates may give some lower grade government sponsored mortgage-backed securities less potential for growth in value than conventional bonds with comparable maturities;
o in addition, when interest rates fall, the rate of prepayments tends to increase. During such periods, the reinvestment of prepayment proceeds by the Fund will generally be at lower rates than the rates that were carried by the obligations that have been prepaid;
o because of these and other reasons, a government sponsored mortgage-backed security's total return and maturity may be difficult to predict; and
o to the extent that the Fund purchases government sponsored mortgage-backed securities at a premium, prepayments may result in loss of the Fund's principal investment to the extent of premium paid.
Long-term Objective
The Fund is intended for investors seeking a high level of total return over the long-term. The Fund is not meant to provide a vehicle for those who wish to play short-term swings in the stock market. An investment in shares of the Fund should not be considered a complete investment program. Each shareholder should take into account the Fund's investment objective as well as the shareholder's other investments when considering an investment in the Fund.
Market Value and Net Asset Value
The Fund is a diversified, closed-end management investment company. Shares of closed-end funds are bought and sold in the securities markets and may trade at either a premium or discount from net asset value. Listed shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of stock of a closed-end fund is a risk separate and distinct from the risk that the Fund's net asset value will decrease. The Fund cannot predict whether its listed stock will trade at, below or above net asset value. Stockholders desiring liquidity may, subject to applicable securities laws, trade their stock in the Fund on the New York Stock Exchange or other markets on which such stock may trade at the then current market value, which may differ from the then current net asset value. Stockholders will incur brokerage or other transaction costs to sell stock.
Foreign Securities
Investments in the securities of foreign issuers involve certain considerations and risks not ordinarily associated with investments in securities of domestic issuers. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Foreign securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other foreign taxes, which may adversely affect the net return on such investments. There may be difficulty in obtaining or enforcing a court judgment abroad. In addition, it may be difficult to effect repatriation of capital invested in certain countries. In addition, with respect to certain countries, there are risks of expropriation, confiscatory taxation, political or social instability or diplomatic developments that could affect assets of the Fund held in foreign countries.
There may be less publicly available information about a foreign company than a U.S. company. Foreign securities markets may have substantially less volume than U.S. securities markets and some foreign company securities are less liquid than securities of otherwise comparable U.S. companies. A portfolio of foreign securities may also be adversely affected by fluctuations in the rates of exchange between the currencies of different nations and by exchange control regulations. Foreign markets also have different clearance and settlement procedures that could cause the Fund to encounter difficulties in purchasing and selling securities on such markets and may result in the Fund missing attractive investment opportunities or experiencing loss. In addition, a portfolio that includes foreign securities can expect to have a higher expense ratio because of the increased transaction costs on non-U.S. securities markets and the increased costs of maintaining the custody of foreign securities. The Fund may invest up to 25% of its total assets in securities of foreign issuers.
The Fund may purchase sponsored American Depository Receipts ("ADRs") or U.S. denomi nated securities of foreign issuers, which will not be included in the 25% foreign securities limitation. ADRs are receipts issued by United States banks or trust companies in respect of securities of foreign issuers held on deposit for use in the United States securities markets. While ADRs may not necessarily be denominated in the same currency as the securities into which they may be converted, many of the risks associated with foreign securities may also apply to ADRs.
Special Risks of Derivative Transactions
Participation in the options or futures markets and in currency exchange transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. If the Investment Adviser's prediction of movements in the direction of the securities, foreign currency and interest rate markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. Risks inherent in the use of options, foreign currency, futures contracts and options on futures contracts, securities indices and foreign currencies include:
o dependence on the Investment Adviser's ability to predict correctly movements in the direction of interest rates, securities prices and currency markets;
o imperfect correlation between the price of options and futures contracts and options thereon and movements in the prices of the securities or currencies being hedged;
o the fact that skills needed to use these strategies are different from those needed to select portfolio securities;
o the possible absence of a liquid secondary market for any particular instrument at any time;
o the possible need to defer closing out certain hedged positions to avoid adverse tax consequences;
o the possible inability of the Fund to purchase or sell a security at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a security at a disadvantageous time due to a need for the Fund to maintain "cover" or to segregate securities in connection with the hedging techniques; and
o the creditworthiness of counterparties.
For a further description, see "Risk Factors and Special Considerations -- Futures Transactions" and "Risk Factors and Special Considerations -- Forward Currency Exchange Contracts."
Futures Transactions
Futures and options on futures entail certain risks, including but not limited to the following:
o no assurance that futures contracts or options on futures can be offset at favorable prices;
o possible reduction of the yield of the Fund due to the use of hedging;
o possible reduction in value of both the securities hedged and the hedging instrument;
o possible lack of liquidity due to daily limits or price fluctuation;
o imperfect correlation between the contracts and the securities being hedged; and
o losses from investing in futures transactions that are potentially unlimited and the segregation requirements for such transactions.
For a further description, see "Investment Objective and Policies -- Investment Practices" in the SAI.
Forward Currency Exchange Contracts
The use of forward currency contracts may involve certain risks, including the failure of the counter party to perform its obligations under the contract and that the use of forward contracts may not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices of the currencies hedged or used for cover. For a further description of such investments, see "Investment Objective and Policies -- Investment Practices" in the SAI.
Dependence on Key Personnel
The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory services with respect to the Fund's investments. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser.
Current Market Uncertainties
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 terrorists attacks and related events have led to increased short-term market volatility and may have long-term effects on U.S. and world markets. A similar disruption of financial markets could affect interest rates, securities exchanges, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the Series B Preferred and/or Series C Auction Rate 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. 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 Fitch on its preferred stock. 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 Auction Rate Preferred or obtain the equivalent of a fixed rate for the Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred in a notional amount in excess of the outstanding amount of the Series C Auction Rate Preferred. The Fund will monitor any such swap with a view to ensuring that the Fund remains in compliance with all applicable regulatory investment policy and tax requirements.
MANAGEMENT OF THE FUND
General
The Fund's Board of Directors (who, with its officers, are described in the SAI) has overall responsibility for the management of the Fund. The Board decides upon matters of general policy and reviews the actions of the Investment Adviser, Gabelli Funds, LLC, located at One Corporate Center, Rye, New York 10580-1434, and the Sub-Administrator (as defined below). Pursuant to an Investment Advisory Contract with the Fund, the Investment Adviser, under the supervision of the Fund's Board of Directors, provides a continuous investment program for the Fund's portfolio; provides investment research and makes and executes recommendations for the purchase and sale of securities; and provides all facilities and personnel, including officers required for its administrative management and pays the compensation of all officers and directors of the Fund who are its affiliates. As compensation for its services and the related expenses borne by the Investment Adviser, the Fund pays the Investment Adviser a fee, computed daily and payable monthly, equal, on an annual basis, to 1.00% of the Fund's average weekly net assets. However, 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 its outstanding preferred stock for any calendar year in which the net asset value total return of the Fund allocable to the common stock, including distributions and the advisory fee subject to potential waiver, is less than the stated annual dividend rate of such preferred stock, prorated during the year such preferred stock is issued and the final year it is outstanding. 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
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to an advisory agreement with the Fund. The Investment Adviser is a New York corporation with principal offices located at One Corporate Center, Rye, New York 10580. The Investment Adviser was organized in 1999 and is the successor to Gabelli Advisers, Inc., which was organized in 1980. As of December 31, 2002, the Investment Adviser acted as registered investment adviser to 18 management investment companies with aggregate net assets of $8.7 billion. The Investment Adviser, together with other affiliated investment advisers, had assets under management totaling $9.7 billion, as of December 31, 2002. GAMCO Investors, Inc., an affiliate of the Investment Adviser, acts as investment adviser for individuals, pension trusts, profit sharing trusts and endowments and as a sub-adviser to management investment companies, having aggregate assets of $10.0 billion under management as of December 31, 2002. Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as investment adviser for The Treasurer's Fund and separate accounts having aggregate assets of $1.6 billion under management as of December 31, 2002.
The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset Management Inc., a New York corporation, whose Class A Common Stock is traded on the New York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a "controlling person" of the Investment Adviser on the basis of his ownership of a majority of the stock of the Gabelli Group Capital Partners, Inc., which owns a majority of the capital stock of Gabelli Asset Management Inc.
Payment of Expenses
The Investment Adviser is obligated to pay expenses associated with providing the services contemplated by the Investment Advisory Agreement between the Fund and the Investment Adviser (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 administra tion 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 stockholder reports, charges of the custodian, any subcustodian and transfer and dividend paying agent, expenses in connection with its respective automatic dividend reinvestment and voluntary cash purchase plan, SEC fees, fees and expenses of unaffiliated directors, accounting and pricing costs, including costs of calculating the net asset value of the Fund, 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 stock for sale in various states, litigation and other extraordinary or non-recurring expenses, and other expenses properly payable by the Fund.
In addition to the fees of the Investment Adviser, the Fund is responsible for the payment of all its other expenses incurred in the operation of the Fund, which include, among other things, expenses for legal and independent accountant's services, stock exchange listing fees, expenses relating to the offering of preferred stock, rating agency fees, costs of printing proxies, stock certificates and stockholder reports, charges of State Street Bank and Trust Company ("State Street" or the "Custodian"), charges of EquiServe and The Bank of New York, SEC fees, fees and expenses of unaffiliated directors, accounting and printing costs, the Fund's pro rata portion of membership fees in trade organizations, fidelity bond coverage for the Fund's officers and employees, interest, brokerage costs, taxes, expenses of qualifying the Fund for sale in various states, expenses of personnel performing stockholder servicing functions, litigation and other extraordinary or non-recurring expenses and other expenses properly payable by the Fund.
Selection of Securities Brokers
The Investment Advisory Contract contains provisions relating to the selection of securities brokers to effect the portfolio transactions of the Fund. Under those provisions, the Investment Adviser may (i) direct Fund portfolio brokerage to Gabelli & Company, Inc. or other broker-dealer affiliates of the Investment Adviser and (ii) pay commissions to brokers other than Gabelli & Company, Inc. that are higher than might be charged by another qualified broker to obtain brokerage and/or research services considered by the Investment Adviser to be useful or desirable for its investment management of the Fund and/or its other advisory accounts or those of any investment adviser affiliated with it. The SAI contains further information about the Investment Advisory Contract including a more complete description of the advisory and expense arrangements, exculpatory and brokerage provisions, as well as information on the brokerage practices of the Fund.
Portfolio Manager
Mario J. Gabelli is responsible for the day-to-day management of the Fund. Mr. Gabelli has served as Chairman, President and Chief Investment Officer of the Investment Adviser since 1980. Mr. Gabelli also serves as Portfolio Manager for several other funds in the Gabelli fund family. Because of the diverse nature of Mr. Gabelli's responsibilities, he will devote less than all of his time to the day-to-day management at the Fund. 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.; Vice Chairman of the Board of Lynch Corporation, a diversified manufacturing company, and Chairman of the Board and Chief Executive Officer of Lynch Interactive Corporation, a multimedia and communications services company.
Non-resident Directors
Karl Otto Pohl and Anthonie C. van Ekris, directors of the Fund, reside outside the United States and all or a significant portion of their assets are located outside the United States. Neither director has an authorized agent in the United States to receive service of process. As a result, it may not be possible for investors to effect service of process within the United States or to enforce against either director in United States courts judgments predicated upon civil liability provisions of United States securities laws. It may also not be possible to enforce against either director in foreign courts judgments of United States courts or liabilities in original actions predicated upon civil liability provisions of the United States securities laws.
Sub-Administrator
The Investment Adviser has entered into sub-administration agreement with PFPC Inc. (the "Sub-Administrator") pursuant to which the Sub-Administrator provides certain administrative services necessary for the Fund's operations which do not include the investment advisory and portfolio management services provided by the Investment Adviser. For these services and the related expenses borne by the Sub-Administrator, the Investment Adviser pays a prorated monthly fee at the annual rate of .0275% of the first $10.0 billion of the aggregate average net assets of the Fund and all other funds advised by the Investment Adviser and administered by the Sub-Administrator, .0125% of the aggregate average net assets exceeding $10 billion and .01% of the aggregate average net assets in excess of $15 billion. The Sub-Administrator has its principal office at 760 Moore Road, King of Prussia, Pennsylvania 19406.
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 practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND DISTRIBUTIONS
The Fund may retain for reinvestment, and pay the resulting federal income taxes on, its net capital gain, if any, although the Fund reserves the authority to distribute its net capital gain in any year. 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 8% of average quarter-end net assets attributable to common stock. This policy permits holders of common stock to realize a predictable, but not assured, level of cash flow and some liquidity periodically with respect to their common stock without having to sell shares. To implement this policy, the Fund makes quarterly distributions of $0.20 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 2.0% of the net asset value of the Fund as of the last day of the four preceding calendar quarters less the aggregate distributions of $0.60 per share made for the most recent three calendar quarters) in order to meet the Fund's 8% pay-out goal. If, for any calendar year, the total distributions exceed net investment income and net capital gain, the excess will generally be treated as a tax-free return of capital up to the amount of the stockholder's tax basis in his stock. The amount treated as a tax-free return of capital will reduce a stockholder's tax basis in his stock, thereby increasing his potential gain or reducing his potential loss on the sale of his stock. Any amounts distributed to a stockholder in excess of the basis in the stock will be taxable to the stockholder as capital gain. See "Taxation" below.
In the event the Fund distributes amounts in excess of its net investment income and net capital gain, such distributions will decrease the Fund's total assets and, therefore, have the likely effect of increasing the Fund's expense ratio. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a time when independent investment judgment might not dictate such action.
The Fund, along with other 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 calling for periodic (e.g., quarterly or semi-annually, but in no event more frequently than monthly) distributions in an amount equal to a fixed percentage of the Fund's average net asset value over a specified period of time or market price per share of common stock at or about the time of distribution or pay-out of a fixed dollar amount. If the total distributions required by the proposed periodic pay-out policy exceed the Fund's net investment income and net capital gain, the excess will be treated as a return of capital. If the Fund's net investment income (including net short-term capital gains) and net long-term capital gains for any year exceed the amount required to be distributed under the 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. The Fund reserves the right, but does not currently intend, to retain for reinvestment and pay the resulting U.S. federal income taxes on the excess of its net realized long-term capital gains over its net short-term capital losses, if any.
DESCRIPTION OF THE SERIES B PREFERRED AND
SERIES C AUCTION RATE PREFERRED
The Fund offers by this prospectus, in the aggregate, $50 million of preferred stock of either Series B Preferred or Series C Auction Rate Preferred, or a combination of both such series. The following is a brief description of the terms of each of the Series B Preferred and the Series C Auction Rate 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 each of the Series B Preferred and the Series C Auction Rate Preferred. For complete terms of the Series B Preferred or the Series C Auction Rate Preferred, including definitions of terms used in this prospectus, please refer to the actual terms of such series, which are set forth in the applicable Articles Supplementary.
General
Under its Charter, the Fund is authorized to issue up to 1,995,000 shares of preferred stock as Series B Preferred and up to 5,000 shares of preferred stock as Series C Auction Rate Preferred. No fractional shares of either series will be issued. The Board of Directors reserves the right to issue additional shares of preferred stock, including Series B Preferred or Series C Auction Rate Preferred, from time to time, subject to the restrictions in the Fund's Charter and the 1940 Act.
If and when issued, the Series B Preferred will have a liquidation preference of $25 per share and the Series C Auction Rate Preferred will have a liquidation preference of $25,000 per share. Upon a liquidation, each holder of Series B Preferred or Series C Auction Rate Preferred will be entitled to receive out of the assets of the Fund available for distribution to stockholders (after payment of claims of the Fund's creditors but before any distributions with respect to the Fund's common stock or any other stock of the Fund ranking junior to the Series B Preferred and Series C Auction Rate Preferred as to liquidation payments) an amount per share equal to such share's liquidation preference plus any accumulated but unpaid dividends (whether or not earned or declared) to the date of distribution. The Series B Preferred and the Series C Auction Rate 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. Series B Preferred and Series C Auction Rate Preferred shares each carry one vote per share on all matters on which such shares are entitled to vote. The Series B Preferred and the Series C Auction Rate Preferred will, upon issuance, be fully paid and nonassessable and will have no preemptive, exchange or conversion rights. Any Series B Preferred or Series C Auction Rate 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 B Preferred and/or Series C Auction Rate Preferred.
Rating Agency Guidelines
Upon issuance, both the Series B Preferred and the Series C Auction Rate
Preferred will be rated Aaa by Moody's Investors Service, Inc. In addition,
the Series C Auction Rate Preferred will also be rated AAA by Fitch. The Fund
is required under Moody's and Fitch guidelines to maintain assets having in
the aggregate a discounted value at least equal to the Basic Maintenance
Amount (as defined below) for its outstanding preferred stock, including any
outstanding Series B Preferred or Series C Auction Rate Preferred, with
respect to the separate guidelines Moody's and Fitch has 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 such rating agency). The Moody's and Fitch 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
"Basic Maintenance Amount" is equal to (i) the sum of (a) 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, (b) the total
principal of any debt (plus accrued and projected interest), (c) certain Fund
expenses and (d) certain other current liabilities (excluding any unpaid
dividends on the Fund's common stock) less (ii) the Fund's (a) cash and (b)
assets consisting of indebtedness which (x) is to mature prior to or on the
date of redemption or repurchase of the preferred stock, (y) are U.S.
Government Obligations or evidences of indebtedness rated at least Aaa, P-1,
VMIG-1 or MIG-1 by Moody's or AAA, SP-1+ or A-1+ by Standard and Poor's, and
(z) is held by the Fund for the payment of dividends or distributions, the
amounts needed to redeem or repurchase preferred stock, or the Fund's
liabilities.
If the Fund does not timely cure a failure to maintain a discounted value of its portfolio equal to the Basic Maintenance Amount in accordance with the requirements of the applicable rating agency or agencies then rating the Series B Preferred or the Series C Auction Rate Preferred at the request of the Fund, the Fund may, and in certain circumstances will be required to, mandatorily redeem preferred stock, including the Series B Preferred or the Series C Auction Rate Preferred, as described below under " -- Redemption."
The Fund may, but is not required to, adopt any modifications to the rating agency guidelines that may hereafter be established by Moody's or Fitch. Failure to adopt any such modifications, however, may result in a change in the relevant rating agency's ratings or a withdrawal of such ratings altogether. In addition, any rating agency providing a rating for the Series B Preferred or the Series C Auction Rate Preferred at the request of the Fund 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 of Directors determines that such modification is necessary to prevent a reduction in rating of the shares of preferred stock by Moody's and/or Fitch, as the case may be, or 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 Fitch (or such other rating agency then rating the Series B Preferred or Series C Auction Rate Preferred at the request of the Fund) that such modification would not adversely affect its then-current rating of the Series B Preferred or Series C Auction Rate Preferred, as the case may be.
In addition, with respect to the Series C Auction Rate Preferred, the Board of Directors may amend the Articles Supplementary definition of "Maximum Rate" (the "maximum rate" as defined below under " -- Dividends on the Series C Auction Rate Preferred -- Maximum Rate") to increase the percentage amount by which the "AA" Financial Composite Commercial Paper Rate or the Treasury Index Rate, whichever is applicable, is multiplied to determine the maximum rate without the vote or consent of the holders of Series C Auction Rate Preferred or any other stockholder of the Fund, but only after consultation with the broker-dealers for the Series C Auction Rate Preferred, and with confirmation from each applicable rating agency that the Fund could meet the Basic Maintenance Amount Test applicable to the Series C Auction Rate Preferred immediately following any such increase. See " -- Dividends on the Series C Auction Rate Preferred -- Maximum Rate."
As described by Moody's and Fitch, the ratings assigned to the Series B Preferred and the Series C Auction Rate Preferred are assessments of the capacity and willingness of the Fund to pay the obligations of each of the Series B Preferred and the Series C Auction Rate Preferred. The ratings on the Series B Preferred and the Series C Auction Rate Preferred are not recommendations to purchase, hold or sell shares of either series, 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 B Preferred or Series C Auction Rate Preferred will be able to sell such shares on an exchange, in an auction or otherwise. The ratings are based on current information furnished to Moody's and Fitch 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 B Preferred or Series C Auction Rate Preferred, as the case may be, only so long as such rating agency is rating such shares at the request of the Fund. The Fund will pay fees to Moody's and Fitch for rating the Series B Preferred and the Series C Auction Rate 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 1940 Act requirements are summarized below.
The Fund will be required under the Articles Supplementary for each of the Series B Preferred and/or Series C Auction Rate Preferred to determine whether it has as of the last business day of each March, June, September and December of each year, an "asset coverage" (as defined in the 1940 Act) of at least 200% (or such higher or lower percentage as may be required at the time under the 1940 Act) with respect to all outstanding senior securities of the Fund that are stock, including any outstanding Series B Preferred and the Series C Auction Rate 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 60 days, in the case of the Series B Preferred, or 10 days, in the case of the Series C Auction Rate Preferred, (including the Series B Preferred or Series C Auction Rate Preferred) the Fund may, and in certain circumstances will be required to, mandatorily redeem shares of preferred stock sufficient to satisfy such asset coverage. See " -- Redemption" below.
If the shares of Series B Preferred and/or Series C Auction Rate Preferred offered hereby had been issued and sold as of February 14, 2003, 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 $1,500,000), would have been computed as follows:
value of Fund assets less liabilities not constituting senior securities ($144,898,943) divided by senior securities representing indebtedness plus liquidation preference of each class of preferred stock ($50,000,000), expressed as a percentage = 290%.
Dividends on the Series B Preferred
Upon issuance of the Series B Preferred (if issued), holders of shares of Series B Preferred will be entitled to receive, when, as and if declared by the Board of Directors of the Fund out of funds legally available therefor, cumulative cash dividends, at the annual rate of % (computed on the basis of a 360-day year consisting of twelve 30-day months) of the liquidation preference of $25 per share, payable quarterly on March 26, June 26, September 26 and December 26 in each year or, if any such day is not a business day, the immediately succeeding business day. Such dividends will commence on , 2003, and will be payable to the persons in whose names the shares of Series B Preferred are registered at the close of business on the fifth preceding business day.
Dividends on the shares of Series B Preferred will accumulate from the date on which such shares are issued; provided, however, that any shares of Series B Preferred issued within 30 days of the original issue date of the series will accumulate dividends from the series' original date of issue.
Dividends on the Series C Auction Rate Preferred
General. Upon issuance of the Series C Auction Rate Preferred (if issued), the holders of Series C Auction Rate Preferred will be entitled to receive cash dividends stated at annual rates as a percentage of its $25,000 per share liquidation preference, that will vary from dividend period to dividend period. The dividend rate for the initial dividend period for any Series C Auction Rate Preferred offered in this prospectus will be the rate set out on the cover of this prospectus. For subsequent dividend periods, the Series C Auction Rate 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 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 (or less) 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 Auction Rate 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 immediately 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 a date not more than 15 days before the payment date, as the Fund's Board of Directors may fix.
The dividend paying agent, 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred pays dividends based on a rate set at auction at which Series C Auction Rate Preferred may be bought and sold. The auction usually is held weekly, but may be held more or less frequently. The Bank of New York, the auction agent, reviews orders from broker-dealers on behalf of existing holders who wish to sell, hold at the auction rate, or hold only at a specified dividend rate , and on behalf of potential holders who wish to buy Series C Auction Rate Preferred. The auction agent then determines the lowest dividend rate that will result in all of the Series C Auction Rate Preferred continuing to be held. See "The Auction of Series C Auction Rate Preferred."
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 will be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events), the applicable rate for such period will be the applicable rate for the then-current dividend period so extended and the dividend payment date for such dividend period will be the first business day immediately succeeding the end of such period.
Determination of Dividend Rates. The Fund computes the dividends per share by multiplying the applicable rate determined at the auction by a fraction, the numerator of which normally is the number of days in such dividend period and the denominator of which is 360. This applicable rate is then multiplied by $25,000 to arrive at the dividend per share.
Maximum Rate. The dividend rate that results from an auction for the Series C Auction Rate Preferred will not be greater than the applicable "maximum rate." The maximum 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 Auction Rate Preferred by Moody's and Fitch 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 Fitch 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, that if the most recent such statistical release will not have been published during the 15 days preceding the date of computation, the foregoing computations will 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 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 the Series C Auction Rate 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 default will be deemed to have occurred and the dividend rate for the dividend period immediately following the dividend with respect to which the dividend payment default would otherwise have occurred will be the applicable rate set at the auction for such dividend period.
However, if the Fund does not effect a timely cure, the dividend rate for the Series C Auction Rate Preferred for such default period, and any subsequent dividend period for which such default is continuing, will be the default rate. In the event the Fund fully pays all default amounts due during a dividend period, the dividend rate for the remainder of that dividend period will be, as the case may be, the applicable rate (for the first dividend period following a dividend default) or the then-maximum rate (for any subsequent dividend period for which such default is continuing).
The default rate means 300% of the applicable "AA" Financial Composite Commercial Paper Rate for a dividend period of 184 days or fewer and 300% of the applicable Treasury Index Rate for a dividend period of longer than 184 days. Late charges are also calculated at the applicable default rate.
Designation of Special Dividend Periods. The Fund may instruct the auction agent to hold auctions and pay dividends more or 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 Auction Rate Preferred are sold in the secondary market.
Any designation of a special dividend period will be effective only if
(i) notice thereof will 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 Auction Rate
Preferred will have been cured as provided for in the Charter, (iii) the
auction immediately preceding the special dividend period was not a failed
auction, (iv) if the Fund will have mailed a notice of redemption with respect
to Series C Auction Rate Preferred, the Fund will have deposited with the
paying agent all funds necessary for such redemption, and (v) the Fund has
confirmed that as of the auction date immediately preceding the first day of
such special dividend period, it has assets with an aggregate discounted value
at least equal to the Basic Maintenance Amount (as defined below), and the
Fund has consulted with the broker- dealers for the Series C Auction Rate
Preferred and has provided notice of such designation and a Basic Maintenance
Report to each rating agency then rating the Series C Auction Rate Preferred
at the request of the Fund.
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 (y) 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: (1) 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 will 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 (2) 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.
Restrictions on Dividends and Other Distributions for the Series B Preferred and the Series C Auction Rate Preferred
So long as any Series B Preferred or Series C Auction Rate Preferred is outstanding, the Fund may not pay any dividend or distribution (other than a dividend or distribution paid in common stock or in options, warrants or rights to subscribe for or purchase common shares) in respect of the common stock or call for redemption, redeem, purchase or otherwise acquire for consideration any common stock (except by conversion into or exchange for shares of the Fund ranking junior to the Series B Preferred and/or Series C Auction Rate Preferred as to the payment of dividends and the distribution of assets upon liquidation), unless:
o the Fund has declared and paid (or provided to the relevant dividend paying agent) all cumulative dividends on the Fund's preferred stock, including the Series B Preferred and/or Series C Auction Rate Preferred, due on or prior to the date of such common stock dividend or distribution;
o the Fund has redeemed the full number of shares of Series B Preferred and/or Series C Auction Rate Preferred to be redeemed pursuant to any mandatory redemption provision in the Fund's Charter; and
o after paying the dividend, the Fund meets applicable asset coverage requirements described under " -- Rating Agency Guidelines" and " -- Asset Maintenance Require ments."
No full dividend will be declared or paid on the Series B Preferred or Series C Auction Rate Preferred for any dividend period, or part thereof, unless full cumulative dividends due through the most recent dividend payment dates therefor for all outstanding series of preferred stock of the Fund ranking on a parity with the Series B Preferred and Series C Auction Rate Preferred as to the payment of dividends have been or contemporaneously are declared and paid. If full cumulative dividends due have not been paid on all outstanding shares of preferred stock of the Fund ranking on a parity with the Series B Preferred and/or Series C Auction Rate Preferred as to the payment of dividends, any dividends being paid on the shares of such preferred stock (including the Series B Preferred and/or Series C Auction Rate Preferred) will be paid as nearly pro rata as possible in proportion to the respective amounts of dividends accumulated but unpaid on each such series of preferred stock on the relevant dividend payment date.
Redemption
Mandatory Redemption Relating to Asset Coverage Requirements. The Fund may, at its option, consistent with its Charter and the 1940 Act, and in certain circumstances will be required to, mandatorily redeem preferred stock (including, at its discretion, the Series B Preferred or Series C Auction Rate 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 60 days, in the case of the Series B Preferred, or 10 business days in the case of the Series C Auction Rate Preferred 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 monthly valuation date, and such failure is not cured on or before 10 business days after such valuation date.
The redemption price for shares of each of the Series B Preferred and Series C Auction Rate Preferred subject to mandatory redemption will be, respectively, $25 per share and $25,000 per share, in each case 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 Series C Auction Rate 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% (that is, 110% rating agency asset coverage). In addition, as discussed under " -- Optional Redemption" below, the Fund generally may exercise its optional redemption rights with respect to the Series C Auction Rate 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 the holders whose shares are to be redeemed ratably on the basis of the redemption price of such shares, and the remainder of those shares 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 Fund's outstanding preferred stock are to be redeemed, the Fund, at its discretion and subject to the limitations of the 1940 Act and Maryland law, will select the one or more series of preferred stock from which shares will be redeemed and the amount of preferred stock to be redeemed from each such series. 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 (or by such other equitable method as the Fund may determine). 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, which may be expressed as a percentage of shares held on the applicable record date.
Optional Redemption of the Series B Preferred. Prior to , 2008, the shares of Series B Preferred are not subject to optional redemption by the Fund unless such redemption is necessary, in the judgment of the Fund, to maintain the Fund's status as a regulated investment company under the Code. Commencing on , 2008 and thereafter, the Fund may at any time redeem shares of Series B Preferred in whole or in part for cash at a redemption price per share equal to $25 per share plus accumulated and unpaid dividends (whether or not earned or declared) to the redemption date. Such redemptions are subject to the notice requirements set forth under " -- Redemption Procedures" and the limitations of the 1940 Act and Maryland law.
Optional Redemption of the Series C Auction Rate Preferred. The Fund may, at its option, redeem the Series C Auction Rate Preferred, in whole or in part, at any time following the initial dividend period so long as the Fund has not designated a non-call period. The Fund may designate a non- call period during a dividend period of more than seven days. In the case of Series C Auction Rate Preferred having a dividend period of one year or less, the redemption price per 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, and in the case of Series C Auction Rate Preferred having a dividend period of more than one year, for the redemption price plus any redemption premium applicable during such dividend period. Such redemptions are subject to the notice requirements set forth under " -- Redemption Procedures" and the limitations of the 1940 Act and Maryland law.
Redemption Procedures. A notice of redemption with respect to an
optional redemption will be given to the holders of record of preferred stock
selected for redemption not less than 15 days, in the case of the Series B
Preferred, and not less than 7 days in the case of the Series C Auction Rate
Preferred, nor, in both cases, more than 40 days prior to the date fixed for
redemption. Preferred stockholders may receive shorter notice in the event of
a mandatory redemption. Each notice of redemption will state (i) the
redemption date, (ii) the number or percentage of shares of preferred stock to
be redeemed (which may be expressed as a percentage of such shares
outstanding), (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, (vii) the provision of the Articles Supplementary under which the
redemption is being made and (viii) any conditions precedent to such
redemption. 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.
The holders of Series B Preferred or Series C Auction Rate Preferred will not have the right to redeem their shares of the Fund at their option.
Liquidation Rights
Upon a liquidation, dissolution or winding up of the affairs of the Fund (whether voluntary or involuntary), holders of Series B Preferred or Series C Auction Rate 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 B Preferred or Series C Auction Rate Preferred as to liquidation payments, a liquidation distribution in the amount of $25 per share, in the case of the Series B Preferred, or $25,000 per share, in the case of the Series C Auction Rate Preferred, in either case 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 B Preferred and/or Series C Auction Rate Preferred as to payment upon liquidation will be insufficient to permit the payment in full to such holders of the Series B Preferred and/or Series C Auction Rate 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 B Preferred, the Series C Auction Rate 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 B Preferred and/or Series C Auction Rate 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 B Preferred and/or Series C Auction Rate 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 B Preferred and/or Series C Auction Rate Preferred along with holders of other outstanding shares of series of preferred stock, will be entitled to one vote per share held 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
outstanding shares of Series B Preferred, Series C Auction Rate 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 B Preferred, Series C Auction Rate 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 B Preferred,
Series C Auction Rate 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 have not been deposited with the applicable
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 B Preferred, Series C Auction Rate Preferred and other
series of preferred stock as described above, would then 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 B Preferred,
Series C Auction Rate 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 B Preferred or Series C Auction Rate 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 Series B Preferred or Series C Auction Rate Preferred, as applicable), 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 with respect to such shares of 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 will not approve any of the actions set forth in the preceding sentence which materially adversely affects the contract rights expressly set forth in the Charter with respect to such shares of a series of preferred stock (such as the Series B Preferred or Series C Auction Rate 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 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 B Preferred and/or Series C Auction Rate Preferred), voting together as a single class, will be required to approve any plan of reorganization adversely affecting the preferred stock 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 Objective and Policies" and "Investment Restrictions" in this prospectus and the SAI. For purposes of the preferred stock voting rights described in this section, except as otherwise required under the 1940 Act, the phrase "vote of the holders of a majority of the outstanding shares of preferred stock" (or any like phrase) 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 B Preferred, Series C Auction Rate 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 of Directors determines that such modification is necessary to prevent a reduction in rating of the shares of preferred stock by Moody's and/or Fitch (or any other rating agency then rating the Series B Preferred or Series C Auction Rate Preferred at the request of the Fund), as the case may be, or 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 B Preferred or Series C Auction Rate 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 applicable paying agent to effect such redemption. The holders of Series B Preferred and/or Series C Auction Rate 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 B Preferred or Series C Auction Rate Preferred is outstanding and subject to compliance with the Fund's investment objective, 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 (including the retirement of any senior securities representing indebtedness to be retired with such proceeds), 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 B Preferred or Series C Auction Rate Preferred is outstanding, subject to receipt of approval from Moody's and, in the case of the Series C Auction Rate Preferred, Fitch, and subject to compliance with the Fund's investment objective, policies and restrictions, the Fund may issue and sell shares of one of more other series of preferred stock in addition to the Series B Preferred or Series C Auction Rate 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 (including, without limitation, to the redemption of preferred stock for which notice of redemption has been given prior to such issuance) 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 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.
The Fund does not currently intend to offer additional preferred shares or senior securities representing indebtedness. However, the Fund will consider from time to time whether to do so and may issue additional such securities were the Board of Directors to conclude that such an offering would be consistent with the Fund's Charter and applicable law, and in the best interest of existing common stockholders.
Repurchase of Series B Preferred and Series C Auction Rate Preferred Shares
The Fund is a closed-end investment company and, as such, holders of the Series B Preferred or Series C Auction Rate Preferred do not and will not have the right to redeem their shares of the Fund. The Fund, however, may repurchase Series B Preferred or, outside of an auction, Series C Auction Rate Preferred when it is deemed advisable by the Board of Directors in compliance with the requirements of the 1940 Act and regulations thereunder and other applicable requirements.
Book-Entry
Shares of Series B Preferred will initially be held in the name of Cede & Co. as nominee for The Depository Trust Company ("DTC"). The Fund will treat Cede & Co. as the holder of record of the Series B Preferred for all purposes. In accordance with the procedures of DTC, however, purchasers of Series B Preferred will be deemed the beneficial owners of shares purchased for purposes of dividends, voting and liquidation rights. Purchasers of Series B Preferred may obtain registered certificates by contacting the Transfer Agent.
Shares of Series C Auction Rate Preferred will initially be held by the auction agent as custodian for Cede & Co., in whose name the shares of the Series C Auction Rate Preferred shall be registered. The Fund will treat Cede & Co. as the holder of record of the Series C Auction Rate Preferred for all purposes.
THE AUCTION OF SERIES C AUCTION RATE PREFERRED
Summary of Auction Procedures
The following is a brief summary of the auction procedures for the Series C Auction Rate Preferred, 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. Accordingly, this description does not purport to be complete and is qualified, in its entirety, by reference to the Fund's Charter, including the provisions of the Articles Supplementary establishing the Series C Auction Rate Preferred.
The auctions determine the dividend rate for the Series C Auction Rate Preferred, but each dividend rate will not be higher than the maximum rate. See "Description of the Series B Preferred and Series C Auction Rate Preferred -- Dividends on the Series C Auction Rate Preferred." If you own shares of Series C Auction Rate Preferred, you may instruct your broker-dealer to enter one of three kinds of order in the auction with respect to your shares: sell, bid and hold.
o If you enter a sell order, you indicate that you want to sell Series C Auction Rate Preferred at $25,000 per share, no matter what the next dividend period's rate will be.
o If you enter a bid (or "hold at a rate") order, which must specify a dividends rate, you indicate that you want to sell Series C Auction Rate Preferred only if the next dividend period's rate is less than the rate you specify.
o If you enter a hold order you indicate that you want to continue to own Series C Auction Rate Preferred, no matter what the next dividend period's rate will be.
You may enter different types of orders for different portions of your Series C Auction Rate Preferred. You may also enter an order to buy additional Series C Auction Rate Preferred. All orders must be for whole shares. All orders you submit are irrevocable. There is a fixed number of Series C Auction Rate 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, the rating of the Series C Auction Rate Preferred and general economic conditions including current interest rates. If you own Series C Auction Rate Preferred and submit a bid for them higher than the then-maximum 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 Auction Rate 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 Auction Rate 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 the dividend rate you specify. If your bid for shares you do not own specifies a rate higher than the then- maximum rate, your bid will not be considered.
Broker-dealers will submit orders from existing and potential holders of Series C Auction Rate 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 Auction Rate Preferred. A broker-dealer's failure to submit orders for Series C Auction Rate 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. The Fund may not submit an order in any auction.
The auction agent after each auction for the Series C Auction Rate
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 365 days, the product of (i) a fraction, the
numerator of which is the number of days in such dividend period and the
denominator of which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times
(iv) the aggregate number of Series C Auction Rate 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 Auction Rate Preferred placed by the
broker-dealers at the auction agreed to by the Fund and the broker-dealers.
If the number of Series C Auction Rate Preferred shares subject to bid orders by potential holders with a dividend rate equal to or lower than the then-maximum rate is at least equal to the number of Series C Auction Rate 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 Auction Rate Preferred available for purchase in the auction.
If the number of Series C Auction Rate Preferred shares subject to bid orders by potential holders with a dividend rate equal to or lower than the then-maximum rate is less than the number of Series C Auction Rate Preferred shares subject to sell orders, then the auction is considered to be a failed auction, and the dividend rate will be the maximum 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 Auction Rate Preferred for which they submitted sell orders.
The auction agent will not consider a bid above the then-maximum rate. The purpose of the maximum rate is to place an upper limit on dividends with respect to the Series C Auction Rate 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 Series C Auction Rate 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 Auction Rate 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, as determined in accordance with procedures set forth in the Articles Supplementary establishing the Series C Auction Rate Preferred.
The auction procedures include a pro rata allocation of Series C Auction Rate 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 Auction Rate Preferred shares in its order. If this happens, broker-dealers will be required to make appropriate pro rata allocations among their respective 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 Auction Rate 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 New York Stock Exchange 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 Auction Rate Preferred will be held on , 2003, the business day preceding the dividend payment date for the initial dividend period. Thereafter, except during special dividend periods, auctions for Series C Auction Rate Preferred normally will be held every Tuesday (or the immediately preceding business day if Tuesday is a holiday), and each subsequent dividend period for the Series C Auction Rate Preferred normally will begin on the following Wednes day.
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 will be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events), the applicable rate for such period will be the applicable rate for the then current dividend period so extended and the dividend payment date for such dividend period will be the first business day immediately succeeding the end of such period.
The following is a simplified example of how a typical auction works. Assume that the Fund has 1,000 outstanding Series C Auction Rate 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 Bid order at 1.6% rate for
sell all 500 shares if all 500 shares
auction rate is less than
1.6%
Current Holder B Owns 300 shares, wants Hold order - will take the
to hold auction rate
Current Holder C Owns 200 shares, wants to Bid order at 1.4% rate for
200 shares if auction rate all 200 shares
is less than 1.4%
Potential Holder D Wants to buy 200 shares Places order to buy at or
above 1.5%
Potential Holder E Wants to buy 300 shares Places order to buy at or
above 1.4%
Potential Holder F Wants to buy 200 shares Places order to buy at or
above 1.6%
|
The lowest dividend rate that will result in all 1,000 Series C Auction Rate Preferred shares continuing to be held is 1.5% (the offer by D). Therefore, the dividend rate will be 1.5%. 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 Series C Auction Rate Preferred
The underwriters are not required to make a market in the Series C Auction Rate 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 Auction Rate Preferred will develop or, if it does develop, that it will provide owners with liquidity of investment. The Series C Auction Rate Preferred will not be registered on any stock exchange or on the NASDAQ market. Investors who purchase Series C Auction Rate 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 Auction Rate 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 Auction Rate Preferred in the name of a broker-dealer, a sale or transfer of your Series C Auction Rate 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 is authorized to issue one billion (1,000,000,000) shares of capital stock, par value $.001 per share, in multiple classes and series thereof as determined from time to time by the Board of Directors of the Fund. Of the Fund's one billion (1,000,000,000) shares of authorized capital stock, one hundred million (100,000,000) shares have been classified by the Board of Directors as common stock class and two million (2,000,000) shares as preferred stock class. As of February 14, 2003, 11,113,431 shares of common stock were outstanding. The common stock of the Fund is listed on the New York Stock Exchange under the symbol "GCV" and began trading March 31, 1995. The average weekly trading volume of the common stock on the NYSE for the 12 months ended February 14, 2003 was 83,921. Each share within a particular class or series thereof has equal voting, dividend, distribution and liquidation rights. There are no conversion or preemptive rights in connection with any outstanding stock of the Fund. All stock, when issued in accordance with the terms of the offering, will be fully paid and non-assessable. The common stock is not redeemable and has no preemptive, conversion or cumulative voting rights. 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 8% of average quarter-end net assets attribut able to common stock. This policy permits holders of common stock to realize a predictable, but not assured, level of cash flow and some liquidity periodically with respect to their common stock without having to sell shares.
The Fund is a closed-end, management investment company and, as such, its stockholders do not, and will not, have the right to redeem their stock. The Fund, however, may repurchase its common stock from time to time as and when it deems such a repurchase advisable. The Fund's Board of Directors has determined that such repurchase, up to 500,000 shares of common stock, may be made when the Fund's common stock is trading at a discount of 10% or more from net asset value. Pursuant to this authorization the Fund has repurchased in the open market 305,200 shares through December 31, 2002, none of which stock was repurchased during the year ended December 31, 2002. Pursuant to the 1940 Act, the Fund may repurchase its stock on a securities exchange (provided that the Fund has informed its stockholders within the preceding six months of its intention to repurchase such stock) or as otherwise permitted in accordance with Rule 23c-1 under the 1940 Act. Under Rule 23c-1, certain conditions must be met for such alternative purchases regarding, among other things, distribution of net income for the preceding fiscal year, asset coverage with respect to the Fund's senior debt and equity securities, identity of the sellers, price paid, brokerage commissions, prior notice to stockholders of an intention to purchase stock and purchasing in a manner and on a basis which does not discriminate unfairly against the other stockholders through their interest in the Fund. In addition, Rule 23c-1 requires the Fund to file notices of such purchase with the SEC. Any repurchase of common stock by the Fund will also be subject to Maryland corporate law, which requires that immediately following such repurchase the total assets of the Fund must be equal to or greater than the sum of the Fund's total liabilities plus the aggregate liquidation preference of its outstanding preferred stock.
When the Fund repurchases its common stock for a price below its net asset value, the net asset value of the common stock that remains outstanding will be enhanced. This does not, however, necessarily mean that the market price of the Fund's remaining outstanding common stock will be affected, either positively or negatively. Further, interest on any borrowings made to finance the repurchase of common stock will reduce the net income of the Fund.
From the commencement of the Fund's operations as a closed-end investment company, the Fund's common stock has traded in the market for extended periods at both a premium to and a discount from net asset value.
Preferred Stock
Currently, two million (2,000,000) shares of the Fund's one billion (1,000,000,000) authorized shares of capital stock have been classified by the Board of Directors as preferred stock, par value $.001 per share. As of February 14, 2003, there were no shares of preferred stock outstanding. 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, 2002, the Fund had outstanding 600,000 shares of Series A Preferred, all of which the Fund redeemed on February 11, 2003. Prior to its redemption, the Series A Preferred was rated AAA by S&P and was listed and traded on the New York Stock Exchange under the symbol "GCV Pr."
The following table shows the number of shares of (i) capital stock authorized, (ii) its classifica tion and (iii) capital stock outstanding for each class of authorized securities of the Fund as of February 14, 2003.
AMOUNT AMOUNT AMOUNT
CLASS OF STOCK AUTHORIZED CLASSIFIED(2) OUTSTANDING
---------------- ----------- ---------- -----------
Common Stock..... 1,000,000,000(1) shares 98,000,000 11,113,431
Preferred Stock.. 1,000,000,000(1) shares 4,000,000 0(3)
|
(1) The total number of shares of capital stock of all classes authorized. The Board of Directors is authorized to classify or reclassify these one billion shares.
(2) By resolution dated February 19, 2003 the Board of Directors reclassified two million shares of preferred stock as common stock.
(3) Does not include the Series B Preferred or Series C Auction Rate 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. The discussion reflects applicable tax laws of the United States as of the date of this prospectus, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service (the "IRS") retroactively or prospectively.
No attempt is made to present a detailed explanation of all U.S. federal, state, local and foreign tax concerns affecting the Fund and its stockholders, and the discussion set forth herein does not constitute tax advice. Investors are urged to consult their own tax advisers to determine the tax consequences to them of investing in the Fund.
Taxation of the Fund
The Fund has elected to be treated and has qualified as, and intends to continue to qualify as, a regulated investment company under Subchapter M of the Code. Accordingly, the Fund must, among other things, (i) derive in each taxable year at least 90% of its gross income (including tax-exempt interest) from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (ii) diversify its holdings so that, at the end of each quarter of each taxable year (a) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. government securities, the 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 total assets and not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the market value of the Fund's total assets is invested in the securities of any issuer (other than U.S. government securities and the securities of other regulated investment companies) or of any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses.
As a regulated investment company, the Fund generally is not subject to
U.S. federal income tax on income and gains that it distributes each taxable
year to stockholders, if it distributes at least 90% of the sum of the Fund's
(i) investment company taxable income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over
net long-term capital losses and other taxable income other than any net
capital gain (as defined below) reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax-exempt interest over certain disallowed
deductions). The Fund intends to distribute at least annually substantially
all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax at the Fund level. To avoid the tax, the Fund must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (ii) 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Fund's fiscal year), and (iii) certain undistributed amounts from previous years on which the Fund paid no U.S. federal income tax. While the Fund intends to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund's taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In that event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirement.
If for any taxable year the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and such distributions will be taxable to the stockholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits.
Taxation of Stockholders
Distributions paid to you by the Fund from its ordinary income or from an excess of net short- term capital gains over net long-term capital losses (together referred to hereinafter as "ordinary income dividends") are taxable to you as ordinary income to the extent of the Fund's earning and profits. Distributions made to you from an excess of net long-term capital gains over net short-term capital losses ("capital gain dividends"), including capital gain dividends credited to you but retained by the Fund, are taxable to you as long-term capital gains if they have been properly designated by the Fund, regardless of the length of time you have owned Fund stock. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of your stock and, after such adjusted tax basis is reduced to zero, will constitute capital gains to you (assuming the stock is held as a capital asset). Generally, not later than 60 days after the close of its taxable year, the Fund will provide you with a written notice designating the amount of any ordinary income dividends or capital gain dividends and other distributions.
The sale or other disposition of common stock of the Fund will generally result in capital gain or loss to you, and will be long-term capital gain or loss if the stock has been held for more than one year at the time of sale. Any loss upon the sale or exchange of Fund stock held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received (including amounts credited as an undistributed capital gain dividend) by you. A loss realized on a sale or exchange of stock of the Fund will be disallowed if other substantially identical Fund stock is acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the stock is disposed of. In such case, the basis of the stock acquired will be adjusted to reflect the disallowed loss. Present law taxes both long-term and short-term capital gains of corporations 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 38.6% while long-term capital gains generally will be taxed at a maximum rate of 20% and 10% for taxpayers in the 15% bracket. The 20% capital gains rate and the 10% capital rate will be reduced to 18% and 8% respectively, for capital assets held for more than five years if the holding period begins after December 31, 2000.
Dividends and other taxable distributions are taxable to you even though they are reinvested in additional stock of the Fund. If the Fund pays you a dividend in January that 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 you on December 31 of the year in which the dividend was declared.
The Fund is required in certain circumstances to backup withhold on taxable dividends and certain other payments paid to non-corporate holders of the Fund's stock who do not furnish the Fund with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service.
The Bush Administration has announced a proposal to reduce or eliminate the tax on dividends; however, many of the details of the proposal (including how the proposal would apply to dividends paid by a regulated investment company) have not been specified. Moreover, the prospects for this proposal are unclear. Accordingly, it is not possible to evaluate how this proposal might affect the tax discussion above.
The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury regulations in effect as they directly govern the taxation of the Fund and its stockholders. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive. A more complete discussion of the tax rules applicable to the Fund and its stockholders can be found in the Statement of Additional Information that is incorporated by reference into this prospectus. Stockholders are urged to consult their tax advisers regarding specific questions as to U.S. federal, foreign, state, local income or other taxes.
ANTI-TAKEOVER PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund presently has provisions in its Charter and Amended and Restated By-Laws (together, its "Governing Documents") that could have the effect of limiting:
o the ability of other entities or persons to acquire control of the Fund's Board of Directors;
o the Fund's freedom to engage in certain transactions; or
o the ability of the Fund's directors or stockholders to amend the Governing Documents or effectuate changes in the Fund's management.
These provisions of the Governing Documents of the Fund may be regarded as "anti-takeover" provisions. The Board of Directors of the Fund is divided into three classes, each having a term of three years. Each year the term of one class of directors will expire. Accordingly, only those directors in one class may be changed in any one year, and it would require two years to change a majority of the Board of Directors. Such system of electing directors may have the effect of maintaining the continuity of management and, thus, make it more difficult for the stockholders of the Fund to change the majority of directors. See "Management of the Fund." A director of the Fund may be removed with cause by a vote of a majority of the votes entitled to be cast for the election of directors of the Fund. A director of the Fund may not be removed without cause. In addition, the affirmative vote of the holders of 75% of the outstanding shares of the Fund, and the vote of a majority (as defined in the 1940 Act) of the holders of preferred shares, voting as a single class, is required to authorize its conversion from a closed-end to an open-end investment company, or to amend certain provisions of the Charter involving conversion to an open-end fund.
Further, unless a higher percentage is provided for under the Charter, the affirmative vote of a majority (as defined in the 1940 Act) of the votes entitled to be cast by holders of outstanding shares of the Fund's preferred stock, voting as a separate class, will be required to approve any plan of reorganiza tion adversely affecting such stock or any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among other things, open-ending the Fund and changing the Fund's invest ment objective or changing the investment restrictions described as fundamental policies under "Investment Restrictions" in the SAI.
Maryland corporations that are subject to the Securities Exchange Act of 1934 and have at least three outside directors, such as the Fund, may by board resolution elect to become subject to certain corporate governance provisions set forth in the Maryland corporate law, even if such provisions are inconsistent with the corporation's charter and by-laws. Accordingly, notwithstanding its Charter or By-Laws, under Maryland law the Fund's Board of Directors may elect by resolution to, among other things:
o require that special meetings of stockholders be called only at the request of stockholders entitled to cast at least a majority of the votes entitled to be cast at such meeting;
o reserve for the Board the right to fix the number of Fund directors;
o provide that directors are subject to removal only by the vote of the holders of two-thirds of the stock entitled to vote; and
o retain for the Board sole authority to fill vacancies created by the death, removal or resignation of a director, with any director so appointed to serve for the balance of the unexpired term rather than only until the next annual meeting of stockholders.
The Board may make any of the foregoing elections without amending the Fund's Charter or By-Laws and without stockholder approval. Though a corporation's charter or a resolution by its board may prohibit its directors from making the elections set forth above, the Fund's Board currently is not prohibited from making any such elections.
The provisions of the Governing Documents and Maryland law described above could have the effect of depriving the owners of stock in the Fund of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a principal stockholder.
The Governing Documents of the Fund are on file with the SEC. For the full text of these provisions see "Further Information."
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT
AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company (the "Custodian"), located at 150 Royall Street, Canton, MA 02021, 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, N.A., located at P.O. Box 43025, Providence, RI 02940-3025, serves as the Fund's dividend disbursing agent, as agent under the Fund's automatic dividend reinvestment and voluntary cash purchase plan and as transfer agent and registrar for the common stock of the Fund.
Series B Preferred. EquiServe will also serve as the Fund's transfer agent, registrar, dividend and paying agent and redemption agent with respect to the Series B Preferred.
Series C Auction Rate 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 redemption agent with respect to the Series C Auction Rate Preferred.
UNDERWRITING
Salomon Smith Barney Inc. and Gabelli & Company, Inc. are acting as underwriters in this offering. Subject to the terms and conditions stated in the underwriting agreement 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 shares of Series B Preferred and Series C Auction Rate Preferred set forth opposite the underwriter's name.
Number of Series C
Number of Series Auction Rate
Underwriter B Preferred Shares 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 B Preferred or Series C Auction Rate Preferred, as applicable, if they purchase any such 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.
Offering of Series B Preferred Shares
The Fund has been advised by the underwriters that they propose initially to offer some of the Series B Preferred 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 $ per share. The sales load the Fund will pay of $ per Series B Preferred share is equal to % 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 B Preferred purchased in the initial public offering on or before , 2003.
Prior to the offering, there has been no public market for the Series B Preferred. Application has been made to list the Series B Preferred on the New York Stock Exchange. However, during an initial period which is not expected to exceed 30 days after the date of this prospectus, the Series B Preferred will not be listed on any securities exchange. During such period, the underwriters intend to make a market in the Series B Preferred; however, they have no obligation to do so. Consequently, an investment in the Series B Preferred may be illiquid during such period.
In connection with the offering, the underwriters may purchase and sell shares of Series B Preferred in the open market. These transactions may include short sales and stabilizing transactions. Short sales involve syndicate sales of shares in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the underwriters repurchase shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a decline in the market price of the stock. They may also cause the price of the Series B Preferred to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the New York Stock Exchange or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
Offering of Series C Auction Rate Preferred Shares
The Fund has been advised by the underwriters that they propose initially to offer some of the Series C Auction Rate Preferred 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 $ per share. The sales load the Fund will pay of $ per Series C Auction Rate Preferred share is equal to % 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 Auction Rate Preferred purchased in the initial public offering on or before , 2003.
Provision of Other Services to the Fund
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 affiliates may, from time to time, engage in transactions with and perform 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 of Series C Auction Rate Preferred" 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, NY 10013. The principal business address 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.
LEGAL MATTERS
Certain matters concerning the legality under Maryland law of the Series B Preferred and Series C Auction Rate 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 B Preferred and/or Series C Auction Rate 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 included 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 SEC. Reports, proxy statements and other information filed by the Fund with the SEC pursuant to the informational requirements of such Acts can be inspected and copied at the public reference facilities maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Fund, that file electronically with the SEC.
The Fund's common stock is listed on the New York Stock Exchange, and reports, proxy statements and other information concerning the Fund and filed with the SEC by the Fund can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
This prospectus constitutes part of a Registration Statement filed by the Fund with the SEC under the Securities Act of 1933, as amended, 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 B Preferred and Series C Auction Rate 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 SEC. Each such statement is qualified in its entirety by such reference. The complete Registration Statement may be obtained from the SEC upon payment of the fee prescribed by its rules and regulations or free of charge through the SEC'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 Special Considerations" 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 , 2003 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
INVESTMENT OBJECTIVE AND POLICIES ........................................B-3
INVESTMENT RESTRICTIONS...................................................B-17
MANAGEMENT OF THE FUND....................................................B-19
PORTFOLIO TRANSACTIONS ...................................................B-27
REPURCHASE OF COMMON STOCK................................................B-30
PORTFOLIO TURNOVER .......................................................B-30
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN............................................B-30
TAXATION .................................................................B-31
ADDITIONAL INFORMATION CONCERNING
AUCTIONS FOR SERIES C AUCTION RATE PREFERRED...........................B-39
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND SERIES C AUCTION RATE PREFERRED.............B-48
MOODY'S AND FITCH GUIDELINES .............................................B-56
NET ASSET VALUE...........................................................B-68
BENEFICIAL OWNERS.........................................................B-69
GENERAL INFORMATION.......................................................B-70
FINANCIAL STATEMENTS......................................................B-72
GLOSSARY..................................................................B-73
|
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 will, 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 that 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 that 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 that 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.
|
FITCH, INC.
AAA This is the highest rating assigned by Fitch 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. Principal
and interest payments on bonds in this category are regarded as safe.
A 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.
|
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 C1 is reserved for income bonds on which no interest is being paid and debt rated D is in payment default.
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 Fitch does not rate a particular type of obligation as a matter of policy.
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.
|
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.
$50,000,000
THE GABELLI
CONVERTIBLE AND
INCOME SECURITIES FUND
INC.
1,000,000 Shares, Series B % Cumulative Preferred Stock
(Liquidation Preference $25 per Share)
1,000 Shares, Series C Auction Rate Cumulative Preferred Stock
(Liquidation Preference $25,000 per Share)
[Gabelli Logo]
PROSPECTUS
, 2003
Salomon Smith Barney
Gabelli & Company, Inc.
The information in this statement of additional information 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 statement of additional information 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 March 13, 2003
STATEMENT OF ADDITIONAL INFORMATION
The Gabelli Convertible and Income Securities Fund Inc. (the "Fund") is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund seeks a high level of total return on its assets through a combination of current income and capital appreciation. The Fund invests primarily in a portfolio of convertible and income producing securities selected by Gabelli Funds, LLC, the investment adviser to the Fund (the "Investment Adviser"). It is the policy of the Fund, under normal market conditions, to invest at least 80% of the value of its total assets in "Convertible Securities," i.e., debt or equity securities (bonds, debentures, notes, stocks and other similar securities) that are convertible into common stock or other equity securities, and "Income Securities," i.e., securities that are expected to periodically accrue or generate income for securities holders, including short-term discounted Treasury Bills. The Fund expects to continue its practice of focusing on Convertible Securities to the extent attractive opportunities are available.
This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the prospectus for the Fund dated , 2003 (the "Prospectus"). Investors should obtain and read the Prospectus prior to purchasing the Series B Preferred or the Series C Auction Rate 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.
Each capitalized term used but not defined in this SAI has the meaning ascribed to it, as the case may be, in the Prospectus or in the glossary of this SAI.
TABLE OF CONTENTS
Page
Investment Objective and Policies...............................B-3
Investment Restrictions........................................B-17
Management of the Fund.........................................B-19
Portfolio Transactions.........................................B-27
Repurchase of Common Stock.....................................B-30
Portfolio Turnover.............................................B-30
Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan.................................................B-30
Taxation.......................................................B-31
Additional Information Concerning
Auctions for the Series C Auction Rate Preferred...............B-39
Additional Information Concerning the
Series B Preferred and Series C Auction Rate Preferred.........B-48
Moody's and Fitch Guidelines...................................B-56
Net Asset Value................................................B-68
Beneficial Owners..............................................B-69
General Information............................................B-70
Financial Statements...........................................B-72
Glossary.......................................................B-73
|
The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission, Washington, D.C. The registration statement may be obtained from the Securities and Exchange Commission upon payment of the fee prescribed, or inspected at the Securities and Exchange Commission's office at no charge. This Statement of Additional Information is dated March , 2003.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is a high level of total return on its assets. Under normal market conditions, the Fund will invest at least 80% of the value of its total assets in "Convertible Securities," i.e., securities (bonds, debentures, notes, stocks and other similar securities) that are convertible into common stock or other equity securities, and "Income Securities," i.e., securities that are expected to periodically accrue or generate income for their holders, including short-term discounted Treasury Bills. The Fund expects to continue its practice of focusing on Convertible Securities to the extent attractive opportunities are available. See "Investment Objective and Policies" in the Prospectus.
Investment Practices
Convertible Securities. A Convertible Security entitles the holder to exchange such security for a fixed number of shares of common stock or other equity security, usually of the same company, at fixed prices within a specified period of time and to receive the fixed income of a bond or the dividend preference of a preferred stock until the holder elects to exercise the conversion privilege. The fixed income or dividend component of a Convertible Security is referred to as the security's "investment value."
A Convertible Security's position in a company's capital structure depends upon its particular provisions. In the case of subordinated convertible debentures, the holder's claims on assets and earnings are subordinated to the claims of others and are senior to the claims of common stockholders.
To the degree that the price of a Convertible Security rises above its investment value because of a rise in price of the underlying common stock, the value of such security is influenced more by price fluctuations of the underlying common stock and less by its investment value. The price of a Convertible Security that is supported principally by its conversion value will rise along with any increase in the price of the common stock, and such price generally will decline along with any decline in the price of the common stock except that the security will receive additional support as its price approaches investment value. A Convertible Security purchased or held at a time when its price is influenced by its conversion value will produce a lower yield than nonconvertible senior securities with comparable investment values. Convertible Securities may be purchased by the Fund at varying price levels above their investment values and/or their conversion values in keeping with the Fund's investment objective.
Many Convertible Securities in which the Fund will invest have call provisions entitling the issuer to redeem the security at a specified time and at a specified price. This is one of the features of a Convertible Security which affects valuation. Calls may vary from absolute calls to provisional calls. Convertible Securities with superior call protection usually trade at a higher premium. If long-term interest rates decline, the interest rates of new Convertible Securities will also decline. Therefore, in a falling interest rate environment companies may be expected to call Convertible Securities with high coupons and the Fund would have to invest the proceeds from such called issues in securities with lower coupons. Thus, Convertible Securities with superior call protection will permit the Fund to maintain a higher yield than with issues without call protection.
Income Securities. Although it is the Fund's policy to invest in Convertible Securities to the extent attractive opportunities are available, the Fund may also invest in Income Securities other than Convertible Securities that are expected to periodically accrue or generate income for their holders. Such Income Securities include (i) fixed income securities such as bonds, debentures, notes, stock, short-term discounted Treasury Bills or certain securities of U.S. government sponsored instrumentalities, as well as money market mutual funds that invest in those securities, which, in the absence of an applicable exemptive order, will not be affiliated with the Investment Adviser, and (ii) common stocks of issuers that have historically paid dividends. Fixed income securities obligate the issuer to pay to the holder of the security a specified return, which may be either fixed or reset periodically in accordance with the terms of the security. Fixed income securities generally are senior to an issuer's common stock and their holders generally are entitled to receive amounts due before any distributions are made to common stockholders. Common stocks generally do not obligate an issuer to make periodic distributions to holders.
The market value of fixed income securities, especially those that provide a fixed rate of return, may be expected to rise and fall inversely with interest rates and in general is affected by the credit rating of the issuer, the issuer's performance and perceptions of the issuer in the market place. The market value of callable or redeemable fixed income securities may also be affected by the issuer's call and redemption rights. It is possible that the issuer of fixed income securities may not be able to meet its payment obligations on interest or principal to holders. Further, holders of non-convertible fixed income securities do not participate in any capital appreciation of the issuer.
The Fund may also invest in obligations of U.S. government sponsored instrumentalities. Unlike non-U.S. government securities, obligations of certain agencies and instrumentalities of the U.S. government, such as the Government National Mortgage Association, are supported by the "full faith and credit" of the U.S. government; others, such as those of the Export-Import Bank of the U.S., are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. government would provide financial support to U.S. government sponsored instrumentalities if it is not obligated to do so by law.
The Fund also may invest in common stock of issuers that have historically paid dividends or otherwise made distributions to common stockholders. Unlike payments on fixed income securities, common stock dividend payments generally are not guaranteed and so may be discontinued by the issuer at its discretion or because of the issuer's inability to satisfy its liabilities. Further, an issuer's history of paying dividends does not guarantee that it will continue to pay dividends in the future. In addition to dividends, under certain circumstances the holders of common stock may benefit from the capital appreciation of the issuer.
Other Investments. The Fund may without limit invest in securities of companies for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced if, in the judgement of the Investment Adviser, there is a reasonable prospect of capital appreciation significantly greater than the brokerage and other transaction expenses involved.
In general, securities which are the subject of such an offer or proposal sell at a premium to their historic market price immediately prior to the announcement of the offer or may also discount what the stated or appraised value of the security would be if the contemplated transaction were approved or consummated. Such investments may be advantageous when: the discount significantly overstates the risk of the contingencies involved; the market significantly undervalues the securities, assets or cash to be received by stockholders of the prospective portfolio company as a result of the contemplated transaction; or the market fails adequately to recognize the possibility that the offer or proposal may be replaced or superseded by an offer or proposal of greater value. The evaluation of such contingencies requires unusually broad knowledge and experience on the part of the Investment Adviser which must appraise not only the value of the issuer and its component businesses as well as the assets or securities to be received as a result of the contemplated transaction but also the financial resources and business motivation of the offeror and the dynamics and business climate when the offer or proposal is in process.
In making the investments, the Fund will not violate any of its investment restrictions (see below, "Investment Restrictions") including the requirement that, (i) as to 75% of its total assets, it will not invest more than 5% of its total assets in the securities of any one issuer and (ii) it will not invest more than 25% of its total assets in any one industry. Certain investments are short-term in nature and will tend to increase the turnover ratio of the Fund thereby increasing its brokerage and other transaction expenses.
Unregistered Convertible Securities and Other Illiquid Investments. As set forth in the Prospectus, the Fund is not subject to an independent limitation on the amount it may invest in unregistered securities and other illiquid investments, including repurchase agreements having a maturity of longer than seven days.
The staff of the Securities and Exchange Commission (the "SEC") has taken the position that purchased over-the-counter ("OTC") options and the assets used as "cover" for written OTC options are illiquid. The assets used as cover for OTC options written by the Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered illiquid only to the extent that the maximum repurchase price under the option formula exceeds the intrinsic value of the option.
When Issued and Delayed Delivery Securities and Forward Commitments. As discussed in the Prospectus, the Fund may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized in the portfolio of the Fund until the Investment Adviser determines that issuance of the security is probable. At such time, the Fund will record the transaction and, in determining its net asset value, will reflect the value of the security daily. At such time, the Fund will also establish a segregated account with its custodian bank in which it will maintain cash or liquid high-grade debt securities at least equal in value to the amount of its commitments. The Investment Adviser does not believe that the net asset value of the Fund will be adversely affected by its purchase of securities on this basis.
Foreign Securities. Subject to the limitations described in the Prospectus, the Fund may invest in foreign securities which involve certain risks not associated with domestic investments.
Among other risks, foreign markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlements could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.
High Yield/High Risk Securities. Subject to the limitations described in the Prospectus, the Fund may invest in high yielding, lower rated bonds, commonly called "junk bonds." Bonds that are rated Ba or lower by Moody's or BB or lower by S&P, or unrated bonds of comparable quality, are generally considered to be high yield bonds. These high yield bonds are subject to greater risks than lower yielding, higher rated debt securities.
Lower rated securities are subject to risk factors such as: (i)
vulnerability to economic downturns and changes in interest rates; (ii)
sensitivity to adverse economic changes and corporate developments; (iii)
redemption or call provisions which may be exercised at inopportune times;
(iv) difficulty in accurately valuing or disposing of such securities; (v)
federal legislation which could affect the market for such securities; and
(vi) special adverse tax consequences associated with investments in certain
high yield, high risk bonds structured as zero coupon or pay-in-kind
securities.
High yield bonds, like other bonds, may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Fund would have to replace the security with a lower yielding security, resulting in lower return for investors. Conversely, a high yield bond's value will decrease in a rising interest rate market.
The market for high yield bonds is in some cases more thinly traded than the market for investment grade bonds, and recent market quotations may not be available for some of these bonds. Market quotations are generally available only from a limited number of dealers and may not represent firm bids from such dealers or prices for actual sales. As a result, the Fund may have greater difficulty valuing the high yield bonds in its portfolio accurately and disposing of these bonds at the time or price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like other bonds, attempt to evaluate the timeliness of principal and interest payments on those bonds. However, such ratings do not assess the risk of a decline in the market value of those bonds. In addition, ratings may fail to reflect recent events in a timely manner and are subject to change. If a rating with respect to a portfolio security is changed, the Investment Adviser will determine whether the security will be retained based upon the factors the Investment Adviser considers in acquiring or holding other securities in the portfolio. Investment in high yield bonds may make achievement of the Fund's investment objective more dependent on the Investment Adviser's own credit analysis than is the case for higher rated bonds.
Market prices for high yield bonds tend to be more sensitive than those for higher rated securities due to many of the factors described above, including the creditworthiness of the issuer, redemption or call provisions, the liquidity of the secondary trading market and changes in credit ratings, as well as interest rate movements and general economic conditions. In addition, yields on such bonds will fluctuate over time. An economic downturn could severely disrupt the market for high yield bonds.
The risk of default in payment of principal and interest on high yield bonds is significantly greater than with higher rated debt securities because high yield bonds are generally unsecured and are often subordinated to other obligations of the issuer, and because the issuers of high yield bonds usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates. Upon a default, bondholders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of the Fund to the extent it invests in high yield bonds, is expected to be more volatile than the net asset value of funds which invest solely in higher rated debt securities.
Derivative Instruments.
Options. The Fund may, from time to time, subject to guidelines of the Board of Directors and the limitations set forth in the Prospectus and applicable rating agency guidelines, purchase or sell, i.e., write, options on securities, securities indices and foreign currencies which are listed on a national securities exchange or in the OTC market, as a means of achieving additional return or of hedging the value of the Fund's portfolio.
A call option is a contract that gives the holder of the option the right to buy from the writer of the call option, in return for a premium, 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 a contract that gives the holder of the option the right, in return for a premium, to sell to the seller the underlying security at a specified price. The seller of the put option has the obligation to buy the underlying security upon exercise at the exercise price.
A call option is "covered" if the Fund owns the underlying instrument covered by the call or has an absolute and immediate right to acquire that instrument without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other instruments held in its portfolio. A call option is also covered if the Fund holds a call on the same instrument as the call written where the exercise price of the call held is (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 securities or other liquid securities in a segregated account 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 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. The Investment Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. 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 the Fund has been assigned an exercise notice, the Fund will be unable to effect a closing purchase transaction. Similarly, if the Fund is the holder of an option it may liquidate its position by effecting a closing sale transaction. This is accomplished by selling an option of the same series as the option previously purchased. There can be no assurance that either 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.
Options on Securities Indices. The Fund may purchase and sell securities index options. One effect of such transactions may be to hedge all or part of the Fund's securities holdings against a general decline in the securities market or a segment of the securities market. Options on securities indices are similar to options on stocks except that, rather than the right to take or make delivery of stock at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
The Fund's successful use of options on indices depends upon its ability to predict the direction of the market and is subject to various additional risks. The correlation between movements in the index and the price of the securities being hedged against is imperfect and the risk from imperfect correlation increases as the composition of the Fund diverges from the composition of the relevant index. Accordingly, a decrease in the value of the securities being hedged against may not be wholly offset by a gain on the exercise or sale of a securities index put option held by the Fund.
Options on Foreign Currencies. Instead of purchasing or selling currency futures (as described below), the Fund may attempt to accomplish similar objectives by purchasing put or call options on currencies or by writing put options or call options on currencies either on exchanges or in OTC markets. A put option gives the Fund the right to sell a currency at the exercise price until the option expires. A call option gives the Fund the right to purchase a currency at the exercise price until the option expires. Both types of options serve to insure against adverse currency price movements in the underlying portfolio assets designated in a given currency. The Fund's use of options on currencies will be subject to the same limitations as its use of options on securities, described above and in the Prospectus.
Currency options may be subject to position limits which may limit the ability of the Fund to fully hedge its positions by purchasing the options.
As in the case of interest rate futures contracts and options thereon, described below, the Fund may hedge against the risk of a decrease or increase in the U.S. dollar value of a foreign currency denominated debt security which the Fund owns or intends to acquire by purchasing or selling options contracts, futures contracts or options thereon with respect to a foreign currency other than the foreign currency in which such debt security is denominated, where the values of such different currencies (vis-a-vis the U.S. dollar) historically have a high degree of positive correlation.
Futures Contracts. The Fund will enter into futures contracts only for certain bona fide hedging, yield enhancement and risk management purposes. The Fund may enter into futures contracts for the purchase or sale of debt securities, financial indices, and U.S. government securities (collectively, "interest rate futures contracts"). It may also enter into futures contracts for the purchase or sale of foreign currencies in which securities held or to be acquired by the Fund are denominated, or the value of which have a high degree of positive correlation to the value of such currencies as to constitute an appropriate vehicle for hedging. In addition, the Fund may enter into futures contracts on stock and bond indices (collectively, "securities indices"). The Fund may enter into such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the assumption of a contrac tual obligation to deliver the assets underlying the contract at a specified price at a specified future time. A "purchase" 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 price at a specified future time. Certain futures contracts are settled on a net cash payment basis rather than by the sale and delivery of the assets underlying the futures contracts. U.S. futures contracts have been designed by exchanges that have been designated as "contract markets" by the Commodity Futures Trading Commission (the "CFTC"), an agency of the U.S. government, and must be executed through a futures commission merchant, i.e., a brokerage firm, which is a member of the relevant contract market. Futures contracts trade on these contract markets and their affiliated clearing organizations guarantee performance of the contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment (initial margin). It is expected that the initial margin on U.S. exchanges will vary from 0.5% to 4% of the face value of the contract. Under certain circumstances, however, such as during periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment. Thereafter, the futures contract is valued daily and the payment in cash of "variation margin" may be required, a process known as "mark-to-the-market." Each day the Fund is required to provide or is entitled to receive variation margin in an amount equal to any change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual delivery or acquisition of underlying assets, in most cases the contractual obligation is extinguished by offset before the expiration of the contract.
The offsetting of a contractual obligation is accomplished by buying (to offset an earlier sale) or selling (to offset an earlier purchase) an identical futures contract calling for delivery in the same month. Such a transaction cancels the obligation to make or take delivery of the underlying commodity. When the Fund purchases or sells futures contracts, the Fund will incur brokerage fees and related transactions costs.
In addition, futures contracts entail risks. The ordinary spreads between values in the cash and futures markets, due to differences in the characters of those markets, are subject to distortions. First, all participants in the futures market are subject to initial and variation margin requirements. Rather than meeting additional variation margin requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing price distortions. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Increased participation by speculators in the futures market may cause temporary price distortions. Thus, a correct forecast of interest rate trends by the Investment Adviser may still not result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its portfolio securities and sells futures contracts on other securities that historically have had a high degree of positive correlation to the value of the portfolio securities, the value of its portfolio securities might decline more rapidly than the value of a poorly correlated futures contract rises. In that case, the hedge will be less effective than if the correlation had been greater. In a similar but more extreme situation, the value of the futures position might in fact decline while the value of the portfolio securities holds steady or rises. This would result in a loss that would not have occurred but for the attempt to hedge.
Options on Futures Contracts. The Fund may also enter into options on futures contracts for certain bona fide hedging, yield enhancement and risk management purposes. The Fund may purchase put and call options and write put and call options on futures contracts that are traded on U.S. and foreign exchanges. The Investment Adviser, on behalf of the Fund, has no present intention to engage in uncovered option transactions. 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 (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. The writer of the option is required upon exercise to assume a short futures position (if the option is a call) or a long futures position (if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account which represents the amount by which the market price of the futures contract at exercise, exceeds, in the case of a call, or is less than, in the case of a put, the exercise of the option on the futures contract.
The Fund will be considered "covered" with respect to a call option it writes on a futures contract if the Fund owns the asset which is deliverable under the futures contract or an option to purchase that futures contract having a strike price equal to or less than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash or liquid securities equal to the fluctuating value of the optioned futures. The Fund will be considered "covered" with respect to a put option it writes on a futures contract if it owns an option to sell that futures contract having a strike price equal to or greater than the strike price of the "covered" option and having an expiration date not earlier than the expiration date of the "covered" option, or if it segregates and maintains with its custodian for the term of the option, cash or liquid securities at all times equal in value to the exercise price of the put (less any initial margin deposited by the Fund with its custodian with respect to such put option). There is no limitation on the amount of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge against an increase in the value of debt securities the Fund intends to acquire. If the futures price at expiration of the option is above the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase that may have occurred in the price of the debt securities the Fund intends to acquire. If the market price of the underlying futures contract is below the exercise price when the option is exercised, the Fund will incur a loss, which may be wholly or partially offset by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge against a decrease in the value of the Fund's portfolio securities. If the market price of the underlying futures contract at expiration of a written call option is below the exercise price, the Fund will retain the full amount of the option premium, thereby partially hedging against any decline that may have occurred in the Fund's holding of debt securities. If the futures price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be wholly or partially offset by the increase in the value of the securities in the Fund's portfolio which were being hedged.
The Fund may purchase put options on futures contracts to hedge its portfolio against the risk of a decline in the value of the debt securities it owns as a result of rising interest rates or fluctuating currency exchange rates. The Fund may also purchase call options on futures contracts as a hedge against an increase in the value of securities the Fund intends to acquire as a result of declining interest rates or fluctuating currency exchange rates.
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 that 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 that the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it received. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from options on futures it has written may to some extent be reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon. Generally, foreign currency futures contracts and options thereon are similar to the interest rate futures contracts and options thereon discussed previously. By entering into currency futures and options thereon, the Fund will seek to establish the rate at which it will be entitled to exchange U.S. dollars for another currency at a future time. By selling currency futures, the Fund will seek to establish the number of dollars it will receive at delivery for a certain amount of a foreign currency. In this way, whenever the Fund anticipates a decline in the value of a foreign currency against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value of some or all of the securities held in its portfolio that are denominated in that currency. By purchasing currency futures, the Fund can establish the number of dollars it will be required to pay for a specified amount of a foreign currency in a future month. Thus, if the Fund intends to buy securities in the future and expects the U.S. dollar to decline against the relevant foreign currency during the period before the purchase is effected, the Fund can attempt to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the price of the premium and related transaction costs it must pay for the option, to decide whether or not to buy (in the case of a call option) or to sell (in the case of a put option) a futures contract at a specified price at any time during the period before the option expires. If the Investment Adviser, in purchasing an option, has been correct in its judgment concerning the direction in which the price of a foreign currency would move as against the U.S. dollar, the Fund may exercise the option and thereby take a futures position to hedge against the risk it had correctly anticipated or close out the option position at a gain that will offset, to some extent, currency exchange losses otherwise suffered by the Fund. If exchange rates move in a way the Fund did not anticipate, however, the Fund will have incurred the expense of the option without obtaining the expected benefit; any such movement in exchange rates may also thereby reduce rather than enhance the Fund's profits on its underlying securities transactions.
Securities Index Futures Contracts and Options Thereon. Purchases or sales of securities index futures contracts are used for hedging purposes to attempt to protect the Fund's current or intended investments from broad fluctuations in stock or bond prices. For example, the Fund may sell securities index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Fund's securities portfolio that might otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the futures position. When the Fund is not fully invested in the securities market and anticipates a significant market advance, it may purchase securities index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund intends to purchase. As such purchases are made, the corresponding positions in securities index futures contracts will be closed out. The Fund may write put and call options on securities index futures contracts for hedging purposes.
Limitations on the Purchase and Sale of Futures Contracts and Options on Futures Contracts. Subject to the guidelines of the Board of Directors, the Fund may engage in transactions in futures contracts and options hereon only for bona fide hedging, yield enhancement and risk management purposes, in each case in accordance with the rules and regulations of the CFTC.
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.
In addition, investment in future contracts and related options generally will be limited by the rating agency guidelines applicable to any of the Fund's outstanding preferred stock.
Forward Currency Exchange Contracts. The Fund may engage in currency transactions other 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 by the Investment Adviser, the Fund may not be able to contract to sell the currency at a price above the level to which the currency is anticipated to decline.
Special Risk Considerations Relating to Futures and Options Thereon. The Fund's ability to establish and close out positions in futures contracts and options thereon will be subject to the development and maintenance of liquid markets. Although the Fund generally will purchase or sell only those futures contracts and options thereon for which there appears to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option thereon at any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Fund maintains a position, it will not be possible to effect a closing transaction in that contract or to do so at a satisfactory price and the Fund would have to either make or take delivery under the futures contract or, in the case of a written option, wait to sell the underlying securities until the option expires or is exercised or, in the case of a purchased option, exercise the option. In the case of a futures contract or an option thereon which the Fund has written and which the Fund is unable to close, the Fund would be required to maintain margin deposits on the futures contract or option thereon and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon and forward contracts by the Fund is subject to the ability of the Investment Adviser to predict correctly movements in the direction of interest and foreign currency rates. If the Investment Adviser's expectations are not met, the Fund will be in a worse position than if a hedging strategy had not been pursued. For example, if the Fund has hedged against the possibility of an increase in interest rates that 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.
Repurchase Agreements. The Fund may engage in repurchase agreements as set forth in the Prospectus. A repurchase agreement is an instrument under which the purchaser, i.e., the Fund, acquires a debt security and the seller agrees, at the time of the sale, to repurchase the obligation at a mutually agreed upon time and price, thereby determining the yield during the purchaser's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. The underlying securities are ordinarily U.S. Treasury or other government obligations or high quality money market instruments. The Fund will require that the value of such underlying securities, together with any other collateral held by the Fund, always equals or exceeds the amount of the repurchase obligations of the counter party. The Fund's risk is primarily that, if the seller defaults, the proceeds from the disposition of the underlying securities and other collateral for the seller's obligation are less than the repurchase price. If the seller becomes insolvent, the Fund might be delayed in or prevented from selling the collateral. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, the Fund will experience a loss.
If the financial institution which is a party to the repurchase agreement petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss.
Loans of Portfolio Securities. Consistent with applicable regulatory requirements, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times secured by cash or cash equivalents, which are maintained in a segregated account pursuant to applicable regulations and that are at least equal to the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earns interest on the cash amounts deposited as collateral, which will be invested in short- term obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its stock is qualified for sale. The Fund's loans of portfolio securities will be collateralized in accordance with applicable regulatory requirements and no loan will cause the value of all loaned securities to exceed 33% of the value of the Fund's total assets. The Fund's ability to lend portfolio securities will be limited by the rating agency guidelines applicable to any of the Fund's outstanding preferred stock.
A loan may generally be terminated by the borrower on one business day notice, or by the Fund on five business days notice. If the borrower fails to deliver the loaned securities within five days after receipt of notice, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. The Board of Directors will oversee the creditworthiness of the contracting parties on an ongoing basis. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. The risks associated with loans of portfolio securities are substantially similar to those associated with repurchase agreements. Thus, if the counter party to the loan petitions for bankruptcy or becomes subject to the United States Bankruptcy Code, the law regarding the rights of the Fund is unsettled. As a result, under extreme circumstances, there may be a restriction on the Fund's ability to sell the collateral and the Fund would suffer a loss. When voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in such loaned securities. The Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund as fundamental policies, except as otherwise indicated. Under the 1940 Act, a fundamental policy may not be changed without the vote of a majority of the outstanding voting securities of the Fund and the vote of a majority of the preferred shares, voting as a single class, as defined in the 1940 Act. Such a majority is defined as the lesser of (i) 67% or more of the shares present at a meeting of stockholders, if the holders of 50% of the outstanding shares of the Fund are present or represented by proxy or (ii) more than 50% of the outstanding shares of the Fund.
Under its investment restrictions the Fund may not:
o Purchase the securities of any one issuer, other than the United States government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of its total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to such 5% and 10% limitations.
o Purchase or otherwise acquire real estate or interests therein, although the Fund may purchase securities of issuers which engage in real estate operations and securities secured by real estate or interests therein.
o Purchase or otherwise acquire or sell commodities or commodity contracts except that the Fund may purchase or sell financial futures contracts and related options thereon.
o Purchase oil, gas or other mineral leases, rights or royalty contracts, or exploration or development programs, except that the Fund may invest in the securities of companies which operate, invest in, or sponsor such programs.
o Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, except that the Fund reserves the right to invest up to 5% of its total assets in not more than 3% of the securities of any one investment company including small business investment companies or invest up to 10% of its total assets in the securities of investment companies, nor make any such investments other than through purchases in the open market where to the best information of the Fund no commission or profit to a sponsor or dealer (other than the customary broker's commission) results from such purchase.
o Pledge its assets or assign or otherwise encumber them except to secure permitted borrowings. For the purpose of this restriction, collateral arrangements with respect to the writing of options or entering into financial futures transactions or forward contracts, or when issued or delayed delivery securities are not deemed to be pledges of assets and such arrangements are not deemed to be the issuance of a senior security as described in the immediately following restriction.
o Issue senior securities except to the extent permitted by applicable law.
o Borrow money except for short-term credits from banks as may be necessary for the clearance of portfolio transaction and for temporary or emergency purposes to the extent permitted by applicable law.
o Make loans of money or securities, except: (a) that the Fund may
engage in repurchase agreements as set forth in the Prospectus and
(b) the Fund may lend its portfolio securities consistent with
applicable regulatory requirements and as set forth in the
Prospectus.
o Make short sales of securities or maintain a short position, unless at all times when a short position is open, it either owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short.
o Engage in the underwriting of securities, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in disposing of a portfolio security.
o Invest for the purpose of exercising control or management of any other issuer.
o Invest more than 25% of the value of its total assets in any one industry.
If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage resulting from a change in values of portfolio securities or amount of total or net assets will not be considered a violation of any of the foregoing restrictions.
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, State Street Bank and Trust Company, the Fund's custodian (the "Custodian"), EquiServe Trust Company ("EquiServe"), the Fund's transfer agent and dividend disbursing agent with respect to the Series B Preferred, and The Bank of New York, the Fund's auction agent, paying agent and registrar with respect to the Series C Auction Rate Preferred. The day-to-day operations of the Fund are delegated to the Investment Adviser.
The names and business addresses of the directors and principal officers of the Fund are set forth in the following table, together with their positions and their principal occupations during the past five years and, in the case of the directors, their positions with certain other organizations and companies.
Number of
Term of Funds in
Name (And Age), Office and Fund Other
Position with the Fund Length of Complex Principal Directorships
and Time Overseen by Occupation During Held by
Business Address1 Served2 Director Past Five Years Director
----------------- ---------- ------------ ----------------- --------------
INTERESTED
DIRECTORS3:
Mario J. Gabelli Since 22 Chairman of the Board Director of Morgan
Director, President and 1989*** and Chief Executive Group Holdings, Inc.
Chief Investment Officer Officer of Gabelli (holding company);
Age: 60 Asset Management Vice Chairman of
Inc. and Chief Lynch Corporation
Investment Officer of (diversified
Gabelli Funds, LLC manufacturing)
and GAMCO
Investors, Inc;
Chairman and Chief
Executive Officer of
Lynch Interactive
Corporation
(multimedia and
services)
Karl Otto Pohl+ Since 31 Member of the Director of Gabelli
Director 1992*** Shareholder Asset Management
Age: 72 Committee of Sal Inc. (investment
Oppenheim Jr. & Cie management);
(private investment Chairman, Incentive
bank); Former Capital and Incentive
President of the Asset Management
Deutsche Bundesbank (Zurich); Director at
and Chairman of its Sal Oppenheim Jr. &
Central Bank Council Cie, Zurich
(1980-1991)
NON-INTERESTED
DIRECTORS:
--------------
E. Val Cerutti Since 7 Chief Executive Director of Lynch
Director 1989** Officer of Cerutti Corporation
Age: 62 Consultants, Inc.;
Former President and
Chief Operating
Officer of Stella D'oro
Biscuit Company
(through 1992);
Adviser, Iona College
School of Business
Anthony J. Colavita4 Since 33 President and Attorney ___
Director 1989* at Law in the law firm
Age: 66 of Anthony J.
Colavita, P.C.
Dugald A. Fletcher Since 2 President, Fletcher & Director of Harris
Director 1989** Company, Inc.; and Harris Group,
Age: 72 Former Director and Inc. (venture capital)
Chairman and Chief
Executive Officer of
Binnings Building
Products, Inc. (1997)
Anthony R. Pustorino Since 17 Certified Public ___
Director 1989** Accountant; Professor
Age: 76 Emeritus, Pace
University
Werner J. Roeder, MD4 Since 26 Medical Director of ___
Director 2001*** Lawrence Hospital
Age: 61 and practicing private
physician
Anthonie C. van Ekris+ Since 18 Managing Director of
Director 1992* BALMAC
Age: 67 International, Inc.
Salvatore J. Zizza Since 9 Chairman, Hallmark Board Member of
Director 1991* Electrical Supplies Hollis Eden
Age: 56 Corp.; Former Pharmaceuticals
Executive Vice
President of FMG
Group (OTC), a
healthcare provider.
OFFICERS:
Bruce N. Alpert Since 2003 ___ Executive Vice ___
President President and Chief
Age: 51 Operating Officer of
Gabelli Funds, LLC
since 1988 and an
officer of all mutual
funds advised by
Gabelli Funds, LLC
and its affiliates;
Director and President
of Gabelli Advisors,
Inc.
Gus Coutsouros Since 2003 ___ Vice President and Chief
Vice President and Financial Officer of
Treasurer Gabelli Funds, LLC since
Age: 40 1998 and an officer of all
mutual funds advised by
Gabelli Funds and its
affiliates and Chief Financial
Officer of Gabelli Advisers Inc.
Prior to 1998, Treasurer of
Lazard Funds.
Peter W. Latartara Since 1998 ___ Vice President of the ___
Vice President Fund since 1998.
Age: 35 Vice President of
Gabelli & Company,
Inc. from 1996
James E. McKee Since 1995 ___ Vice President, ___
Secretary General Counsel and
Age: 38 Secretary of 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
|
+ Non-resident director with no authorized agent in the United States.
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 Stockholders and
until their successors are duly elected and qualified.
** Term expires at the Fund's 2004 Annual Meeting of Stockholders and
until their successors are duly elected and qualified.
*** Term expires at the Fund's 2005 Annual Meeting of Stockholders 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 Preferred Stock.
The Board of Directors of the Fund are divided into three classes, with a class having a term of three years except as described below. Each year the term of office of one class of directors of the Fund will expire. However, to ensure that the term of a class of the Fund's directors expires each year, one class of the Fund's directors will serve three-year terms. The terms of Messrs. Colavita, van Ekris and Zizza as directors of the Fund expire in 2003; the terms of Messrs. Fletcher and Pustorino as directors of the Fund expire in 2004; and the terms of Messrs. Gabelli, Pohl, Cerutti and Dr. Roeder as directors of the Fund expire in 2005.
Name of Director Dollar Range of Equity Aggregate Dollar Range of
Securities in the Fund Equity Securities in all
Registered Investment
Companies Overseen by
Directors in Family of
Investment Companies
INTERESTED DIRECTORS
Mario J. Gabelli E E
Karl Otto Pohl A A
DISINTERESTED DIRECTORS
E. Val Cerutti C E
Anthony J. Colavita E E
Dugald A Fletcher E E
Anthony R. Pustorino D E
Werner J, Roeder, MD A E
Anthonie C. van Ekris C E
Salvatore J. Zizza E E
------------------------------------------
|
* KEY TO DOLLAR RANGES
A. None
B. $1 - $10,000
C. $10,001 - $50,000
D. $50,001 - $100,000
E. Over $100,000
All stock was valued as of December 31, 2002.
The Directors serving on the Fund's Nominating Committee are Messrs. Anthony J. Colavita, Chairman of the committee, and Salvatore J. 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 stockholders if a vacancy were to exist. Such recommendations should be forwarded to the Secretary of the Fund. The Nominating Committee did not meet during the year ended December 31, 2002. The Fund does not have a standing compensation committee.
Messrs. Anthony R. Pustorino, Chairman, Anthony J. Colavita, and Salvatore J. 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, 2002, 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 22, 2002 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 or its affiliates a fee of $5,000 per year plus $750 per meeting attended, together with each director's actual out-of-pocket expenses relating to attendance at such meetings.
The following table shows certain compensation information for the directors and officers of the Fund for the fiscal year ended December 31, 2002. Mr. Latartara is employed by the Fund and his compensation is evaluated and approved by the directors. Other officers who are employed by the Investment Adviser receive no compensation or expense reimbursement from the Fund.
Compensation Table For the Fiscal Year Ended December 31, 2002
TOTAL
COMPENSATION
FROM THE FUND
AND FUND
AGGREGATE COMPLEX PAID
NAME OF PERSON AND COMPENSATION TO DIRECTORS/
POSITION* FROM THE FUND OFFICERS
MARIO J. GABELLI $0 $0
Chairman of the Board (22)
E. VAL CERUTTI Director (7) $8,750 $23,250
ANTHONY J. COLAVITA Director (33) $9,750 $152,286
DUGALD A. FLETCHER Director (2) $9,250 $17,250
KARL OTTO POHL Director (31) $0 $0
ANTHONY R. PUSTORINO Director (17) $9,750 $132,286
WERNER J. ROEDER, MD Director (26) $8,750 $97,786
ANTHONIE C. van EKRIS Director (18) $8,750 $67,250
SALVATORE J. ZIZZA Director (9) $10,250 $73,750
-------
TOTAL** $65,250
|
* Represents the total compensation paid to such persons during the calendar year ended December 31, 2002 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 number in parenthesis represents the number of such investment companies and portfolios.
** Does not include $2,202 of out of pocket Director expenses, which would bring total Director compensation/expenses from the Fund to $67,452.
For his services as Vice President of the Fund, Mr. Latartara, received compensation in 2002 of $97,500.
Indemnification of Directors and Officers; Limitations on Liability
Subject to limitations imposed by the 1940 Act, the Fund's Charter limits the liability of the Fund's directors and officers to the Fund and its stockholders to the fullest extent permitted by Maryland law. Under Maryland law, Maryland corporations may limit their directors' and officers' liability for money damages to the corporation and stockholders except to the extent (i) that it is proved that a director or officer actually received an improper benefit or profit in money, property or services, in which case such director or officer may be liable for the amount of the benefit or profit actually received or (ii) that a judgment or other final adjudication adverse to a director or officer is entered in a proceeding based on a finding that such director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.
The Charter also provides for the indemnification of, and expenses to be advanced on behalf of, directors and officers, among others, to the fullest extent permitted by Maryland law, subject to the limitations imposed by the 1940 Act. Under Maryland law, corporations may indemnify present and past directors and officers, or officers of another corporation that serve at the request of the indemnifying corporation, against judgments, penalties, fines, settlements and reasonable expenses (including attorneys' fees) actually incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation in which such director or officer is adjudicated liable to the corporation), in which they are made parties by reason of being or having been directors or officers, unless it is proved that (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the director or officer actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Maryland law also provides that, unless limited by the corporation's charter, a corporation will indemnify present and past directors and officers who are successful, on the merits or otherwise, in the defense of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, against reasonable expenses (including attorneys' fees) incurred in connection with such proceeding. The Fund's Charter does not limit the extent of this indemnity.
Investment Advisory and Administrative Arrangements
Gabelli Funds, LLC acts as the Fund's Investment Adviser pursuant to an advisory agreement with the Fund (the "Advisory Agreement"). The Investment Adviser is a New York corporation with principal offices located at One Corporate Center, Rye, New York 10580. The Investment Adviser was organized in 1999 and is the successor to Gabelli Advisers, Inc., which was organized in 1980. As of December 31, 2002, the Investment Adviser acted as registered investment advisers to 18 management investment companies with aggregate net assets of $8.7 billion. The Investment Adviser, together with other affiliated investment advisers, had assets under management totaling $9.7 billion, as of December 31, 2002. GAMCO Investors, Inc., an affiliate of the Investment Adviser, acts as investment adviser for individuals, pension trusts, profit sharing trusts and endowments and as a sub-adviser to management investment companies, having aggregate assets of $10.0 billion under management as of December 31, 2002. Gabelli Fixed Income LLC, an affiliate of the Investment Adviser, acts as investment adviser for The Treasurer's Fund and separate accounts having aggregate assets of $1.6 billion under management as of December 31, 2002. The Investment Adviser is a wholly-owned subsidiary of Gabelli Asset Management Inc., a New York corporation, whose Class A Common Stock is traded on the New York Stock Exchange under the symbol "GBL." Mr. Mario J. Gabelli may be deemed a "controlling person" of the Investment Adviser on the basis of his ownership of a majority of the stock of the Gabelli Group Capital Partners, Inc., which owns a majority of the capital stock of Gabelli Asset Management Inc.
Under the terms of the Advisory Agreement, the Investment Adviser manages the portfolio of the Fund in accordance with its stated investment objective 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 stockholders and supervising the calculation of the net asset value of its stock. All expenses of computing the net asset value of the Fund, including any equipment or services obtained solely for the purpose of pricing shares or valuing its investment portfolio, will be an expense of the Fund under its Advisory Agreement unless the Investment Adviser voluntarily assumes responsibility for such expense.
The Advisory Agreement combines investment advisory and administrative responsibilities in one agreement. 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. 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 the stated annual dividend rate of such series, 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 "Gabelli."
Pursuant to its terms, the Advisory Agreement will remain in effect with respect to the Fund until the second anniversary of stockholder approval of such Agreement, and from year to year thereafter if approved annually (i) by the Fund's Board of Directors or by the holders of a majority of its outstanding voting securities and (ii) by a majority of the directors who are not "interested persons" (as defined in the 1940 Act) of any party to the Advisory Agreement, by vote cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement was initially approved by the Board of Directors at a meeting held on June 5, 1989 and was approved most recently by the Board of Directors on May 22, 2002. The Advisory Agreement terminates automatically on its assignment and may be terminated without penalty on 60 days written notice at the option of either party thereto or by a vote of a majority (as defined in the 1940 Act) of the Fund's outstanding shares.
For each of the years ended December 31, 2000, December 31, 2001, and December 31, 2002, the Investment Adviser was paid $822,916, $750,049, and $687,016 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 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. 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 SEC thereunder, as well as other regulatory requirements, the Fund's Board of Directors have determined that portfolio transactions may be executed through Gabelli & Company, Inc. 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 obligations 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 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.
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.
For the fiscal years ended December 31, 2000, December 31, 2001, and December 31, 2002, the Fund paid a total of $144,932, $42,738, and $19,349 respectively, in brokerage commissions, of which Gabelli & Company, Inc. and its affiliates received $116,959, $34,251, and $16,332, 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, 2002 represented approximately 84.4% of the aggregate dollar amount of brokerage commissions paid by the Fund for such period and approximately 96.7% of the aggregate dollar amount of transactions by the Fund for such period.
REPURCHASE OF COMMON STOCK
The Fund is a closed-end, diversified, management investment company and as such its stockholders do not, and will not, have the right to redeem their stock. The Fund, however, may repurchase its common stock from time to time as and when it deems such a repurchase advisable. Such repurchases will be made when the Fund's common stock is trading at a discount of 10% or more (or such other percentage as the Board of Directors of the Fund may determine from time to time) from net asset value. Pursuant to the 1940 Act, the Fund may repurchase its common stock on a securities exchange (provided that the Fund has informed its stockholders within the preceding six months of its intention to repurchase such stock) or as otherwise permitted in accordance with Rule 23c-1 under the 1940 Act. Under that Rule, certain conditions must be met regarding, among other things, distribution of net income for the preceding fiscal year, status of the seller, price paid, brokerage commissions, prior notice to stockholders of an intention to purchase stock and purchasing in a manner and on a basis that does not discriminate unfairly against the other stockholders through their interest in the Fund.
When the Fund repurchases its common stock for a price below net asset value, the net asset value of the common stock that remains outstanding will be enhanced, but this does not necessarily mean that the market price of the outstanding common stock will be affected, either positively or negatively.
PORTFOLIO TURNOVER
The portfolio turnover rates of the Fund for the fiscal years ending December 31, 2002, December 31, 2001 and 2000 were 56%, 59% and 169%, respectively. Portfolio turnover rate is calculated by dividing the lesser of an investment company's annual sales or purchases of portfolio securities by the monthly average value of securities in its portfolio during the year, excluding portfolio securities the maturities of which at the time of acquisition were one year or less. A high rate of portfolio turnover involves correspondingly greater brokerage commission expense than a lower rate, which expense must be borne by the Fund and its stockholders, as applicable. A higher rate of portfolio turnover may also result in taxable gains being passed to stockholders.
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
Under the Fund's Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (the "Plan"), a stockholder whose shares of the Fund's common stock is registered in his own name will have all distributions reinvested automatically by 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 immediately 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 its 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 members of such Plan 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 participants in such Plan.
All correspondence concerning the Plan should be directed to EquiServe at P.O. Box 43025, Providence, RI 02940-3025.
TAXATION
The following discussion is a brief summary of certain 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.
Taxation of the Fund
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: (i)
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
(ii) diversify its holdings so that, at the end of each quarter of each
taxable year, subject to certain exceptions, (a) 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 (b) 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.
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.
The IRS has taken the position 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 stockholders and preferred stockholders 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 common stockholders and preferred stockholders. The amount of net capital gain and ordinary investment income and dividends qualifying for the dividends received deduction allocable among common stockholders and the preferred stockholders 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.
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 (i) 98% of its ordinary income for the calendar year, (ii) 98% of its capital gain net income (both long-term and short-term) for the one year period ending on October 31 of such year, (unless an election is made to use the Fund's fiscal year), and (iii) 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 on all of its income, 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 on all of its income, 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 25% 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, 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. 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). For non-corporate taxpayers, net investment income will currently be taxed at a maximum rate of 38.6% while net capital gain generally will be taxed at a maximum rate of 20%. For corporate taxpayers, both net investment income and net capital gain are taxed at a maximum rate of 35%.
Stockholders may be entitled to offset their capital gain dividends with capital losses. There are a number of statutory provisions affecting when capital loses 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.
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 amounts 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.
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.
The Bush Administration has announced a proposal to reduce or eliminate the tax on dividends; however, many of the details of the proposal (including how the proposal would apply to dividends paid by a regulated investment company) have not been specified. Moreover, the prospects for this proposal are unclear. Accordingly, it is not possible to evaluate how this proposal might affect the tax discussion above.
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 refunded or credited against such stockholder's federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service.
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 B Preferred or Series C Auction Rate Preferred should consult their own tax advisers regarding the purchase, ownership and disposition of Series B Preferred or Series C Auction Rate Preferred.
ADDITIONAL INFORMATION
CONCERNING AUCTIONS FOR SERIES C AUCTION RATE PREFERRED
General
The Articles Supplementary provide that the Applicable Rate for each Dividend Period of the Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred. One certificate for all of the Series C Auction Rate 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 Auction Rate Preferred contained in the Articles Supplementary. The Fund will also issue stop-transfer instructions to the transfer agent for the Series C Auction Rate 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 B Preferred and Series C Auction Rate Preferred -- Voting Rights" in the Prospectus, Cede & Co. will be the Holder of all the Series C Auction Rate 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 Auction Rate 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 Auction Rate Preferred:
(i) each Beneficial Owner of Series C Auction Rate Preferred may submit to its Broker-Dealer by telephone or otherwise a:
(a) "Hold Order" - indicating the number of Outstanding Series C Auction Rate Preferred shares, if any, that such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for such shares for the immediately succeeding Dividend Period of such shares;
(b) "Bid" - indicating the number of Outstanding Series C Auction Rate Preferred shares, if any, that such Beneficial Owner offers to sell if the Applicable Rate for such Series C Auction Rate Preferred for the immediately 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 Auction Rate Preferred shares, if any, that such Beneficial Owner offers to sell without regard to the Applicable Rate for such Series C Auction Rate Preferred for the immediately 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 Auction Rate Preferred shares that they offer to purchase if the Applicable Rate for Series C Auction Rate Preferred for the immediately 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 Auction Rate 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 Auction Rate Preferred an Order or Orders covering all the Outstanding Series C Auction Rate 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 Auction Rate 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 Auction Rate Preferred an Order or Orders covering all of the Outstanding Series C Auction Rate 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 Auction Rate Preferred shares held by such Beneficial Owner and not subject to Orders submitted to its Broker-Dealer.
A Potential Beneficial Owner of Series C Auction Rate Preferred may submit to its Broker- Dealer Bids in which it offers to purchase Series C Auction Rate 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 Auction Rate 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 Auction Rate Preferred that offers to become the Beneficial Owner of additional Series C Auction Rate 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 Auction Rate Preferred subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of Series C Auction Rate 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 Auction Rate 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 Auction Rate 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.
The Fund may not submit an Order in any Auction.
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 Auction Rate Preferred shares that is fewer than the number of Series C Auction Rate 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 will be made for settlement on the Business Day immediately 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 the Maximum Rate as 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 willful misconduct or gross 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 grossly negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the Existing Holders of Series C Auction Rate 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 of Series C Auction Rate Preferred -- Secondary Market Trading and Transfer of Series C Auction Rate 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., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon written notice to the Fund on a date no earlier than 30 days after the date of delivery of 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 has entered into such an agreement with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for Series C Auction Rate 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 365 days, the product of (i) a fraction, the numerator of
which is the number of days in such dividend period and the denominator of
which is 365, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the
aggregate number of Series C Auction Rate 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 Auction Rate Preferred placed by the
broker-dealers at the auction agreed to by the Fund and the broker-dealers.
For the purposes of the preceding sentence, Series C Auction Rate 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
(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.
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 Auction Rate 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, will 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 Auction Rate 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 Auction Rate Preferred will be considered valid, but only up to and including in the aggregate the number of Outstanding shares of Series C Auction Rate Preferred held by such Existing Holder, and, if the number of Series C Auction Rate Preferred shares subject to such Hold Orders exceeds the number of Outstanding shares of Series C Auction Rate Preferred 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 Auction Rate Preferred will be considered valid up to and including the excess of the number of Outstanding shares of Series C Auction Rate Preferred held by such Existing Holder over the number of Series C Auction Rate 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 Auction Rate Preferred is submitted to the Auction Agent with the same rate and the number of Outstanding shares of Series C Auction Rate Preferred 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 shares of Series C Auction Rate Preferred subject to each Bid with the same rate will be reduced pro rata to cover the number of shares of Series C Auction Rate Preferred equal to such excess;
(c) subject to subclauses (a) and (b), if more than one Bid of an Existing Holder for Series C Auction Rate Preferred is submitted to the Auction Agent with different rates, such Bids will 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 shares of Series C Auction Rate Preferred 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 Auction Rate Preferred by or on behalf of a Potential Holder at the rate specified therein; and
(iii) all Sell Orders for Series C Auction Rate Preferred will be
considered valid up to and including the excess of the number of
Outstanding shares of Series C Auction Rate Preferred 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 Auction Rate 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 Auction Rate Preferred shares specified therein.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date for Series C Auction Rate 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 shares of Series C Auction Rate Preferred over the number of Outstanding shares of Series C Auction Rate Preferred subject to Submitted Hold Orders (such excess being herein referred to as the "Available Series C Auction Rate Preferred") and whether Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will have been made if the number of Outstanding shares of Series C Auction Rate Preferred 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 shares of Series C Auction Rate Preferred that are the subject of Submitted Sell Orders (including the number of Series C Auction Rate Preferred shares subject to Bids of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for Series C Auction Rate Preferred have been made, the Auction Agent will determine the lowest rate specified in such Submitted Bids (the Winning Bid Rate for shares of such Series) 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 Auction Rate Preferred shares which, when added to the number of Outstanding Series C Auction Rate 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 Auction Rate 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 Auction Rate Preferred is subject to Submitted Hold Orders), the Applicable Rate for the next Dividend Period for all Series C Auction Rate 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 Auction Rate Preferred subject to such Sell Orders but will continue to own Series C Auction Rate 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 Auction Rate Preferred is subject to Submitted Hold Orders, the Applicable Rate for all Series C Auction Rate Preferred for the immediately 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 Auction Rate 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 Auction Rate Preferred subject to such Hold Orders.
If Sufficient Clearing Bids for Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred subject to such Submitted Bid, unless the number of Outstanding Series C Auction Rate Preferred shares subject to all such Submitted Bids is greater than the number of Series C Auction Rate Preferred shares ("remaining shares") in excess of the Available Series C Auction Rate Preferred over the number of Series C Auction Rate 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 Auction Rate Preferred subject to such Submitted Bid determined on a pro rata basis based on the number of Outstanding Series C Auction Rate 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 Auction Rate Preferred will purchase any Available Series C Auction Rate Preferred not accounted for in clauses (ii) through (iv) above on a pro rata basis based on the Outstanding Series C Auction Rate Preferred shares subject to all such Submitted Bids.
If Sufficient Clearing Bids for Series C Auction Rate Preferred shares have not been made (unless this results because all Outstanding Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 immediately
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 Auction Rate 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 Auction Rate Preferred shares
being sold or purchased on such Auction Date so that the number of Series C
Auction Rate 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 Auction Rate Preferred share, the Auction Agent will, in such
manner as, in its sole discretion, it will determine, allocate Series C
Auction Rate Preferred for purchase among Potential Holders so that only whole
Series C Auction Rate 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 Auction Rate Preferred as a result of the Auction and will be required to advise each customer purchasing or selling Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred shares that is less than the number of Series C Auction Rate Preferred shares that otherwise was to be purchased by such person. In such event, the number of Series C Auction Rate Preferred shares to be so delivered will be determined by the Broker-Dealer. Delivery of such lesser number of Series C Auction Rate Preferred shares will constitute good delivery.
ADDITIONAL INFORMATION CONCERNING
THE SERIES B PREFERRED AND SERIES C AUCTION RATE PREFERRED
The additional information concerning the Series B Preferred and Series C Auction Rate Preferred contained in this SAI does not purport to be complete a complete description of those Series and should be read in conjunction with the description of the Series B Preferred and Series C Auction Rate Preferred contained in the Prospectus under "Description of the Series B Preferred and Series C Auction Rate Preferred." This description is subject to and qualified in its entirety by reference to the Fund's Charter, including the provisions of the Articles Supplementary establishing, respectively, the Series B Preferred and the Series C Auction Rate Preferred. Copies of these Articles Supplementary are filed as exhibits 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.
Dividends and Dividend Periods For the Series C Auction Rate Preferred
Holders of Series C Auction Rate 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 Stock.
By 12:00 noon, New York City time, on the Business Day immediately 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 Auction Rate 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 Auction Rate 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) will 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 will 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 Auction Rate 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 360.
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 Auction Rate Preferred is set forth in the Prospectus. See "The Auction of Series C Auction Rate Preferred -- 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 Auction Rate 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 Auction Rate Preferred Basic Maintenance Amount.
The Maximum Rate will apply automatically following an Auction for Series C Auction Rate Preferred in which Sufficient Clearing Bids have not been made (other than because all Series C Auction Rate 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 (i) circumstances in which the Dividend Rate is the Default Rate, as described below or (ii) in the event 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, in which case the length of the then current dividend period will be extended by seven days, or a multiple thereof if necessary because of such unforeseen event or events, the applicable rate for such period will be the applicable rate for the then current dividend period so extended and the dividend payment date for such dividend period will be the first business day immediately succeeding the end of such period). The All Hold Rate will apply automatically following an Auction in which all of the Outstanding Series C Auction Rate 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 immediately 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 immediately succeeding Dividend Period and of the Auction Date of the immediately succeeding Auction.
Notification of Dividend Period. The Fund will designate the duration of Dividend Periods of the Series C Auction Rate 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 Auction Rate Preferred has been cured as set forth under " -- Default Period," (iii) Sufficient Clearing Orders 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, 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 immediately 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 Auction Rate Preferred Basic Maintenance Amount and has consulted with the Broker-Dealers and has provided notice and a Series C Auction Rate Preferred Basic Maintenance Report to each Rating Agency which is then rating the Series C Auction Rate 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 immediately 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 Auction Rate 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 immediately preceding the relevant Dividend Payment Date or Redemption Date, as the case may be, (i) the full amount of any declared dividend on the Series C Auction Rate 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 Auction Rate Preferred being redeemed on such Redemption Date (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 Auction Rate Preferred, and the dividend rate for each Dividend Period commencing during a Default Period will be equal to the Default Rate; provided, however, that if a Default Period is deemed not to have occurred because the Default has been cured, then the dividend rate for the period shall be the Applicable Rate set at the auction for such period.
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 applicable to such Series; provided, however, that if a Default Period shall end prior to the end of Standard Dividend Period that had commenced during the Default Period, an Auction shall be held on the last day of such Standard Dividend Period.
In the event the Fund fully pays all default amounts due during a Dividend Period, the dividend rate for the remainder of that Dividend Period will be, as the case may be, the Applicable Rate (for the first Dividend Period following a Dividend Default) or the Maximum Rate (for any subsequent Dividend Period for which such Default is continuing).
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 (except a dividend payable in stock of the issuer) or other distributions upon any of its outstanding common stock, or purchase any such common stock, if at the time of the declaration, distribution or purchase, as applicable (and after giving effect thereto), asset coverage with respect to the Fund's outstanding senior securities representing stock, including the Series B Preferred or Series C Auction Rate Preferred, would be less than 200% (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), or (ii) declare any dividend (except a dividend payable in stock of the issuer) or other distributions upon any of its outstanding capital stock, including the Series B Preferred or Series C Auction Rate Preferred, or purchase any such capital stock if, at the time of such declaration, distribution or purchase, as applicable (and after giving effect thereto), asset coverage with respect to the senior securities representing indebtedness would be less than 300% (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), except that dividends may be declared upon any Preferred Stock, including the Series B Preferred or Series C Auction Rate Preferred, if, at the time of such declaration (and after giving effect thereto), asset coverage with respect to the senior securities representing indebtedness would be equal to or greater 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). A declaration of a dividend or other distribution on or purchase or redemption of Series B Preferred or Series C Auction Rate Preferred is prohibited, unless there is no event of default under indebtedness senior to the Series B Preferred and/or Series C Auction Rate 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 B Preferred and/or Series C Auction Rate Preferred).
For so long as the Series B Preferred or Series C Auction Rate Preferred is Outstanding, except as otherwise provided in the Articles Supplementary, the Fund will not pay any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, shares of Common Stock or other stock, if any, ranking junior to the Series B Preferred and/or Series C Auction Rate Preferred as to dividends or upon liquidation) with respect to shares of Common Stock or any other stock of the Fund ranking junior to the Series B Preferred and/or Series C Auction Rate Preferred as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of Common Stock or other stock ranking junior to the Series B Preferred and/or Series C Auction Rate Preferred (except by conversion into or exchange for shares of the Fund ranking junior to the Series B Preferred and/or Series C Auction Rate 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 Basic Maintenance Amount applicable to, as the case may be, the Series B Preferred or Series C Auction Rate Preferred and the 1940 Act Asset Coverage with respect to the Fund's Outstanding Preferred Stock, including the Series B Preferred and/or Series C Auction Rate Preferred, 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 B Preferred and/or Series C Auction Rate Preferred (or will have been declared and sufficient funds for the full payment thereof will have been deposited with the Paying Agent or the dividend-disbursement agent, as applicable) and (z) the Fund has redeemed the full number of shares of Preferred Stock to be redeemed pursuant to any provision for mandatory redemption contained in the Articles Supplementary, including any Series B Preferred and/or Series C Auction Rate Preferred required or determined to be redeemed pursuant to any such provision.
No full dividend will be declared or paid on the Series B Preferred or Series C Auction Rate Preferred for any Dividend Period or part thereof, unless full cumulative dividends due through the most recent Dividend Payment Dates of the Outstanding Preferred Stock (including the Series B Preferred and/or Series C Auction Rate Preferred) have been or contemporaneously are declared and paid. If full cumulative dividends due have not been paid on all such shares of Preferred Stock, any dividends being paid on such shares of Preferred Stock (including the Series B Preferred and/or Series C Auction Rate Preferred) will be paid as nearly pro rata as possible in proportion to the respective amounts of dividends accumulated but unpaid on each such series of Preferred Stock on the relevant Dividend Payment Date.
Asset Maintenance
The Fund is required to satisfy two separate asset maintenance requirements in respect of its Preferred Stock, including the Series B Preferred and/or Series C Auction Rate 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 each of the series of Preferred Stock, including Series B Preferred and/or Series C Auction Rate Preferred, plus specified liabilities, payment obligations and other amounts; and (ii) the Fund must maintain asset coverage for its Outstanding Preferred Stock, including for the Series B Preferred and/or Series C Auction Rate Preferred, of at least 200%.
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 Basic Maintenance Amount, calculated separately for Moody's (if Moody's is then rating the Series B Preferred or Series C Auction Rate Preferred at the request of the Fund) and Fitch (if Fitch is then rating the Series B Preferred or Series C Auction Rate 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 some or all of the Series B Preferred or Series C Auction Rate Preferred.
The "Basic Maintenance Amount" means, as of any Valuation Date, the
dollar amount equal to (i) the sum of (a) the product of the number of shares
of each 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 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; (c) the Fund's other liabilities due and payable as of
such Valuation Date (except that dividends and other distributions payable by
the Fund on Common Stock will not be included as a liability) and such
liabilities projected to become due and payable by the Fund during the 90 days
following such Valuation Date (excluding liabilities for investments to be
purchased and for dividends and other distributions not declared as of such
Valuation Date); and (d) any current liabilities of the Fund as of such
Valuation Date to the extent not reflected in (or specifically excluded by)
any of (i)(a) through (i)(c) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund pursuant to
reverse repurchase agreements and any payables for assets purchased as of such
Valuation Date) less (ii) (a) the adjusted value of any of the Fund's assets
or (b) the face value of any of the Fund's assets if, in the case of both
(ii)(a) and (ii)(b), such assets are either cash or evidences of indebtedness
which mature prior to or on the date of redemption or repurchase of shares of
Preferred Stock or payment of another liability and are either U.S. Government
Obligations or evidences of indebtedness which have a rating assigned by
Moody's of at least Aaa, P-1, VMIG-1 or MIG-1 or by S&P of at least AAA, SP-1+
or A-1+, and are irrevocably held by the Fund's custodian bank in a segregated
account or deposited by the Fund with the dividend-disbursing agent 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
(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 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 (i)
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 Basic Maintenance Amount are based on the criteria established in connection with rating the Series B Preferred or Series C Auction Rate Preferred, as the case may be. 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 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 B Preferred or Series C Auction Rate Preferred, as the case may be, and which so requires that any such changes would not impair an applicable Aaa credit rating from Moody's or AAA rating from Fitch.
A Rating Agency's Guidelines will apply to the Series B Preferred or Series C Auction Rate 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 Fitch for rating, as the case may be, the Series B Preferred and/or Series C Auction Rate Preferred. The ratings assigned to the Series B Preferred or Series C Auction Rate Preferred are not recommendations to buy, sell or hold Series B Preferred or Series C Auction Rate Preferred. Such ratings may be subject to revision or withdrawal by the assigning Rating Agency at any time. Any rating of the Series B Preferred or Series C Auction Rate 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 Basic Maintenance Amount on or prior to the applicable 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), 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 stock 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 Auction Rate 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 Auction Rate Preferred Basic Maintenance Amount Test.
1940 Act Series C Auction Rate Preferred Asset Coverage. As of each
Valuation Date, the Fund will determine whether the 1940 Act Asset Coverage is
met as of that date. The Fund will 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 (a) the last Business Day of each March, June,
September and December and (b) 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 will 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 a Basic Maintenance Report to each applicable Rating Agency and the Auction Agent, if any, which sets forth, as of the related Valuation Date, Eligible Assets sufficient to meet or exceed the applicable Basic Maintenance Amount, the Market Value and Discounted Value thereof (in a series and in the aggregate) and the applicable Basic Maintenance Amount. Such Basic Maintenance Reports must be delivered as of the applicable 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.
Deposit Assets Requirements Relating to the Series C Auction Rate Preferred
The Fund is obligated to deposit in a segregated custodial account a specified amount of Deposit Assets not later than 12:00 noon, New York City time, on each Dividend Payment Date and each Redemption Date relating to the Series C Auction Rate Preferred. These Deposit Assets, 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 Relating to the Series C Auction Rate Preferred
Series C Auction Rate 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 Auction Rate Preferred through different Broker-Dealers, advises the Auction Agent of such transfer. Any certificates representing the Series C Auction Rate 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 FITCH GUIDELINES
The descriptions of the Moody's and Fitch Guidelines contained in this SAI do not purport to be complete and are subject to and qualified in their entireties by reference to the applicable Articles Supplementary. Copies of the Articles Supplementary are 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 Fitch, each a Rating Agency, in connection with the Fund's receipt of a rating of Aaa from Moody's and AAA from Fitch, respectively, for the Series C Auction Rate Preferred and a rating of Aaa from Moody's for the Series B 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 Rating Agency Guidelines. Accordingly, although the Fund reserves the right to invest in such securities to the extent set forth herein, such securities 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 Outstanding shares of Series B Preferred, Series C Auction Rate Preferred and other Preferred Stock 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 Outstanding Shares of Series B Preferred, Series C Auction Rate Preferred and other Preferred Stock 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 "Additional Information Concerning The Series B Preferred and Series C Auction Rate 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 either Moody's or Fitch, although other similar arrangements might apply with respect to other rated 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 "Basic Maintenance Amount"), the determination of which is as set forth under "Additional Information Concerning The Series B Preferred and Series C Auction Rate Preferred -- Asset Maintenance." Moody's and Fitch 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).
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 B Preferred and Series C Auction Rate Preferred will acquire certain rights. See "Additional Information Concerning The Series B Preferred and Series C Auction Rate Preferred -- Asset Maintenance."
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 Fitch) indicates strong asset protection, conservative balance sheet ratios and positive indications of continued protection of preferred dividend requirements. A Moody's or Fitch credit rating of preferred stock does not address the likelihood that a resale mechanism (such as the Auction) will be successful. As described respectively by Moody's and Fitch, 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 B Preferred or Series C Auction Rate 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 Fitch by the Fund and obtained by Moody's and Fitch 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 Basic Maintenance Amount. 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:
(a) Convertible securities (including convertible preferreds):
DISCOUNT FACTORS (1)
RATINGS(2) UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
----------------- -------- ----------- ---------- ---------------
Aaa.............. 162% 256% 233% 250%
Aa............... 167% 261% 238% 265%
A................ 172% 266% 243% 275%
Baa.............. 188% 282% 259% 285%
Ba............... 195% 290% 265% 290%
B................ 199% 293% 270% 295%
NR(3)............ 300% 300% 300% 300%
|
(1) Discount factors are for 7-week exposure period.
(2) If a convertible security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(3) Unrated fixed-income and convertible securities, which are rated by
neither Moody's nor S&P, are limited to 10% of discounted Moody's
Eligible Assets. If a corporate debt security is unrated by both Moody's
and S&P, the Fund will use the percentage set forth under "Unrated" in
this table.
Upon conversion to common stock, the Discount Factors applicable to common stock will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL ----------------- -------- ---------- ----------- 7 week exposure period....... 170% 264% 241% |
(b) Corporate Debt Securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
MOODY'S RATING CATEGORY(1)
--------------------------
TERMS TO MATURITY OF
CORPORATE DEBT SECURITY AAA AA A BAA BA B UNRATED(2)
----------------------- --- -- - --- -- - ----------
1 year or less.................................. 109% 112% 115% 118% 119% 125% 225%
2 years or less (but longer than 1 year)........ 115 118 122 125 127 133 225
3 years or less (but longer than 2 years)....... 120 123 127 131 133 140 225
4 years or less (but longer than 3 years)....... 126 129 133 138 140 147 225
5 years or less (but longer than 4 years)....... 132 135 139 144 146 154 225
7 years or less (but longer than 5 years)....... 139 143 147 152 156 164 225
10 years or less (but longer than 7 years)...... 145 150 155 160 164 173 225
15 years or less (but longer than 10 years)..... 150 155 160 165 170 180 225
20 years or less (but longer than 15 years)..... 150 155 160 165 170 190 225
30 years or less (but longer than 20 years)..... 150 155 160 165 170 191 225
Greater than 30 years........................... 165 173 181 189 205 221 225
|
(1) If a corporate debt security is unrated by Moody's but is rated by S&P,
a rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used; where
the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(2) Unrated corporate debt securities, which are corporate debt securities
rated by neither Moody's nor S&P, are limited to 10% of discounted
Moody's Eligible Assets. If a corporate debt security is unrated by both
Moody's and S&P, the Fund will use the percentage set forth under
"Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of such securities.
(c) Preferred Stock: The Moody's Discount Factor for preferred stock shall be (i) for preferred stocks issued by a utility, 146%; (ii) for preferred stocks of industrial and financial issuers, 209%; (iii) for preferred stocks issued by real estate related issuers, 154%; and (iv) for auction rate preferred stocks, 350%.
(d) U.S. Government Obligations and U.S. Treasury Strips:
U.S. GOVERNMENT SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- -------------------------- --------------------
1 year or less.................................. 107% 107%
2 years or less (but longer than 1 year)........ 113 115
3 years or less (but longer than 2 years)....... 118 121
4 years or less (but longer than 3 years)....... 123 128
5 years or less (but longer than 4 years)....... 128 135
7 years or less (but longer than 5 years)....... 135 147
10 years or less (but longer than 7 years)...... 141 163
15 years or less (but longer than 10 years)..... 146 191
20 years or less (but longer than 15 years)..... 154 218
30 years or less (but longer than 20 years)..... 154 244
|
(e) Short-Term Instruments and Cash: The Moody's Discount Factor applied to short-term portfolio securities, including without limitation short-term corporate debt securities, Short-Term Money Market Instruments and short-term municipal debt obligations, will be (i) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (ii) 115%, so long as such portfolio securities mature or have a demand feature at par not exercisable within the Moody's Exposure Period; and (iii) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. Moody's rated Rule 2a-7 money market funds will also have a discount factor of 100%.
(f) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A Securities for Rule 144A Securities will be 130% of the Moody's Discount Factor which would apply were the securities registered under the Securities Act.
"Moody's Eligible Assets" means:
(a) cash (including interest and dividends due on assets rated (i) Baa3 or higher by Moody's if the payment date is within five Business Days of the Valuation Date, (ii) A2 or higher if the payment date is within thirty days of the Valuation Date, and (iii) A1 or higher if the payment date is within the Moody's Exposure Period) and receivables for Moody's Eligible Assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such receivables are (1) settled through clearing house firms with respect to which the Fund has received prior written authorization from Moody's or (2) (A) with counterparties having a Moody's long-term debt rating of at least Baa3 or (B) with counterparties having a Moody's Short-Term Money Market Instrument rating of at least P-1;
(b) Short-Term Money Market Instruments, so long as (i) such
securities are rated at least P-1, (ii) in the case of demand deposits, time
deposits and overnight funds, the supporting entity is rated at least A2, or
(iii) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security matures
within three months or (3) is rated at least Aa3 and the security matures
within six months. In addition, Moody's rated Rule 2a-7 money market funds are
also eligible investments.
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Rule 144A Securities;
(e) Corporate debt securities if (i) such securities are rated B3 or higher by Moody's; (ii) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's or S&P; (iii) for debt securities rated Ba1 and below, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (iv) such securities have been registered under the Securities Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act as determined by the Fund's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors, except that such securities that are not subject to U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded; and (v) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (1) corporate debt
securities not rated at least B3 by Moody's shall be considered to be Moody's
Eligible Assets only to the extent the Market Value of such corporate debt
securities does not exceed 10% of the aggregate Market Value of all Moody's
Eligible Assets; provided, however, that if the Market Value of such corporate
debt securities exceeds 10% of the aggregate Market Value of all Moody's
Eligible Assets, a portion of such corporate debt securities (selected by the
Fund) shall not be considered Moody's Eligible Assets, so that the Market
Value of such corporate debt securities (excluding such portion) does not
exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; and
(2) corporate debt securities rated by neither Moody's nor S&P shall be
considered to be Moody's Eligible Assets only to the extent such securities
are issued by entities which (A) have not filed for bankruptcy within the past
three years, (B) are current on all principal and interest in their fixed
income obligations, (C) are current on all preferred stock dividends, and (D)
possess a current, unqualified auditor's report without qualified, explanatory
language.
(f) Convertible bonds, provided that (i) the issuer of common stock must have a Moody's senior unsecured debt of B3 or better, or an S&P rating of BB or better, (ii) the common stocks must be traded on the NYSE, AMEX, or NASDAQ, (iii) dividends must be paid in U.S. dollars, (iv) the portfolio of convertible bonds must be diversified as set forth in Figure 1 below, (v) the company shall not hold shares exceeding the average weekly trading volume during the preceding month, (vi) synthetic convertibles are excluded from asset eligibility.
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
--------------------------------------------------------------
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
TYPE ISSUER (%)(1) INDUSTRY (%) STATE (%) (1)
------------------------------ -------------------------------
Utility...... 4 50 7(2)
Other........ 6 20 n/a
|
(1) Percentage represent a portion of the aggregate market value and number
of outstanding shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be diversified
according to the state in which they generate the largest part of their
revenues. Publicly available information on utility company revenues by
state is available from the Uniform Statistical Report (USR) or the
Federal Energy Regulation commission (FERC).
(g) Preferred stocks if (i) dividends on such preferred stock are cumulative, (ii) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, equity capital at any time over the respective lives of such securities, (iii) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a preferred stock has a senior debt rating from Moody's of Baa1 or higher or a preferred stock rating from Moody's of Baa3 or higher and (v) such preferred stock has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 (if the issuer of such preferred stock has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred stock without such a dividend history would also be eligible). In addition, the preferred stocks must have the following diversification requirements: (1) the preferred stock issue must be greater than $50 million and (2) the minimum holding by the Fund of each issue of preferred stock is $500,000 and the maximum holding of preferred stock of each issue is $5 million. In addition, preferred stocks issued by transportation companies will not be considered Moody's Eligible Assets.
(h) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in this definition but only upon receipt by the Fund of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Fund that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the Series C Auction Rate Preferred.
(i) Interest rate swaps entered into according to International Swap Dealers Association ("ISDA") standards if (i) the counterparty to the swap transaction has a short- term rating of not less than P-1 or, if the counterparty does not have a short-term rating, the counterparty's senior unsecured long-term debt rating is Aa3 or higher and (ii) the original aggregate notional amount of the interest rate swap transaction or transactions is not to be greater than the liquidation preference of the Series C Auction Rate Preferred originally issued. The interest rate swap transaction will be marked-to-market daily.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Moody's Eligible Assets:
MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE MAXIMUM
SINGLE INDUSTRY(3)(4) INDUSTRY (3)(4) ISSUE SIZE
RATINGS(1) ISSUER(2)(3) NON-UTILITY UTILITY ($ IN MILLION) (5)
----------------------------- -------------- --------------- ---------------- ------------------
Aaa.......................... 100% 100% 100% $100
Aa........................... 20 60 30 100
A............................ 10 40 25 100
Baa.......................... 6 20 20 100
Ba........................... 4 12 12 50(6)
B1-B2........................ 3 8 8 50(6)
B3 or below.................. 2 5 5 50(6)
|
(1) Refers to the preferred stock and senior debt rating of the
portfolio holding.
(2) Companies subject to common ownership of 25% or more are considered
as one issuer.
(3) Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
(4) Industries are determined according to Moody's Industry
Classifications, as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50
million.
(6) Portfolio holdings from issues ranging from $50 million to $100
million are limited to 20% of the Fund's total assets.
FITCH GUIDELINES
Under the Fitch guidelines, the Fund is required to maintain specified discounted asset values for its portfolio representing the Basic Maintenance Amount. The Fitch Discount Factor for any Fitch Eligible Asset other than the securities set forth below will be the percentage provided in writing by Fitch. The following Discount Factors apply to portfolio holdings as described below, subject to diversification, issuer size and other requirements, in order to constitute Fitch Eligible Assets includable within the calculation of Discounted Value:
(a) Corporate debt securities. The percentage determined by reference to the rating of a corporate debt security in accordance with the table set forth below.
NOT
TERM TO MATURITY OF CORPORATE RATED OR
DEBT SECURITY UNRATED (1) AAA AA A BBB BB BELOW BB
----------------------------- --------- ------- -------- -------- ======== ---------
3 years or less (but longer than 1 year)............ 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years)........... 111.11% 112.99 % 114.94% 116.96% 134.24% 151.52%
7 years or less (but longer than 5 years)........... 113.64% 115.61% 117.65% 119.76% 135.66% 151.52%
10 years or less (but longer than 7 years).......... 115.61% 117.65% 119.76% 121.95% 136.74% 151.52%
15 years or less (but longer than 10 years)......... 119.76% 121.95% 124.22% 126.58% 139.05% 151.52%
More than 15 years.................................. 124.22% 126.58% 129.03% 131.58% 144.55% 151.52%
|
(1) If a security is not rated by Fitch but is rated by two other rating agencies, then the lower of the ratings on the security from the two other rating agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one other NRSRO, then the rating on the security from the other NRSRO will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any NRSRO, the Fund will use the percentage set forth under "Not Rated" in this table.
(b) Convertible debt securities. The Fitch Discount Factor applied to convertible debt securities is (i) 200% for investment grade convertibles and (ii) 222% for below investment grade convertibles so long as such convertible debt securities have neither (1) conversion premium greater than 100% nor (2) have a yield to maturity or yield to worst of > 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have conversion premiums of greater than 100% is (i) 152% for investment grade convertibles and (ii) 179% for below investment grade convertibles so long as such convertible debt securities do not have a yield to maturity or yield to worst of > 15.00% above the relevant Treasury curve. The Fitch Discount Factor applied to convertible debt securities which have a yield to maturity or yield to worst of > 15.00% above the relevant Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one other NRSRO, then the rating on the security from the other NRSRO will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any NRSRO, the Fund will treat the security as if it were below investment grade.
(c) Preferred securities: The percentage determined by reference to the rating of a preferred security in accordance with the table set forth below.
NOT RATED
OR
NOT RATED OR BELOW PREFERRED SECURITY(1) AAA AA A BBB BB BELOW BB
---------------------------------------- ------- ------ ------ ------ ------ ---------
Taxable Preferred.................................... 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction (DRD) Preferred.......... 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
(1) If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of
the ratings on the security from the two other Rating Agencies will be used to determine the
Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a
Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one
other NRSRO, then the rating on the security from the other NRSRO will be used to determine
the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a
Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating
of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any NRSRO, the Fund
will use the percentage set forth under "Not Rated" in this table.
|
(d) U.S. Government Obligations and U.S. Treasury Strips:
DISCOUNT TIME REMAINING TO MATURITY FACTOR
1 year or less..................................... 100% 2 years or less (but longer than 1 year)........... 103% 3 years or less (but longer than 2 years).......... 105% 4 years or less (but longer than 3 years).......... 107% 5 years or less (but longer than 4 years).......... 109% 7 years or less (but longer than 5 years).......... 112% 10 years or less (but longer than 7 years)......... 114% 15 years or less (but longer than 10 years)........ 122% 20 years or less (but longer than 15 years)........ 130% 25 years or less (but longer than 20 years)........ 146% Greater than 30 years.............................. 154% |
(e) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without limitation Debt
Securities, Short Term Money Market Instruments and municipal debt
obligations, will be (i) 100%, so long as such portfolio securities mature or
have a demand feature at par exercisable within the Fitch Exposure Period;
(ii) 115%, so long as such portfolio securities mature or have a demand
feature at par not exercisable within the Fitch Exposure Period; and (iii)
125%, so long as such portfolio securities neither mature nor have a demand
feature at par exercisable within the Fitch Exposure Period. A Fitch Discount
Factor of 100% will be applied to cash.
(f) Rule 144A Securities: The Fitch Discount Factor applied to Rule 144A Securities will be 110% of the Fitch Discount Factor which would apply were the securities registered under the Securities Act.
(g) Foreign Bonds: The Fitch Discount Factor (i) for a Foreign Bond the
principal of which (if not denominated in U.S. dollars) is subject to a
currency hedging transaction will be the Fitch Discount Factor that would
otherwise apply to such Foreign Bonds in accordance with this definition and
(ii) for (1) a Foreign Bond the principal of which (if not denominated in U.S.
dollars) is not subject to a currency hedging transaction and (2) a bond
issued in a currency other than U.S. dollars by a corporation, limited
liability company or limited partnership domiciled in, or the government or
any agency, instrumentality or political subdivision of, a nation other than
an Approved Foreign Nation, will be 370%.
"Fitch Eligible Assets" means:
(a) Cash (including interest and dividends due on assets rated (i) BBB or higher by Fitch or the equivalent by another NRSRO if the payment date is within five Business Days of the Valuation Date, (ii) A or higher by Fitch or the equivalent by another NRSRO if the payment date is within thirty days of the Valuation Date, and (iii) A+ or higher by Fitch or the equivalent by another NRSRO if the payment date is within the Fitch Exposure Period) and receivables for Fitch Eligible Assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such receivables are settled within five Business Days;
(b) Short Term Money Market Instruments so long as (i) such
securities are rated at least F1+ by Fitch or the equivalent by another NRSRO,
(ii) in the case of demand deposits, time deposits and overnight funds, the
supporting entity is rated at least A by Fitch or the equivalent by another
NRSRO, or (iii) in all other cases, the supporting entity (1) is rated at
least A by Fitch or the equivalent by another NRSRO and the security matures
within one month, (2) is rated at least A by Fitch or the equivalent by
another NRSRO and the security matures within three months or (3) is rated at
least AA by Fitch or the equivalent by another NRSRO and the security matures
within six months;
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Debt securities if such securities have been registered under the Securities Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act as determined by the Fund's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors of the Fund; and such securities are issued by (i) a U.S. corporation, limited liability company or limited partnership, (ii) a corporation, limited liability company or limited partnership domiciled in Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom (the "Approved Foreign Nations"), (iii) the government of any Approved Foreign Nation or any of its agencies, instrumentalities or political subdivisions (the debt securities of Approved Foreign Nation issuers being referred to collectively as "Foreign Bonds"), (iv) a corporation, limited liability company or limited partnership domiciled in Canada or (v) the Canadian government or any of its agencies, instrumentalities or political subdivisions (the debt securities of Canadian issuers being referred to collectively as "Canadian Bonds"). Foreign Bonds held by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. Notwithstanding the limitations in the two preceding sentences, Foreign Bonds and Canadian Bonds held by the Fund will qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. In addition, bonds which are issued in connection with a reorganization under U.S. federal bankruptcy law ("Reorganization Bonds") will be considered debt securities constituting Fitch Eligible Assets if (1) they provide for periodic payment of interest in cash in U.S. dollars or euros; (2) they do not provide for conversion or exchange into equity capital at any time over their lives; (3) they have been registered under the Securities Act or are restricted as to resale under federal securities laws but are eligible for trading under Rule 144A promulgated pursuant to the Securities Act as determined by the Fund's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors of the Fund; (4) they were issued by a U.S. corporation, limited liability company or limited partnership; and (5) at the time of purchase at least one year had elapsed since the issuer's reorganization. Reorganization Bonds may also be considered debt securities constituting Fitch Eligible Assets if they have been approved by Fitch, which approval shall not be unreasonably withheld. All debt securities satisfying the foregoing requirements and restrictions of this paragraph (d) are herein referred to as "Debt Securities;"
(e) Preferred stocks if (i) dividends on such preferred stock are cumulative, (ii) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive equity capital at any time over the respective lives of such securities, (iii) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a preferred stock has a senior debt rating or preferred stock rating from Fitch of BBB- or higher or the equivalent rating by another NRSRO. In addition, the preferred stocks issue must be at least $50 million;
(f) Asset-backed and mortgage-backed securities;
(g) Rule 144A Securities;
(h) Bank Loans;
(i) Municipal debt obligation that (i) pays interest in cash (ii) is part of an issue of municipal debt obligations of at least $5 million, except for municipal debt obligations rated below A by Fitch or the equivalent rating by another NRSRO, in which case the minimum issue size is $10 million;
(j) Tradable credit baskets (e.g., Traded Custody Receipts or TRACERS and Targeted Return Index Securities Trust or TRAINS);
(k) Convertible debt and convertible preferred stocks;
(l) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in this definition may be included in Fitch Eligible Assets, but, with respect to any financial contract, only upon receipt by the Fund of a writing from Fitch specifying any conditions on including such financial contract in Fitch Eligible Assets and assuring the Fund that including such financial contract in the manner so specified would not affect the credit rating assigned by Fitch to the Series C Auction Rate Preferred;
(m) Interest rate swaps entered into according to International Swap Dealers Association ("ISDA") standards if (i) the counterparty to the swap transaction has a short- term rating of not less than F1 by Fitch or the equivalent by another NRSRO or, if the swap counterparty does not have a short-term rating, the counterparty's senior unsecured long-term debt rating is AA or higher by Fitch or the equivalent by another NRSRO and (ii) the original aggregate notional amount of the interest rate swap transaction or transactions is not greater than the liquidation preference of the Series C Auction Rate Preferred originally issued.
Where the Fund sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Fitch Eligible Asset and the amount the Fund is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Fund thereby will constitute a Fitch Eligible Asset if the long-term debt of such other party is rated at least A- by Fitch or the equivalent by another and such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible Asset to the extent that it has been irrevocably deposited for the payment of (a)(i) through (a)(iv) under the definition of Basic Maintenance Amount or to the extent it is subject to any liens, except for (1) liens which are being contested in good faith by appropriate proceedings and which Fitch has indicated to the Fund will not affect the status of such asset as a Fitch Eligible Asset, (2) liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (3) liens to secure payment for services rendered or cash advanced to the Fund by its investment manager or portfolio manager, the Fund's custodian, transfer agent or registrar or the Auction Agent and (4) liens arising by virtue of any repurchase agreement.
Portfolio holdings as described above must be within the following diversification and issue size requirements in order to be included in Fitch's Eligible Assets:
MAXIMUM MAXIMUM MAXIMUM
MINIMUM SINGLE SINGLE ISSUE SIZE ($ IN
SECURITY ISSUER (1) INDUSTRY (1)(2) MILLION) (3)
-------------- --------------- ---------------- -------------
AAA........... 100% 100% $100
AA-........... 20 75 100
A-............ 10 50 100
BBB-.......... 6 25 100
BB-........... 4 16 50
B-............ 3 12 50
CCC........... 2 8 50
|
(1) Percentages represent a portion of the aggregate market value of
corporate debt securities.
(2) Industries are determined according to Fitch's Industry Classifications,
as defined herein.
(3) Preferred stock has a minimum issue size of $50 million.
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 will generally be 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 and 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. dollar denominated assets and futures and options).
Trading takes place in various foreign markets on days which are not Business Days and on which therefore the Fund's 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 Directors 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 February 14, 2003 Title of Class Nature of Ownership Percent of Class
----------------------- -------------- --------------------- ----------------
Cede & Co.* Common 7,182,489 64.63%
P.O. Box 20 (record)
Bowling Green Station
New York, NY 10274
Bear Stearns Securities Corp** Common 1,799,857 16.20%
One Metrotech Center North, 4th Floor (record)
Brooklyn, NY 11201
Mario J. Gabelli and affiliates Common 1,568,548 14.11%
One Corporate Center*** (beneficial)
Rye, NY 10580
Charles Schwab & Co., Inc.** Common 627,152 5.64%
c/o ADP Proxy Services, (record)
51 Mercedes Way
Edgewood, NY 11717
Prudential Securities Inc. Common 573,466 5.16%
c/o ADP Proxy Services (record)
51 Mercedes Way
Edgewood, NY 11717
* A nominee partnership of The Depository Trust Company.
** Shares held at The Depository Trust Company.
*** Includes 209,110 shares owned directly by Mr. Gabelli, 13,334 shares owned by a family
partnership for which Mr. Gabelli serves as general partner, 46,016 shares held by custodial
accounts for which Mr. Gabelli serves as Trustee, 1,089,415 shares owned by Gabelli Asset
Management Inc. or its affiliates, 78,248shares owned by the Gabelli & Company, Inc. Profit-
Sharing Plan, and 132,425 shares owned by discretionary accounts managed by GAMCO
Investors, Inc., a wholly-owned subsidiary of Gabelli Asset Management Inc. Mr. Gabelli
disclaims beneficial ownership of the shares held by custodial accounts, the discretionary
accounts, and by the entities named except to the extent of his interest in such entities.
|
As of February 14, 2003, the Directors and Officers of the Fund as a group beneficially owned approximately 15.25% 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 B Preferred and/or Series C Auction Rate 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.
Counsel and Independent Accountants
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036 is special counsel to the Fund in connection with the issuance of Series B Preferred and/or Series C Auction Rate Preferred.
PricewaterhouseCoopers LLP, independent accountants, 1177 Avenue of the Americas, New York, New York 10036, serve as auditors of the Fund and will annually render an opinion on the financial statements of 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, 2002, together with the report of PricewaterhouseCoopers LLP thereon, are also incorporated herein by reference from the Fund's Annual Report to Shareholders. All other portions of the Annual Report to Shareholders are not incorporated herein by reference and are not part of the Registration Statement. A copy of the Annual Report to Shareholders may be obtained without charge by writing to the Fund at its address at One Corporate Center, Rye, New York 10580-1434 or by calling the Fund toll-free at 800-GABELLI (422-3554).
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 will 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" will 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 will 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 will 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 will be the product of
such rate expressed as a decimal, multiplied by the number of days in which
such commercial paper will mature and the denominator of which will be 360.
"Adjusted Value" of each Eligible Asset shall be computed as follows:
(i) cash shall be valued at 100% of the face value thereof; and
(ii) all other Eligible Assets shall be valued at the applicable Discounted Value thereof; and
(iii)each asset that is not an Eligible Asset shall be valued at zero.
"Administrator" means the other party to the Administration Agreement with the Fund which shall initially be Gabelli Funds, LLC.
"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 will be deemed to be an Affiliate nor will 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 Auction Rate 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 or an Auction does not take place with respect to such Dividend Period because of the commencement of a Default Period that ends prior to an Auction Date, the Maximum Rate and (iii) if all Series C Auction Rate Preferred is the subject of Submitted Hold Orders for the Auction in respect thereof, the All Hold Rate.
"Approved Foreign Nations" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"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 that the preceding Auction Date would have been if not for the advancement procedure; 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. Notwithstanidng the foregoing, in the event 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 will be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events).
"Auction Procedures" means the procedures for conducting Auctions described in "Additional Information Concerning the Auction for Series C Auction Rate Preferred."
"Available Series C Auction Rate Preferred" has the meaning set forth in "Additional Information Concerning the Auction for Series C Auction Rate Preferred -- Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate."
"Basic Maintenance Amount" has the meaning set forth in "Additional Information Concerning The Series B Preferred and Series C Auction Rate Preferred-- Asset Maintenance."
"Basic Maintenance Report" means, with respect to the Series C Auction Rate Preferred, a report prepared by the Administrator which sets forth, as of the related Valuation Date, Moody's Eligible Assets and Fitch Eligible Assets sufficient to meet or exceed the Basic Maintenance Amount, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Basic Maintenance Amount, and shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Beneficial Owner" with respect to Series C Auction Rate 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 Auction Rate 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 Auction Rate 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.
"Canadian Bonds" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Charter" means the Articles of Amendment and Restatement of the Fund, as amended or supplemented (including the Articles Supplementary), as filed with the State Department of Assessments and Taxation of the State of Maryland.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the shares of the Fund's common stock, par value $.001 per share.
"Cure Date" has the meaning set forth in paragraph 3(a)(i) of Article II of the Articles Supplementary for the Series B Preferred and paragraph 3(a)(ii) of Article I of the Articles Supplementary for the Series C Auction Rate Preferred.
"Date of Original Issue" means the date on which the Series B Preferred or Series C Auction Rate Preferred, as the case may be, is originally issued by the Fund.
"Debt Securities" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Default Period" has the meaning set forth in "Additional Information Concerning the Series B Preferred and Series C Auction Rate Preferred -- Dividends and Dividend Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Fund has Eligible Assets with an Adjusted Value equal to or greater than the Basic Maintenance Amount, each Deposit Asset shall be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Asset but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made.
"Discount Factor" means (i) so long as Moody's is rating the Series B Preferred or Series C Auction Rate Preferred at the Fund's request, the Moody's Discount Factor, (ii) so long as Fitch is rating the Series C Auction Rate Preferred, the Fitch Discount Factor, and/or (iii) any applicable discount factor established by any Other Rating Agency, whichever is applicable.
"Discounted Value" means, as applicable, (i) the quotient of the Market Value of an Eligible Asset divided by the applicable Discount Factor, provided 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 "Additional Information Concerning the Series B Preferred and Series C Auction Rate Preferred -- Dividends and Dividend Period."
"Dividend Payment Date" means, with respect to the Series B Preferred Stock, any date on which dividends declared by the Board of Directors thereon are payable pursuant to the provisions of paragraph 1(a) of Article II of the Articles Supplementary of the Series B Preferred, and, with respect to the Series C Auction Rate Preferred, any date on which dividends declared by the Board of Directors thereon are payable pursuant to the provisions of paragraph 2(b) of Article I of the Articles Supplementary, for the Series C Auction Rate Preferred, and shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Dividend Period" means, with respect to Series B Preferred, the quarterly dividend specified in paragraph 1(a) of Article II of the Articles Supplementary for the Series B Preferred and, with respect to Series C Auction Rate Preferred, the initial period determined in the manner set forth under "Designation" in the Articles Supplementary of the Series C Auction Rate Preferred, 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 day prior to the immediately succeeding Business Day.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the Series B Preferred or Series C Auction Rate Preferred at the request of the Fund), Fitch Eligible Assets (if Fitch is then rating the Series C Auction Rate Preferred at the request of the Fund), and/or Other Rating Agency Eligible Assets if any Other Rating Agency is then rating the Series B Preferred or Series C Auction Rate Preferred, whichever is applicable.
"Existing Holder" means (i) a person who beneficially owns those shares of Series C Auction Rate Preferred listed in that person's name in the records of the Fund or the Auction Agent or (ii) the beneficial owner of those shares of Series C Auction Rate Preferred which are listed under such person's Broker-Dealer's name in the records of the Auction Agent, which Broker-Dealer will have signed a master purchaser's letter.
"Fitch" means Fitch, Inc. and its successors at law.
"Fitch Discount Factor" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Fitch Eligible Assets" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Fitch Exposure Period" means the period commencing on (and including) a given Valuation Date and ending 49 days thereafter.
"Fitch Industry Classifications" means, for the purposes of determining Fitch Eligible Assets, each of the following industry classifications:
1. Aerospace & Defense
2. Automobiles
3. Banking, Finance & Real Estate
4. Broadcasting & Media
5. Building & Materials
6. Cable
7. Chemicals
8. Computers & Electronics
9. Consumer Products
10. Energy
11. Environmental Services
12. Farming & Agriculture
13. Food, Beverage & Tobacco
14. Gaming, Lodging & Restaurants
15. Healthcare & Pharmaceuticals
16. Industrial/Manufacturing
17. Insurance
18. Leisure & Entertainment
19. Metals & Mining
20. Miscellaneous
21. Paper & Forest Products
22. Retail
23. Sovereign
24. Supermarkets & Drugstores
25. Telecommunications
26. Textiles & Furniture
27. Transportation
28. Utilities
"Foreign Bonds" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Hold Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Auction Rate Preferred -- Orders By Existing Holders and Potential Holders."
"Holder" means, with respect to the Series C Auction Rate Preferred, the registered holder of Series C Auction Rate 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.
"ISDA" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"Liquidation Preference" means $25 per share of Series B Preferred and $25,000 per share of Series C Auction Rate Preferred Stock and will 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 (i) the number of shares of such common stock issued and outstanding as of the close of business on the date of determination thereof and (ii) 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:
(i) as to any common or preferred stock which is an Eligible Asset, (a) 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 (b) if there was no reported sales price on the Valuation Date, the lower of two bid prices for such stock provided to the Administrator by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and Fitch) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and Fitch's then-current rating of the Series C Auction Rate Preferred), at least one of which will 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;
(ii) as to any U.S. Government Obligation, Short-Term Money Market
Instrument (other than demand deposits, federal funds, bankers'
acceptances and next Business Day repurchase agreements) and
commercial paper, with a maturity of greater than 60 days, the
product of (a) the principal amount (accreted principal to the
extent such instrument accretes interest) of such instrument and
(b) 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 securities dealers having
minimum capitalization of $25,000,000 (or otherwise approved for
such purpose by Moody's and Fitch) or by one such dealer and any
other source (provided that the utilization of such source would
not adversely affect Moody's and Fitch's then-current rating of the
Series B Preferred or Series C Auction Rate Preferred, as the case
may be,) to the administrator, at least one of which will be
provided in writing or by telecopy, telex, other electronic
transcrip tion, computer obtained quotation reducible to written
form or similar means, and in turn provided to the Fund by any such
means by such admin istrator, or, if two bid prices cannot be
obtained, such Eligible Asset will have a Market Value of zero;
(iii)as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day repurchase agreements included in Short-Term Money Market Instruments, the face value thereof;
(iv) 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;
(v) as to any other evidence of indebtedness which is an Eligible Asset, (a) the product of (1) the unpaid principal balance of such indebtedness as of the Valuation Date and (2)(A) 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 (B) if there was no reported sales price on the Valuation Date or if such indebtedness is not traded on a national securi ties 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 Fitch) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and Fitch's then-current rating of the Series B Preferred or Series C Auction Rate Preferred , as the case may be,) to the administrator of the Fund's assets, at least one of which will 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 (b) accrued interest on such indebtedness.
"Maximum Rate" means, on any date on which the Applicable Rate is determined, the applicable percentage of (i) in the case of dividend period of 184 days or less, 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 Auction Rate Preferred by Moody's and Fitch 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 Auction Rate 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 Fitch 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%
|
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Moody's Guidelines."
"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 Fund which are stock, including all Outstanding shares of Series B Preferred and Series C Auction Rate Preferred (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 stock), 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 Fund pursuant to paragraph 9(a)(i)(B) of Article I of the Articles Supplementary of the Series C Auction Rate Preferred.
"Non-Call Period" means a period determined by the Board of Directors after consultation with the Broker-Dealers, during which the Series C Auction Rate Preferred Stock subject to such Special Dividend Period are not subject to redemption at the option of the Fund but only to mandatory redemption.
"NRSRO" means a Nationally Recognized Statistical Ratings Organization.
"Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Auction Rate Preferred -- Orders By Existing Holders and Potential Holders."
"Other Rating Agency" means any rating agency other than Moody's or Fitch then providing a rating for the Series C Auction Rate 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 Auction Rate Preferred.
"Outstanding" means, as of any date, Preferred Stock theretofore issued by the Fund except:
(i) any such share of Preferred Stock theretofore cancelled by the Fund or deliv ered to the Fund for cancellation;
(ii) any such share of Preferred Stock other than the Series C Auction Rate Preferred (or other auction market preferred stock) shares as to which a notice of redemption will 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;
(iii)in the case of shares of the Series C Auction Rate Preferred or other auction market preferred stock, any such shares theretofore delivered to the applicable auction agent for cancellation or with respect to which the Fund has given notice of redemption and irrevocably deposited with the applicable paying agent sufficient funds to redeem such shares; and
(iv) any such share in exchange for or in lieu of which other shares have been issued and delivered.
Notwithstanding the foregoing, (x) 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 subsidiary is the holder or Existing Holder, as applicable, will be disregarded and deemed not Outstanding; (y) in connection with any auction, any auction rate Preferred Stock as to which the Fund or any Person known to the auction agent to be an subsidiary is the holder or Existing Holder, as applicable, will be disregarded and not deemed Outstanding; and (z) for purposes of determining the Basic Maintenance Amount, Series C Auction Rate Preferred held by the Fund will be disregarded and deemed not Outstanding.
"Paying Agent" means with respect to Series C Auction Rate Preferred, 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 and, with respect to any other class or series of preferred stock, the Person appointed by the Fund as dividend disbursing or paying agent with respect to such class or series.
"Person"means and includes an individual, a partnership, the Fund, 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.
"Potential Beneficial Owner or Holder" means (i) any Existing Holder who may be interested in acquiring additional shares of Series C Auction Rate Preferred or (ii) any other person who may be interested in acquiring shares of Series C Auction Rate Preferred 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 will 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 B Preferred and Series C Auction Rate Preferred.
"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 Financial Service, 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.
"Rating Agency" means Moody's and Fitch as long as such rating agency is then rating the Series B Preferred or Series C Auction Rate Preferred at the request of the Fund.
"Rating Agency Guidelines" has the meaning set forth in set forth in "Moody's and Fitch Guidelines."
"Redemption Date" means, with respect to shares of the Fund's Outstanding Preferred Stock, the date fixed by the Fund for the redemption of such shares.
"Redemption Default" has the meaning set forth in "Additional Information Concerning the Series B Preferred and Series C Auction Rate Preferred -- Dividends and Dividend Period."
"Redemption Price" means, with respect to the Series B Preferred, the price set forth in paragraph 3(a) of Article II of the Articles Supplementary for the Series B Preferred Stock and, with respect to the Article C Auction Rate Preferred, the price set forth in paragraph 3(a)(i) of Article I of the Articles Supplementary for the Series C Auction Rate Preferred Stock.
"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 184 days or fewer or the applicable Treasury Index Rate for a Dividend Period of longer than 184 days and, with respect to the determination of the Maximum Rate, the "AA" Financial Composite Commercial Paper Rate or the Treasury Index Rate, as appropriate.
"Reorganization Bonds" has the meaning ascribed to it in "Moody's and Fitch Guidelines -- Fitch Guidelines."
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"Securities Act" means The Securities Act of 1933, as amended, or any successor statute.
"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 B Preferred or Series C Auction Rate Preferred.
"Sell Order" has the meaning set forth in "Additional Information Concerning the Auction for Series C Auction Rate Preferred -- Submission of Orders by Broker-Dealers to Auction Agent."
"Series A Preferred" means the Fund's 8% Cumulative Preferred Stock, $.001 par value per share and liquidation preference $25 per share.
"Series B Preferred" means the Fund's Series B Cumulative Preferred Stock, $.001 par value per share and liquidation preference $25 per share.
"Series C Auction Rate 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 Auction Rate 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 Fitch Eligible Assets if both Moody's and Fitch are then rating the Series C Auction Rate Preferred at the request of the Fund, or the Eligible Assets of whichever of Moody's or Fitch is then doing so if only one of Moody's or Fitch is then rating the Series C Auction Rate Preferred at the request of the Fund, meets or exceeds the Basic Maintenance Amount with respect to the Series C Auction Rate Preferred.
"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:
(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.
"Submitted Bid" has the meaning set forth in "Additional Information Concerning the Auction for Series C Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate 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 Auction Rate Preferred -- Determination of Sufficient Clearing Bids, Winning Bids, Winning Bid Rate and Applicable Rate."
"Sufficient Clearing Orders" means that all shares of Series C Auction Rate Preferred are the subject of Submitted Hold Orders or that the number of shares of Series C Auction Rate Preferred 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 (i) the number of shares of Series C Auction Rate Preferred that are subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate and (ii) the number of shares of Series C Auction Rate Preferred that are subject to Submitted Sell Orders.
"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 will not have been published during the 15 days preceding the date of computation, the foregoing computations will 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 month, or such other date as the Fund and Rating Agencies may agree to for purposes of determining the Basic Maintenance Amount.
"Winning Bid Rate" means the lowest rate specified in the Submitted Bids which if:
(i) (a) each such Submitted Bid of Existing Holders specifying such lowest rate and
(b) 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
(ii) (a) each such Submitted Bid of Potential Holders specifying such lowest rate and
(b) all other such Submitted Bids of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (i) above continuing to hold an aggregate number of Outstanding Series C Auction Rate Preferred shares which, when added to the number of Outstanding Series C Auction Rate Preferred shares to be purchased by such Potential Holders described in subclause (ii) above, would equal not less than the Available Series C Auction Rate Preferred shares.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements (audited) for the fiscal year 2001(1)
(i) Portfolio of Investments as of December 31, 2001
(ii) Statement of Assets and Liabilities as of December 31, 2001
(iii) Statement of Operations for the year ended December 31, 2001
(iv) Statement of Changes in Net Assets for the year ended
December 31, 2001
(v) Financial highlights for a share outstanding throughout the
periods 1992 through 2001
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(2) Exhibits
(a) (i) Articles of Amendment and Restatement(2)
(ii) Articles Supplementary for the 8% Cumulative Preferred Stock(3)
(iii) Form of Articles Supplementary for the Series B % Cumulative
Preferred Stock(7)
(iv) Form of Articles Supplementary for the Series C Auction Rate
Cumulative Preferred Stock(7)
(b) Amended and Restated By-Laws of Registrant(2)
(c) Not applicable
(d) Specimen Stock Certificate:
(i) 8% Cumulative Preferred Stock(6)
(ii) Series B % Cumulative Preferred Stock (7)
(iii) Series C Auction Rate Cumulative Preferred Stock (7)
(e) Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan of
Registrant(2)
(f) Not applicable
(g) Investment Advisory Agreement between Registrant and
Gabelli Funds, LLC(3)
(h) Form of Underwriting Agreement(7)
(i) Not applicable
(j) Custodian Contract between Registrant and Boston Safe
Deposit and Trust Company(3)(8)
(k) (i) Registrar, Transfer Agency and Service Agreement
between Registrant and EquiServe Trust Company relating to the
common stock(2)
(ii) Form of Auction Agency Agreement(7)
(iii)Form of Broker-Dealer Agreement(7)
(iv) Form of DTC Agreement (7)
(l) Opinion and Consent of Miles & Stockbridge(7)
(m) Not applicable
(n) (i) Consent of PricewaterhouseCoopers LLP(7)
(ii) Powers of Attorney(4)
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Codes of Ethics of the Fund and the Adviser(2)
(1) Incorporated by reference to the Fund's annual report filed on March 8,
2002. To be updated prior to effectiveness.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form N-2, File No. 811-05715, as filed with the Securities and Exchange
Commission on March 31, 1995
(3) Incorporated by reference from the Registrant's Registration Statement on
Form N-2, File No. 333-24541 and 811-05715, as filed with the Securities
and Exchange Commission on May 9, 1997.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form N-2, File No. 102494 and 811-05715, as filed with the Securities and
Exchange Commission on January 13, 2003.
(5) To be filed by amendment.
(6) Incorporated by reference from the Fund's Registrant's Registration
Statement on Form N-2, File No. 333-24541 and 811-05715, as filed with the
Securities and Exchange Commission on April 4, 1997.
(7) Filed Herewith.
(8) Subsequently assigned to State Street Bank and Trust Company.
Item 25. Marketing Arrangements
See Exhibit 2(h) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in connection with the offering described in this Registration Statement:
SEC registration fees................... $ 4,046
New York Stock Exchange listing fee..... 14,750
Rating Agency Fees 50,000
Printing and engraving expenses ........ 100,000
Auditing fees and expenses ............. 50,000
Legal fees and expenses................. 150,000
Blue Sky fees and expenses.............. 40,000
Miscellaneous........................... 53,704
Total............................. $462,500
|
Item 27. Persons Controlled by or Under Common Control with Registrant
NONE
Item 28. Number of Holders of Securities as of December 31, 2002
Number of Record
Title of Class Holders
-------------- -------
Capital Stock, par value $.001 per share 2,568
8.00% Cumulative Preferred Stock, par value $.001 per share 26
|
Item 29. Indemnification
The response of this Item is incorporated by reference to the caption "Limitation of Officers' and Directors Liability" in the Part B of this Registration Statement.
Insofar as indemnification for liability arising under the Securities Act may be permitted to trustees, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that, in the opinion of the 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 (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant 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. Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question 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 Investment Adviser
The Investment Adviser, a limited liability company organized under the laws of the State of New York, acts as investment adviser to the Registrant. The Registrant is fulfilling the requirement of this Item 30 to provide a list of the officers and directors of the Investment Adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the Investment Adviser or those officers and directors during the past two years, by incorporating by reference the information contained in the Form ADV of the Investment Adviser filed with the Commission pursuant to the Investment Advisers Act of 1940 (Commission File No. 801-26202).
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained in part at the office of the Investment Adviser at One Corporate Center, Rye, New York 10580-1434, in part at the offices of the Custodian, State Street Bank and Trust Company, 150 Royall Street, Canton, Massachusetts 02021, at the offices of the Fund's Administrator, PFPC, Inc., 3200 Horizon Drive, King of Prussia, Pennsylvania 19406, and in part at the offices of EquiServe Trust Company, N.A., P.O. Box 43025, Providence, RI 02940-3025.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend the offering of shares until the prospectus is amended, if subsequent to the effective date of this registration statement, its net asset value declines more than ten percent from its net asset value, as of the effective date of the registration statement or its net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. Registrant undertakes that, for the purpose of determining any liability under the Securities Act the information omitted from the form of prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 497(h) will be deemed to be a part of the Registration Statement as of the time it was declared effective.
Registrant undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus will be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
6. Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information constituting Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the 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, thereunto duly authorized, in the City of Rye, State of New York, on the 12th day of March, 2003.
THE GABELLI CONVERTIBLE
AND INCOME SECURITIES FUND INC.
By: /s/ Bruce N. Alpert ------------------------------------------ Bruce N. Alpert President |
Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
*
_________________________ Director and Chief March 12, 2003
Mario J. Gabelli Investment Officer
*
_________________________ Director March 12, 2003
Karl Otto Pohl
*
_________________________ Director March 12, 2003
E. Val Cerutti
*
_________________________ Director March 12, 2003
Anthony J. Colavita
*
_________________________ Director March 12, 2003
Dugald A. Fletcher
*
_________________________ Director March 12, 2003
Anthony R. Pustorino
*
_________________________ Director March 12, 2003
Werner J. Roeder, MD
*
_________________________ Director March 12, 2003
Anthonie C. van Ekris
*
_________________________ Director March 12, 2003
Salvatore J. Zizza
/s/ Bruce N. Alpert
_________________________ President March 12, 2003
Bruce N. Alpert
As Attorney-in-Fact
|
* Pursuant to a Power of Attorney, incorporated by reference as Exhibit N(ii) to the Registrant's Registration Statement filed on Form N-2, as filed with the Securities and Exchange Commission on January 13, 2003.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
EX-99 (a) (i) Articles of Amendment and Restatement*
EX-99 (a) (ii) Articles Supplementary relating to the 8% Cumulative
Preferred Stock*
EX-99 (a) (iii) Form of Articles Supplementary relating to the Series B __%
Cumulative Preferred Stock
EX-99 (a) (iv) Form of Articles Supplementary relating to the Series C
Auction Rate Cumulative Preferred Stock
EX-99 (b) Amended and Restated By-Laws of Registrant*
EX-99 (d) (i) Specimen Stock Certificate, 8% Cumulative Preferred Stock*
EX-99 (d) (ii) Specimen Stock Certificate, Series B __% Cumulative
Preferred Stock
EX-99 (d) (iii) Specimen Stock Certificate, Series C Auction Rate
Cumulative Preferred Stock
EX-99 (e) Automatic Dividend Reinvestment and Voluntary Cash
Purchase Plan of Registrant*
EX-99 (g) Investment Advisory Agreement between Registrant and
Gabelli Funds, LLC*
EX-99 (h) Form of Underwriting Agreement
EX-99 (i) Not applicable
EX-99 (j) Custodian Contract between Registrant and Boston Safe
Deposit and Trust Company (subsequently assigned to State
Street Bank and Trust Company)*
EX-99 (k) (i) Registrar, Transfer Agency and Service Agreement between
Registrant and EquiServe Trust Company relating to the
common stock*
EX-99 (k) (ii) Form of Auction Agency Agreement
EX-99 (k) (iii) Form of Broker-Dealer Agreement
EX-99 (k) (iv) Form of DTC Agreement
EX-99 (l) Opinion and Consent of Miles & Stockbridge
EX-99 (m) Not applicable
EX-99 (n) (i) Consent of PricewaterhouseCoopers LLP
EX-99 (n) (ii) Powers of Attorney*
EX-99 (o) Not applicable
EX-99(p) Not applicable
EX-99(q) Not applicable
EX-99 (r) Code of Ethics of the Fund and the Adviser*
|
* Previously filed and incorporated by reference.
Exhibit 99(a)(iii)
ARTICLES SUPPLEMENTARY
CREATING AND FIXING THE RIGHTS OF
SERIES B [__]% CUMULATIVE PREFERRED STOCK OF
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
The Gabelli Convertible and Income Securities Fund Inc., a Maryland corporation, having its principal office in Baltimore City, Maryland (hereinafter called 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 February 19, 2003, pursuant to authority expressly vested in it by Article V of the Charter of the Corporation, adopted a resolution designating 1,995,000 authorized and unissued shares of Preferred Stock as "Series B [__]% Cumulative Preferred Stock" (the "Series B Preferred Stock").
SECOND: The preferences, voting powers, rights, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of shares of the Series B Preferred Stock of the Corporation as set by the Board of Directors are as follows:
ARTICLE I
DEFINITIONS
Unless the context or use indicates another or different meaning or intent, each of the following terms when used in these Articles Supplementary shall have the meaning ascribed to it below, whether such term is used in the singular or plural and regardless of tense:
"Accountant's Confirmation" means a letter from an Independent Accountant delivered to Moody's with respect to certain Basic Maintenance Reports substantially to the effect that:
(a) the Independent Accountant has read the Basic Maintenance Report or Reports prepared by the Administrator during the referenced calendar year that are referred to in such letter;
(b) with respect to the issue size compliance, issuer diversification and industry diversification calculations, such calculations and the resulting Market Value of the Moody's Eligible Assets included in the Reports and the Adjusted Value of the Moody's Eligible Assets included in the Reports are numerically correct;
(c) with respect to the excess or deficiency of the Adjusted Value of the Moody's Eligible Assets included in the Reports when compared to the Basic Maintenance Amount calculated for Moody's, the results of the calculation set forth in the Reports have been recalculated and are numerically correct;
(d) with respect to the Moody's and S&P 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 a Pricing Service or such other services as Moody's 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 Moody's Eligible Assets has been compared to the definition of Moody's Eligible Assets contained in these Articles Supplementary, and the description as appearing in the Reports agrees with the definition of Moody'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 has it 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; and (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.
Such letter shall also state that the Independent Accountant is an "independent accountant" with respect to the Corporation within the meaning of the Securities Act of 1933, as amended, and the related published rules and regulations thereunder.
"Adjusted Value" of each Moody's Eligible Asset shall be computed as follows:
(a) cash shall be valued at 100% of the face value thereof; and
(b) all other Moody's Eligible Assets shall be valued at the Discounted Value thereof; and
(c) each asset that is not a Moody's 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.
"ADRs" means U.S. dollar-denominated American Depository Receipts.
"Adviser" means Gabelli Funds, LLC, a New York limited liability company, or such other person as shall be serving as the investment adviser of the Corporation.
"Annual Valuation Date" means the Valuation Date each calendar year so designated by the Corporation, commencing in the calendar year 2003.
"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 shares of Series B Preferred Stock (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 stock), 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.
"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 by the Liquidation Preference per share; (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 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 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 (or specifically excluded by) 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 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 or the Dividend-Disbursing 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. Basic Maintenance Amount shall, for purposes of these Articles
Supplementary, have a correlative meaning with respect to any other class or
series of Preferred Stock.
"Basic Maintenance Amount Cure Date" means, with respect to the Series B Preferred Stock, 10 Business Days following a Valuation Date, such date being the last day upon which the Corporation's failure to comply with paragraph 5(a)(ii)(A) of Article II hereof could be cured, and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Basic Maintenance Report" or "Report" means, with respect to the Series B Preferred Stock, a report prepared by the Administrator which sets forth, as of the related Valuation Date, Moody's Eligible Assets sufficient to meet or exceed the Basic Maintenance Amount, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Basic Maintenance Amount, and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Board of Directors" means the Board of Directors of the Corporation or any duly authorized committee thereof as permitted by applicable law.
"Business Day" means a day on which the New York Stock Exchange is open for trading and that is neither a Saturday, Sunday nor any other day on which banks in The City of New York, New York are authorized by law to close.
"Charter" means the Articles of Amendment and Restatement of the Corporation, as amended, supplemented (including these Articles Supplementary), as filed with the State Department of Assessments and Taxation of the State of Maryland.
"Common Stock" means the Common Stock, par value $.001 per share, of the Corporation.
"Corporation" means The Gabelli Convertible and Income Securities Fund Inc., a Maryland corporation.
"Cure Date" shall have the meaning set forth in paragraph 3(a)(i) of Article II hereof.
"Date of Original Issue" means [__], and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Corporation has Moody's Eligible Assets with an Adjusted Value equal to or greater than the Basic Maintenance Amount, each Deposit Asset shall be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Asset but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made.
"Discounted Value" means, with respect to a Moody's Eligible Asset, the quotient of (a) in the case of a non-convertible fixed income instrument, the lower of the principal amount (accreted principal to the extent such instrument accretes interest) or liquidation preference and the Market Value thereof or (b) in the case of any other Moody's Eligible Assets, the Market Value thereof, divided by the applicable Moody's Discount Factor.
"Dividend-Disbursing Agent" means, with respect to the Series B Preferred Stock, EquiServe Trust Company, N.A. and its successors or any other dividend-disbursing agent appointed by the Corporation and, with respect to any other class or series of Preferred Stock, the Person appointed by the Corporation as dividend-disbursing or paying agent with respect to such class or series.
"Dividend Payment Date" means with respect to the Series B Preferred Stock, any date on which dividends declared by the Board of Directors thereon are payable pursuant to the provisions of paragraph 1(a) of Article II of these Articles Supplementary and shall for the purposes of these Articles Supplementary have a correlative meaning with respect to any other class or series of Preferred Stock.
"Dividend Period" shall have the meaning set forth in paragraph 1(a) of Article II hereof, and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Independent Accountant" 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 Securities Act of 1933, as amended.
"Liquidation Preference" shall, with respect to the Series B Preferred Stock, have the meaning set forth in paragraph 2(a) of Article II hereof, and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Market Value" means the amount determined by the Corporation with respect to Moody's 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 Moody's Eligible Assets of the Corporation in the manner set forth below:
(a) as to any common or preferred stock which is a Moody's 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 to the Administrator by two recognized securities dealers with a minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such securities dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Series B Preferred Stock), 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 Moody's 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 repurchase agreements) and commercial paper with a maturity of 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 securities dealers having minimum capitalizations of $25,000,000 (or otherwise approved for such purpose by Moody's) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Series B Preferred Stock) 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 Moody's Eligible Asset will have a Market Value of zero;
(c) as to cash, demand deposits, federal funds, bankers' acceptances and next Business Day 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 a Moody's 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) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's then-current rating of the Series B Preferred Stock) 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, plus (ii) accrued interest on such indebtedness.
"Moody's" means Moody's Investors Service, Inc., or its successors at law. In the event that Moody's is no longer rating the Series B Preferred Stock at the request of the Corporation, "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Corporation.
"Moody's Discount Factor" means, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows. According to Moody's guidelines, in addition to standard monthly reporting, the Corporation must notify Moody's if the portfolio coverage ratio of the discounted value of Moody's Eligible Assets to liabilities is less than 130%. Computation of the rating agency asset coverage ratio requires use of the Diversification Table prior to applying discount factors noted below and after identifying Moody's eligible assets for purposes of completing basic maintenance tests. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth below will be the percentage provided in writing by Moody's.
(a) Convertible securities (including convertible preferreds):
DISCOUNT FACTORS(1)
RATINGS(2) UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
---------------------- ------- ---------- --------- --------------
Aaa................... 162% 256% 233% 250%
Aa.................... 167% 261% 238% 265%
A..................... 172% 266% 243% 275%
Baa................... 188% 282% 259% 285%
Ba.................... 195% 290% 265% 290%
B..................... 199% 293% 270% 295%
NR(3)................. 300% 300% 300% 300%
|
(1) Discount factors are for 7-week exposure period.
(2) If a convertible security is unrated by Moody's but is rated by S&P,
a rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used;
where the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(3) Unrated fixed-income and convertible securities, which are rated by
neither Moody's nor S&P, are limited to 10% of discounted Moody's
Eligible Assets. If a corporate debt security is unrated by both
Moody's and S&P, the Corporation will use the percentage set forth
under "Unrated" in this table.
Upon conversion to common stock, the discount Factors applicable to common stock will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
------------- ------- ---------- --------
7-week exposure period..... 170% 264% 241%
|
(b) Corporate Debt Securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
MOODY'S RATING CATEGORY(1)
--------------------------
TERMS TO MATURITY OF
CORPORATE DEBT SECURITY Aaa Aa A Baa Ba B UNRATED(2)
----------------------- --- --- --- --- --- --- ----------
1 year or less.............................. 109% 112% 115% 118% 119% 125% 225%
2 years or less (but longer than 1 year).... 115 118 122 125 127 133 225
3 years or less (but longer than 2 years)... 120 123 127 131 133 140 225
4 years or less (but longer than 3 years)... 126 129 133 138 140 147 225
5 years or less (but longer than 4 years)... 132 135 139 144 146 154 225
7 years or less (but longer than 5 years)... 139 143 147 152 156 164 225
10 years or less (but longer than 7 years).. 145 150 155 160 164 173 225
15 years or less (but longer than 10 years). 150 155 160 165 170 180 225
20 years or less (but longer than 15 years). 150 155 160 165 170 190 225
30 years or less (but longer than 20 years). 150 155 160 165 170 191 225
Greater than 30 years....................... 165 173 181 189 205 221 225
|
(1) If a corporate debt security is unrated by Moody's but is rated by
S&P, a rating two numeric ratings below the S&P rating will be used
(e.g., where the S&P rating is AAA, a Moody's rating of Aa2 will be
used; where the S&P rating is AA+, a Moody's rating of Aa3 will be
used).
(2) Unrated corporate debt securities, which are corporate debt
securities rated by neither Moody's nor S&P, are limited to 10% of
discounted Moody's Eligible Assets. If a corporate debt security is
unrated by both Moody's and S&P, the Corporation will use the
percentage set forth under "Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of such securities.
(c) Preferred Stock: The Moody's Discount Factor for preferred stock shall be (i) for preferred stocks issued by a utility, 146%; (ii) for preferred stocks of industrial and financial issuers, 209%; (iii) for preferred stocks issued by real estate related issuers, 154%; and (iv) for auction rate preferred stocks, 350%.
(d) U.S. Government Obligations and U.S. Treasury Strips:
U.S. GOVERNMENT OBLIGATIONS U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less.................................. 107% 107%
2 years or less (but longer than 1 year)........ 113 115
3 years or less (but longer than 2 years)....... 118 121
4 years or less (but longer than 3 years)....... 123 128
5 years or less (but longer than 4 years)....... 128 135
7 years or less (but longer than 5 years)....... 135 147
10 years or less (but longer than 7 years)...... 141 163
15 years or less (but longer than 10 years)..... 146 191
20 years or less (but longer than 15 years)..... 154 218
30 years or less (but longer than 20 years)..... 154 244
|
(e) Short-Term Instruments and Cash: The Moody's Discount Factor applied to short-term portfolio securities, including without limitation short-term corporate debt securities, Short-Term Money Market Instruments and short-term municipal debt obligations, will be (i) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (ii) 115%, so long as such portfolio securities mature or have a demand feature at par not exercisable within the Moody's Exposure Period; and (iii) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. Moody's rated Rule 2a-7 money market funds will also have a discount factor of 100%.
(f) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A Securities for Rule 144A Securities will be 130% of the Moody's Discount Factor which would apply were the securities registered under the 1933 Act.
"Moody's Eligible Assets" means (a) cash (including interest and
dividends due on assets rated (i) Baa3 or higher by Moody's if the payment
date is within five Business Days of the Valuation Date, (ii) A2 or higher if
the payment date is within thirty days of the Valuation Date, and (iii) A1 or
higher if the payment date is within the Moody's Exposure Period) and
receivables for Moody's Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades which generated
such receivables are (1) settled through clearing house firms with respect to
which the Corporation has received prior written authorization from Moody's or
(2) (A) with counterparties having a Moody's long-term debt rating of at least
Baa3 or (B) with counterparties having a Moody's Short-Term Money Market
Instrument rating of at least P-1;
(b) Short-Term Money Market Instruments, so long as (i) such
securities are rated at least P-1, (ii) in the case of demand deposits, time
deposits and overnight funds, the supporting entity is rated at least A2, or
(iii) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security matures
within three months or (3) is rated at least Aa3 and the security matures
within six months. In addition, Moody's rated Rule 2a-7 money market funds are
also eligible investments.
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Rule 144A Securities;
(e) Corporate debt securities if (i) such securities are rated B3 or higher by Moody's; (ii) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's or S & P; (iii) for debt securities rated Ba1 and below, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (iv) such securities have been registered under the 1933 Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the 1933 Act as determined by the Corporation's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors, except that such securities that are not subject to U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded; and (v) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (1) corporate debt securities not rated at least B3 by Moody's shall be considered to be Moody's Eligible Assets only to the extent the Market Value of such corporate debt securities does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; provided, however, that if the Market Value of such corporate debt securities exceeds 10% of the aggregate Market Value of all Moody's Eligible Assets, a portion of such corporate debt securities (selected by the Corporation) shall not be considered Moody's Eligible Assets, so that the Market Value of such corporate debt securities (excluding such portion) does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; and (2) corporate debt securities rated by neither Moody's nor S&P shall be considered to be Moody's Eligible Assets only to the extent such securities are issued by entities which (A) have not filed for bankruptcy within the past three years, (B) are current on all principal and interest in their fixed income obligations, (C) are current on all preferred stock dividends, and (D) possess a current, unqualified auditor's report without qualified, explanatory language.
(f) Convertible bonds, provided that (i) the issuer of common stock must have a Moody's senior unsecured debt of B3 or better, or an S&P rating of BB or better, (ii) the common stocks must be traded on the NYSE, AMEX, or NASDAQ, (iii) dividends must be paid in U.S. dollars, (iv) the portfolio of convertible bonds must be diversified as set forth in Figure 1 below, (v) the company shall not hold shares exceeding the average weekly trading volume during the preceding month, (vi) synthetic convertibles are excluded from asset eligibility.
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
--------------------------------------------------------------------------------
TYPE MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
ISSUER (%) (1) INDUSTRY (%) STATE (%)(1)
------------------- --------------- -------------- -----------------
Utility............ 4 50 7(2)
Other.............. 6 20 n/a
|
(1) Percentage represent a portion of the aggregate market value and
number of outstanding shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be
diversified according to the state in which they generate the largest
part of their revenues. Publicly available information on utility
company revenues by state is available from the Uniform Statistical
Report (USR) or the Federal Energy Regulation commission (FERC).
(g) Preferred stocks if (i) dividends on such preferred stock are cumulative, (ii) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, equity capital at any time over the respective lives of such securities, (iii) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a preferred stock has a senior debt rating from Moody's of Baa1 or higher or a preferred stock rating from Moody's of Baa3 or higher and (v) such preferred stock has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 (if the issuer of such preferred stock has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred stock without such a dividend history would also be eligible). In addition, the preferred stocks must have the following diversification requirements: (1) the preferred stock issue must be greater than $50 million and (2) the minimum holding by the Corporation of each issue of preferred stock is $500,000 and the maximum holding of preferred stock of each issue is $5 million. In addition, preferred stocks issued by transportation companies will not be considered Moody's Eligible Assets.
(h) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in this definition but only upon receipt by the Corporation of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Corporation that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the shares of Series B Preferred.
(i) Interest rate swaps entered into according to International Swap Dealers Association ("ISDA") standards if (i) the counterparty to the swap transaction has a short-term rating of not less than P-1 or, if the counterparty does not have a short-term rating, the counterparty's senior unsecured long-term debt rating is Aa3 or higher and (ii) the original aggregate notional amount of the interest rate swap transaction or transactions is not to be greater than the liquidation preference of the Preferred Shares originally issued. The interest rate swap transaction will be marked-to-market daily.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Moody's Eligible Assets:
MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE MAXIMUM
SINGLE INDUSTRY(3)(4) INDUSTRY (3)(4) ISSUE SIZE
RATINGS(1) ISSUER(2)(3) NON-UTILITY UTILITY ($ IN MILLION)(5)
----------------------------- ------------ ----------- --------------- -------------------
Aaa.......................... 100% 100% 100% $100
Aa........................... 20 60 30 100
A............................ 10 40 25 100
Baa.......................... 6 20 20 100
Ba........................... 4 12 12 50 (6)
B1-B2........................ 3 8 8 50 (6)
B3 or below.................. 2 5 5 50 (6)
|
(1) Refers to the preferred stock and senior debt rating of the portfolio holding.
(2) Companies subject to common ownership of 25% or more are considered as one issuer.
(3) Percentages represent a portion of the aggregate Market Value of corporate debt securities.
(4) Industries are determined according to Moody's Industry Classifications, as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50 million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million are limited to 20% of the Corporation's total assets.
"Moody's Industry Classifications" means for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Series B Preferred shares).
1. Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition.
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers.
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables.
4. 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.
5. 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.
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural), Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers.
7. Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass.
8. Personal and Non-Durable Consumer Products (Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies.
9. Diversified/Conglomerate Manufacturing.
10. Diversified/Conglomerate Service.
11. Diversified Natural Resources, Precious Metals and Minerals: Fabricating, Distribution.
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and Waste Disposal.
13. Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology.
14. Finance: Investment Brokerage, Leasing, Syndication, Securities.
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture Chemicals, Agricultural Equipment, Fertilizers.
16. Grocery: Grocery Stores, Convenience Food Stores.
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment.
18. Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges.
19. Hotels, Motels, Inns and Gaming.
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety.
21. Leisure, Amusement, Motion Pictures, Entertainment:
Boating, Bowling, Billiards, Musical Instruments,
Fishing, Photo Equipment, Records, Tapes, Sports,
Outdoor Equipment (Camping), Tourism, Resorts, Games,
Toy Manufacturing, Motion Picture Production Theaters,
Motion Picture Distribution.
22. Machinery (Non-Agricultural, Non-Construction, Non-Electronic): Industrial, Machine Tools, Steam Generators.
23. 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 of the foregoing.
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling.
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment.
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport.
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom.
28. Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular.
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes.
30. Personal Transportation: Air, Bus, Rail, Car Rental.
31. Utilities: Electric, Water, Hydro Power, Gas.
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies.
The Corporation will use SIC codes in determining which industry classification is applicable to a particular investment in consultation with the Independent Accountant and Moody's, to the extent the Corporation considers necessary.
"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.
"Notice of Redemption" shall have the meaning set forth in paragraph 3(c)(i) of Article II hereof.
"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 auction rate Preferred Stock 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 auction rate Preferred Stock, 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 shares of Preferred Stock as to which any subsidiary of the Corporation is the holder will be disregarded and deemed not Outstanding, and (ii) in connection with any auction of shares of auction rate Preferred Stock as to which the Corporation or any Person known to the auction agent to be a subsidiary of the Corporation is the holder will be disregarded and not deemed Outstanding.
"Person" 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 B Preferred Stock.
"Pricing Service" means any of the following: Bloomberg Financial Service, 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.
"Redemption Price" has the meaning set forth in paragraph 3(a) of Article II hereof, and for the purposes of these Articles Supplementary shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"S&P" means Standard & Poor's Ratings Services, or its successors at law.
"Series B Preferred Stock" means the Series B [__]% Cumulative Preferred Stock, par value $.001 per share, of the Corporation.
"Series B Asset Coverage Cure Date" means, with respect to the failure by the Corporation to maintain Asset Coverage (as required by paragraph 5(a)(i) of Article II hereof) as of the last Business Day of each March, June, September and December of each year, 60 days following such Business Day.
"Short-Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Corporation (or, in the case of an instrument specified by clauses (a) and (b) below, on the Valuation Date), the remaining terms to maturity thereof are not in excess of 90 days:
(a) U.S. Government Obligations;
(b) commercial paper that is rated at the time of purchase or
acquisition and the Valuation Date at least P-1 by Moody's
and is issued by an issuer (or guaranteed or supported by a
Person other than the issuer) whose long-term unsecured debt
obligations are rated at least Aa3 by Moody's;
(c) demand or time deposits in, or certificates of deposit of,
or banker's acceptances issued by (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) if, in each case, the
commercial paper, if any, and the long-term unsecured debt
obligations (other than such obligations the ratings of
which are based on the credit of a Person other than such
depository institution or trust company) of such depository
institution or trust company at the time of purchase or
acquisition and the Valuation Date, have (A) credit ratings
from Moody's of at least P-1 in the case of commercial paper
and (B) credit ratings from Moody's of at least Aa3 in the
case of long-term unsecured debt obligations; provided,
however, that in the case of any such investment that
matures in no more than one Business Day from the date of
purchase or other acquisition by the Corporation, all of the
foregoing requirements shall be applicable except that the
required long-term unsecured debt credit rating of such
depository institution or trust company from Moody's shall
be at least A2; and provided, further, however, that the
foregoing credit rating requirements shall be deemed to be
met with respect to a depository institution or trust
company if (1) such depository institution or trust company
is the principal depository institution in a holding company
system, (2) the commercial paper, if any, of such depository
institution or trust company is not rated below P-1 by
Moody's and (3) the holding company shall meet all of the
foregoing credit rating requirements (including the
preceding proviso in the case of instruments that mature in
no more than one Business Day from the date of purchase or
other acquisition by the Corporation);
(d) repurchase obligations with respect to any U.S. Government
Obligation entered into with a depository institution, trust
company or securities dealer (acting as principal) which is
rated (i) at least Aa3 if the maturity is three months or
less, (ii) at least A1 if the maturity is two months or less
and (iii) at least A2 if the maturity is one month or less;
and
(e) Eurodollar demand or time deposits in, or certificates of
deposit of, the head office or the London branch office of a
depository institution or trust company meeting the credit
rating requirements of commercial paper and long-term
unsecured debt obligations specified in clause (c) above,
provided that the interest receivable by the Corporation
shall be payable in U.S. dollars and shall not be subject to
any withholding or similar taxes.
"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 month, or such other date as the Corporation and Moody's may agree to for purposes of determining the Basic Maintenance Amount.
"Voting Period" shall have the meaning set forth in paragraph 4(b) of Article II hereof.
ARTICLE II
SERIES B PREFERRED STOCK
1. Dividends.
(a) Holders of shares of Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, cumulative cash dividends at the rate of [__]% per annum (computed on the basis of a 360-day year consisting of twelve 30-day months) of the Liquidation Preference on the Series B Preferred Stock and no more, payable quarterly on March 26th, June 26th, September 26th and December 26th in each year (each a "Dividend Payment Date") commencing [__] (or, if any such day is not a Business Day, then on the next succeeding Business Day) to holders of record of Series B Preferred Stock as they appear on the stock register of the Corporation at the close of business on the fifth preceding Business Day in preference to dividends on shares of Common Stock and any other capital stock of the Corporation ranking junior to the Series B Preferred Stock in payment of dividends. Dividends on shares of Series B Preferred Stock shall accumulate from the date on which such shares are originally issued; provided, however, that with respect to any shares of Series B Preferred Stock issued within 30 days of the Date of Original Issue, dividends on such shares shall accumulate from such Date of Original Issue. Each period beginning on and including a Dividend Payment Date (or the Date of Original Issue, in the case of the first dividend period after issuance of such shares) and ending on but excluding the next succeeding Dividend Payment Date is referred to herein as a "Dividend Period." Dividends on account of arrears for any past Dividend Period or in connection with the redemption of Series B Preferred Stock may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date not exceeding 30 days preceding the payment date thereof as shall be fixed by the Board of Directors.
(b) (i) No full dividends shall be declared or paid on shares of Series B Preferred Stock 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 Corporation ranking on a parity with the Series B Preferred Stock as to the payment of dividends have been or contemporaneously are declared and paid through the most recent Dividend Payment Dates therefor. If full cumulative dividends due have not been paid on all Outstanding shares of such Preferred Stock, any dividends being paid on such shares of Preferred Stock (including the Series B Preferred Stock) will be paid as nearly pro rata as possible in proportion to the respective amounts of dividends accumulated but unpaid on each such series of Preferred Stock on the relevant Dividend Payment Date. No holders of shares of Series B Preferred Stock shall be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in this paragraph 1(b)(i) on shares of Series B Preferred Stock. No interest or sum of money in lieu of interest shall be payable in respect of any dividend payments on any shares of Series B Preferred Stock that may be in arrears.
(ii) For so long as shares of Series B Preferred Stock are
Outstanding, the Corporation shall not pay 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 Stock or other stock, if any,
ranking junior to the Series B Preferred Stock as to dividends and upon
liquidation) in respect of the Common Stock or any other stock of the
Corporation ranking junior to the Series B Preferred Stock as to dividends and
upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any shares of Common Stock or any other stock of the
Corporation ranking junior to the Series B Preferred Stock as to dividends and
upon liquidation (except by conversion into or exchange for stock of the
Corporation ranking junior to the Series B Preferred Stock as to dividends and
upon liquidation), unless, in each case, (A) immediately thereafter, the
aggregate Adjusted Value of the Corporation's Moody's Eligible Assets shall
equal or exceed the Basic Maintenance Amount and the Corporation shall have
Asset Coverage, (B) all cumulative dividends on all shares of Series B
Preferred Stock due on or prior to the date of the transaction have been
declared and paid (or shall have been declared and sufficient funds for the
payment thereof deposited with the applicable Dividend-Disbursing Agent) and
(C) the Corporation has redeemed the full number of shares of Series B
Preferred Stock to be redeemed mandatorily pursuant to any provision contained
herein for mandatory redemption.
(iii) Any dividend payment made on the shares of Series B Preferred Stock shall first be credited against the dividends accumulated with respect to the earliest Dividend Period for which dividends have not been paid.
(c) Not later than the Business Day immediately preceding each Dividend Payment Date, the Corporation shall deposit with the Dividend-Disbursing Agent Deposit Assets having an initial combined value sufficient to pay the dividends that are payable on such Dividend Payment Date, which Deposit Assets shall mature on or prior to such Dividend Payment Date. The Corporation may direct the Dividend-Disbursing Agent with respect to the investment of any such Deposit Assets, provided that such investment consists exclusively of Deposit Assets and provided further that the proceeds of any such investment will be available at the opening of business on such Dividend Payment Date.
2. 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 shares of Series B Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, after satisfying claims of creditors but before any distribution or payment shall be made in respect of the Common Stock or any other stock of the Corporation ranking junior to the Series B Preferred Stock as to liquidation payments, a liquidation distribution in the amount of $25.00 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 shares of Series B Preferred Stock, and any other Outstanding shares of a class or series of Preferred Stock of the Corporation ranking on a parity with the Series B Preferred Stock as to payment upon liquidation, shall be insufficient to permit the payment in full to such holders of Series B Preferred Stock 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 shares of Series B Preferred Stock and such other Preferred Stock ratably in proportion to the respective preferential amounts to which they are entitled. Unless and until the Liquidation Preference plus accumulated and unpaid dividends has been paid in full to the holders of shares of Series B Preferred Stock, 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 B Preferred Stock as to liquidation.
3. Redemption.
Shares of the Series B Preferred Stock shall be redeemed by the Corporation as provided below:
(a) Mandatory Redemptions.
If the Corporation is required to redeem any shares of Preferred Stock (which may include Series B Preferred Stock) pursuant to paragraphs 5(b) or 5(c) of Article II hereof, then the Corporation shall, to the extent permitted by the 1940 Act and Maryland law, by the close of business on such Series B Asset Coverage Cure Date or Basic Maintenance Amount Cure Date (herein collectively referred to as a "Cure Date"), as the case may be, fix a redemption date and proceed to redeem shares as set forth in paragraph 3(c) hereof. On such redemption date, the Corporation shall redeem, out of funds legally available therefor, the number of shares of Preferred Stock, which, to the extent permitted by the 1940 Act and Maryland law, at the option of the Corporation may include any proportion of Series B Preferred Stock or any other series of Preferred Stock, equal to the minimum number of shares the redemption of which, if such redemption had occurred immediately prior to the opening of business on such Cure Date, would have resulted in the Corporation having Asset Coverage or an Adjusted Value of its Moody's Eligible Assets equal to or greater than the Basic Maintenance Amount, as the case may be, immediately prior to the opening of business on such Cure Date or, if Asset Coverage or an Adjusted Value of its Eligible Assets equal to or greater than the Basic Maintenance Amount, as the case may be, cannot be so restored, all of the Outstanding shares of Series B Preferred Stock, at a price equal to $25.00 per share plus accumulated but unpaid dividends (whether or not earned or declared by the Corporation) through the date of redemption (the "Redemption Price"). In the event that shares of Preferred Stock are redeemed pursuant to paragraphs 5(b) or 5(c) of Article II hereof, the Corporation may, but is not required to, redeem a sufficient number of shares of Series B Preferred Stock pursuant to this paragraph 3(a) which, when aggregated with other shares of Preferred Stock redeemed by the Corporation, permits the Corporation to have with respect to the shares of Preferred Stock (including the Series B Preferred Stock) remaining Outstanding after such redemption (i) Asset Coverage of as much as 220% and (ii) Moody's Eligible Assets with Adjusted Value of as great as 110% of the Basic Maintenance Amount. In the event that all of the shares of Series B Preferred Stock then Outstanding are required to be redeemed pursuant to paragraph 5 of Article II hereof, the Corporation shall redeem such shares at the Redemption Price and proceed to do so as set forth in paragraph 3(c) hereof.
(b) Optional Redemptions.
Prior to [__], 2008, the shares of Series B Preferred Stock are not subject to optional redemption by the Corporation unless such redemption is necessary, in the judgment of the Board of Directors, to maintain the Corporation's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Commencing [__], 2008 and thereafter, and prior thereto to the extent necessary to maintain the Corporation's status as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, to the extent permitted by the 1940 Act and Maryland law, the Corporation may at any time upon Notice of Redemption redeem the Series B Preferred Stock in whole or in part at the Redemption Price per share, which notice shall specify a redemption date of not fewer than 15 days nor more than 40 days after the date of such notice.
(c) Procedures for Redemption.
(i) If the Corporation shall determine or be required to redeem shares of Series B Preferred Stock pursuant to this paragraph 3, it shall mail a written notice of redemption ("Notice of Redemption") with respect to such redemption by first class mail, postage prepaid, to each holder of the shares to be redeemed at such holder's address as the same appears on the stock books of the Corporation on the close of business on such date as the Board of Directors may determine, which date shall not be earlier than the second Business Day prior to the date upon which such Notice of Redemption is mailed to the holders of Series B Preferred Stock. Each such Notice of Redemption shall state: (A) the redemption date as established by the Board of Directors; (B) the number of shares of Series B Preferred Stock to be redeemed; (C) the CUSIP number(s) of such shares; (D) the Redemption Price; (E) the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the Notice of Redemption shall so state) are to be surrendered for payment in respect of such redemption; (F) that dividends on the shares to be redeemed will cease to accrue on such redemption date; (G) the provisions of this paragraph 3 under which such redemption is made; and (H) any conditions precedent to such redemption. If fewer than all shares of Series B Preferred Stock held by any holder are to be redeemed, the Notice of Redemption mailed to such holder also shall specify the number or percentage of shares to be redeemed from such holder. No defect in the Notice of Redemption or the mailing thereof shall affect the validity of the redemption proceedings, except as required by applicable law.
(ii) If the Corporation shall give a Notice of Redemption, then by the close of business on the Business Day preceding the redemption date specified in the Notice of Redemption (so long as any conditions precedent to such redemption have been met) or, if the Dividend-Disbursing Agent so agrees, another date not later than the redemption date, the Corporation shall (A) deposit with the Dividend-Disbursing Agent Deposit Assets that shall mature on or prior to such redemption date having an initial combined value sufficient to effect the redemption of the shares of Series B Preferred Stock to be redeemed and (B) give the Dividend-Disbursing Agent irrevocable instructions and authority to pay the Redemption Price to the holders of the shares of Series B Preferred Stock called for redemption on the redemption date. The Corporation may direct the Dividend-Disbursing Agent with respect to the investment of any Deposit Assets so deposited provided that the proceeds of any such investment will be available at the opening of business on such redemption date. Upon the date of such deposit (unless the Corporation shall default in making payment of the Redemption Price), all rights of the holders of the shares of Series B Preferred Stock so called for redemption shall cease and terminate except the right of the holders thereof to receive the Redemption Price thereof and such shares shall no longer be deemed Outstanding for any purpose. The Corporation shall be entitled to receive, promptly after the date fixed for redemption any cash in excess of the aggregate Redemption Price of the shares of Series B Preferred Stock called for redemption on such date and any remaining Deposit Assets. Any assets so deposited that are unclaimed at the end of two years from such redemption date shall, to the extent permitted by law, be repaid to the Corporation, after which the holders of the shares of Series B Preferred Stock so called for redemption shall look only to the Corporation for payment of the Redemption Price thereof. The Corporation shall be entitled to receive, from time to time after the date fixed for redemption, any interest on the Deposit Assets so deposited.
(iii) On or after the redemption date, each holder of shares of Series B Preferred Stock that are subject to redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in the Notice of Redemption and shall then be entitled to receive the cash Redemption Price, without interest.
(iv) In the case of any redemption of less than all of the shares of Series B Preferred Stock pursuant to these Articles Supplementary, such redemption shall be made pro rata from each holder of shares of Series B Preferred Stock in accordance with the respective number of shares held by each such holder on the record date for such redemption.
(v) Notwithstanding the other provisions of this paragraph 3, the Corporation shall not redeem shares of Series B Preferred Stock unless all accumulated and unpaid dividends on all Outstanding shares of Series B Preferred Stock and other Preferred Stock ranking on a parity with the Series B Preferred Stock with respect to dividends for all applicable past Dividend Periods (whether or not earned or declared by the Corporation) shall have been or are contemporaneously paid or declared and Deposit Assets for the payment of such dividends shall have been deposited with the Dividend-Disbursing Agent as set forth in paragraph 1(c) of Article II hereof, 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.
If the Corporation shall not have funds legally available for the redemption of, or is otherwise unable to redeem, all the shares of the Series B Preferred Stock or other Preferred Stock designated to be redeemed on any redemption date, the Corporation shall redeem on such redemption date the number of shares of Series B Preferred Stock and other Preferred Stock so designated as it shall have legally available funds, or is otherwise able, to redeem ratably on the basis of the Redemption Price from each holder whose shares are to be redeemed, and the remainder of the shares of the Series B Preferred Stock and other Preferred Stock designated to be redeemed shall be redeemed on the earliest practicable date on which the Corporation shall have funds legally available for the redemption of, or is otherwise able to redeem, such shares upon Notice of Redemption.
4. Voting Rights.
(a) General.
Except as otherwise provided by law or as specified in the Charter, each holder of shares of Series B Preferred Stock 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, including Series B Preferred Stock, and of shares of Common Stock 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 Series B Preferred Stock, 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, including the Series B Preferred Stock. Subject to paragraph 4(b) of Article II hereof, the holders of outstanding shares of capital stock of the Corporation, including the holders of Outstanding shares of Preferred Stock, including the Series B Preferred Stock, voting as a single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors.
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 that, when added to the two directors elected exclusively by the holders of shares of Preferred Stock pursuant to paragraph 4(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 4(a) above. The Corporation and the Board of Directors shall take all necessary action, including amending the Corporation's by-laws, to effect an increase in the number of directors as described in the preceding sentence. 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 shares of Series B Preferred Stock equal to at least two full years' dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Dividend-Disbursing Agent for the payment 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 Articles Supplementary creating such shares.
Upon the termination of a Voting Period, the voting rights described in this paragraph 4(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 4(b).
(c) Right to Vote with Respect to Certain Other Matters.
So long as any shares of Series B Preferred Stock are Outstanding,
the Corporation shall not, without the affirmative vote of the holders of a
majority (as defined in the 1940 Act) of the shares of Preferred Stock
Outstanding at the time, voting separately as one class, amend, alter or
repeal the provisions of the Charter, whether by merger, consolidation or
otherwise, so as to materially adversely affect any of the contract rights
expressly set forth in the Charter with respect to holders of shares of Series
B Preferred Stock or any other Preferred Stock. To the extent permitted under
the 1940 Act, in the event shares of more than one series of Preferred Stock
are Outstanding, the Corporation shall not effect any of the actions set forth
in the preceding sentence which materially adversely affects the contract
rights expressly set forth in the Charter with respect to 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
Moody's ten Business Days prior to any such vote described above. Unless a
higher percentage is provided for under the Charter or applicable law, the
affirmative vote of the holders of a majority of the Outstanding shares of
Preferred Stock, including Series B Preferred Stock, 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. For purposes of this paragraph 4(c), the phrase
"vote of the holders of a majority of the Outstanding shares of Preferred
Stock" (or any like phrase) 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 (i) 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 (ii) 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 Series B Preferred Stock, 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 Series B Preferred Stock) pursuant to the Charter shall not in and
of itself be considered to adversely affect the contract rights of the holders
of Series B Preferred Stock. The provisions of this paragraph 4(c) are subject
to the provisions of Paragraph 6 of Article II hereof.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of shares of Preferred Stock to elect additional directors as described in paragraph 4(b) above, the Corporation shall call a special meeting of such holders and instruct the Dividend-Disbursing Agent to mail a notice of such special meeting to such holders, 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 Dividend-Disbursing 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 date 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 4(b) above on a one-vote-per-share basis. At any such meeting or adjournment thereof in the absence of a quorum, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting without notice, other than by an announcement at the meeting, to a date not more than 120 days after the original record date.
(ii) For purposes of determining any rights of the holders of Series B Preferred Stock to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these Articles Supplementary, by the other provisions of the Charter, by statute or otherwise, a share of Series B Preferred Stock which is not Outstanding shall not be counted.
(iii) 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 Series B Preferred Stock, 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 Series B Preferred Stock, 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.
(iv) Upon the expiration of a Voting Period, the terms of office of
the additional directors elected by the holders of Preferred Stock pursuant to
paragraph 4(b) above shall expire 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 B
Preferred Stock, to elect additional directors pursuant to paragraph 4(b)
above shall cease, subject to the provisions of the last sentence of paragraph
4(b). Upon the expiration of the terms of the directors elected by the holders
of Preferred Stock pursuant to paragraph 4(b) above, the number of directors
shall be automatically reduced to the number and composition of directors on
the Board immediately preceding such Voting Period.
(e) Exclusive Remedy.
Unless otherwise required by law, the holders of shares of Series B Preferred Stock shall not have any rights or preferences other than those specifically set forth herein. The holders of shares of Series B Preferred Stock shall have no preemptive rights or rights to cumulative voting. In the event that the Corporation fails to pay any dividends on the shares of Series B Preferred Stock, the exclusive remedy of the holders shall be the right to vote for directors pursuant to the provisions of this paragraph 4.
(f) Notification to Moody's.
In the event a vote of holders of Series B Preferred Stock is required pursuant to the provisions of Section 13(a) of the 1940 Act, as long as the Series B Preferred Stock is rated by Moody's at the Corporation's request, the Corporation shall, not later than ten Business Days prior to the date on which such vote is to be taken, notify Moody's 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 Moody's of the result of such vote.
5. Coverage Tests.
(a) Determination of Compliance.
For so long as any shares of Series B Preferred Stock are Outstanding, the Corporation shall make the following determinations:
(i) Asset Coverage. The Corporation shall have Asset Coverage as of the last Business Day of each March, June, September and December of each year in which any share of Series B Preferred Stock is Outstanding.
(ii) Basic Maintenance Amount Requirement.
(A) For so long as any shares of Series B Preferred Stock are Outstanding and are rated by Moody's, the Corporation shall maintain, on each Valuation Date, Moody's Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount, each as of such Valuation Date. Upon any failure to maintain Moody's Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount, the Corporation shall use all commercially reasonable efforts to retain Moody's Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount on or prior to the Basic Maintenance Amount Cure Date, by altering the composition of its portfolio or otherwise.
(B) The Administrator shall prepare a Basic Maintenance Report relating to each Valuation Date. On or before 5:00 P.M., New York City time, on the fifth Business Day after the first Valuation Date following the Date of Original Issue of the Series B Preferred Stock and after each (1) Annual Valuation Date, (2) Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above, (3) Basic Maintenance Amount Cure Date following a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) above and (4) Valuation Date and any immediately succeeding Business Day on which the Adjusted Value of the Corporation's Moody's Eligible Assets exceeds the Basic Maintenance Amount by 5% or less, the Corporation shall complete and deliver to Moody's a Basic Maintenance Report, which will be deemed to have been delivered to Moody's if Moody's receives a copy or telecopy, telex or other electronic transcription or transmission of the Basic Maintenance Report and on the same day the Corporation mails to Moody's for delivery on the next Business Day the Basic Maintenance Report. A failure by the Corporation to deliver a Basic Maintenance Report under this paragraph 5(a)(ii)(B) shall be deemed to be delivery of a Basic Maintenance Report indicating an Adjusted Value of the Corporation's Moody's Eligible Assets less than the Basic Maintenance Amount, as of the relevant Valuation Date.
(C) Within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to an Annual Valuation Date, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report that was prepared by the Corporation during the quarter ending on such Annual Valuation Date. Also, within ten Business Days after the date of delivery to Moody's of a Basic Maintenance Report in accordance with paragraph 5(a)(ii)(B) above relating to a Valuation Date on which the Corporation fails to satisfy the requirements of paragraph 5(a)(ii)(A) and any Basic Maintenance Amount Cure Date, the Corporation shall deliver to Moody's an Accountant's Confirmation relating to such Basic Maintenance Report.
(D) In the event the Adjusted Value of the Corporation's Moody's Eligible Assets shown in any Basic Maintenance Report prepared pursuant to paragraph 5(a)(ii)(B) above is less than the applicable Basic Maintenance Amount, the Corporation shall have until the Basic Maintenance Amount Cure Date to achieve an Adjusted Value of the Corporation's Moody's Eligible Assets at least equal to the Basic Maintenance Amount, and upon such achievement (and not later than such Basic Maintenance Amount Cure Date) the Corporation shall inform Moody's of such achievement in writing by delivery of a revised Basic Maintenance Report showing an Adjusted Value of the Corporation's Moody's Eligible Assets at least equal to the Basic Maintenance Amount as of the date of such revised Basic Maintenance Report.
(E) On or before 5:00 P.M., New York City time, on no later
than the fifth Business Day after the next Valuation Date following each date
on which the Corporation has repurchased more than 1% of its Common Stock
since the most recent date of delivery of a Basic Maintenance Report, the
Corporation shall complete and deliver to Moody's a Basic Maintenance Report.
A Basic Maintenance Report delivered as provided in paragraph 5(a)(ii)(B)
above also shall be deemed to have been delivered pursuant to this paragraph
5(a)(ii)(E).
(b) Failure to Meet Asset Coverage.
If the Corporation fails to have Asset Coverage as provided in paragraph 5(a)(i) hereof and such failure is not cured as of the related Series B Asset Coverage Cure Date, (i) the Corporation shall give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Preferred Stock, which at the Corporation's determination (to the extent permitted by the 1940 Act and Maryland law) may include any proportion of Series B Preferred Stock, to enable it to meet the requirements of paragraph 5(a)(i) above, and, at the Corporation's discretion, such additional number of shares of Series B Preferred Stock or other Preferred Stock in order that the Corporation have Asset Coverage with respect to the shares of Series B Preferred Stock and any other Preferred Stock remaining Outstanding after such redemption as great as 220%, and (ii) deposit with the Dividend-Disbursing Agent Deposit Securities having an initial combined value sufficient to effect the redemption of the shares of Series B Preferred Stock or other Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof.
(c) Failure to Maintain Moody's Eligible Assets having an Adjusted Value at Least Equal to the Basic Maintenance Amount.
If the Corporation fails to have Moody's Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount as provided in paragraph 5(a)(ii)(A) above and such failure is not cured, the Corporation shall, on or prior to the Basic Maintenance Amount Cure Date, (i) give a Notice of Redemption as described in paragraph 3 of Article II hereof with respect to the redemption of a sufficient number of shares of Preferred Stock, which at the Corporation's determination (to the extent permitted by the 1940 Act and Maryland law) may include any proportion of Series B Preferred Stock, to enable it to meet the requirements of paragraph 5(a)(ii)(A) above, and, at the Corporation's discretion, such additional number of shares of Series B Preferred Stock or other Preferred Stock in order that the Corporation have Adjusted Assets with respect to the remaining shares of Series B Preferred Stock and any other Preferred Stock remaining Outstanding after such redemption as great as 110% of the Basic Maintenance Amount, and (ii) deposit with the Dividend-Disbursing Agent Deposit Assets having an initial combined value sufficient to effect the redemption of the shares of Series B Preferred Stock or other Preferred Stock to be redeemed, as contemplated by paragraph 3(a) of Article II hereof.
(d) Status of Shares Called for Redemption.
For purposes of determining whether the requirements of paragraphs 5(a)(i) and 5(a)(ii)(A) hereof are satisfied, (i) no share of the Series B Preferred Stock 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 Dividend-Disbursing Agent (or applicable paying agent) and the requisite Notice of Redemption shall have been given, and (ii) such Deposit Assets deposited with the Dividend-Disbursing Agent (or paying agent) shall not be included.
6. Certain Other Restrictions.
(a) For so long as the Series B Preferred Stock is rated by Moody's
at the request of the Corporation, 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 Moody's
Eligible Assets having an Adjusted Value as of the date of such purchase or
sale to be less than the 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 Moody's Eligible Assets exceeded the 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
Moody's Eligible Assets, unless the Corporation shall have confirmed that,
after giving effect to such alteration, the Adjusted Value of the
Corporation's Moody's Eligible Assets exceeded the Basic Maintenance Amount or
(iii) declare or pay any dividend or other distribution on any shares of
Common Stock or repurchase any shares of Common Stock, 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 paragraph 5(a)(ii)(A) of Article II hereof.
(b) For so long as the Series B Preferred Stock is rated by Moody's at the request of the Corporation, unless the Corporation shall have received written confirmation from Moody's, 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 Investments 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 Article 5 hereof.
(c) For so long as the Series B Preferred Stock is rated by Moody's at the request of the Corporation, the Corporation shall not consolidate the Corporation with, merge the Corporation into, sell or otherwise transfer all or substantially all of the Corporation's assets to another Person or adopt a plan of liquidation of the Corporation, in each case without providing prior written notification to Moody's.
7. Limitation on Incurrence of Additional Indebtedness and Issuance of Additional Preferred Stock
(a) So long as any shares of Series B Preferred Stock 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 7(a).
(b) So long as any shares of Series B Preferred Stock 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 shares of Series B Preferred Stock, 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, including, without limitation, to the redemption of Preferred Stock
for which a Redemption Notice has been mailed prior to such issuance, 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 sum of the liquidation
preference of the shares of Series B Preferred Stock and all other Preferred
Stock of the Corporation then Outstanding, and (ii) no such additional
Preferred Stock 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.
ARTICLE III
ABILITY OF BOARD OF DIRECTORS TO MODIFY THE ARTICLES SUPPLEMENTARY
The calculation of Adjusted Value, 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 Moody's or 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 Corporation by Moody's that such modification would not adversely affect its then-current rating of the shares of Series B Preferred Stock. 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, 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 Moody's (if Moody's is then rating the Series B Preferred Stock at the request of the Corporation) if Moody's has advised the Corporation in writing separately (a) of such adjustments and (b) that the revised calculation definition would not cause Moody's to reduce or withdraw its then-current rating of the shares of Series B Preferred Stock. The adjustments contemplated by the preceding sentence shall be made effective upon the time the Corporation receives the notice from Moody's 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 the stockholders.
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 B Preferred Stock 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 B Preferred Stock or any other capital stock of the Corporation or adversely affect the then-current rating on the Series B Preferred Stock by Moody's.
IN WITNESS WHEREOF, The Gabelli Convertible and Income Securities Fund 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 March , 2003.
By __________________________ Name:
Title:
Attest:
Exhibit 99(a)(iv)
ARTICLES SUPPLEMENTARY
CREATING AND FIXING THE RIGHTS OF
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
The Gabelli Convertible and Income Securities Fund 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 August 21, 2002, pursuant to authority expressly vested in the Board of Directors of the Corporation by Article V of the Charter of the Corporation, adopted a resolution reclassifying 2,000,000 unissued shares of the Common Stock, par value $.001 per share, of the Corporation as Preferred Stock. At a meeting duly convened and held on February 19, 2003, the Board of Directors of the Corporation, pursuant to authority expressly vested in it by Article V of the Charter of the Corporation, adopted a resolution designating 5,000 authorized and unissued shares of Preferred Stock as "Series C Auction Rate Preferred Stock."
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 Stock: A series of [__] 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 Stock"). Each share of Series C Preferred Stock 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 Stock of the Corporation, as are set forth in these Articles Supplementary. The Series C Preferred Stock shall constitute a separate series of Preferred Stock.
As used in these Articles Supplementary, unless the context requires otherwise, each capitalized term shall have the meaning ascribed to it in paragraph 13 of Article I and paragraph 1 of Article II of these Articles Supplementary.
Article I: Series C Preferred Stock Terms
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series C Preferred Stock is [ ]. No fractional shares of Series C Preferred Stock shall be issued.
(b) Shares of Series C Preferred Stock 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) The Series C Preferred Stock shall rank on a parity with any other series of Preferred Stock as to the payment of dividends to which such stock is entitled.
(d) No Holder of Series C Preferred Stock 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 Stock or other securities of the Corporation which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 Stock 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 immediately preceding each Dividend Payment Date for Series C Preferred Stock, an aggregate amount of immediately available funds equal to the dividends to be paid to all Holders of such Series C Preferred Stock 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 Stock shall be paid on the Dividend Payment Date therefor to the Holders of Series C Preferred Stock as their names appear on the stock ledger or stock records of the Corporation on the Business Day immediately 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 the Outstanding shares of Series C Preferred Stock, 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 Stock 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 shares of Series C Preferred Stock being the subject of Submitted Hold Orders), then the dividend rate on each Outstanding share of Series C Preferred Stock 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)(i) 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 immediately 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 Outstanding shares of Series C Preferred Stock 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 immediately preceding the relevant Dividend Payment Date, the full amount of any declared dividend on the Outstanding shares of Series C Preferred Stock then payable on that Dividend Payment Date (a "Dividend 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 shares of Series C Preferred Stock shall have been deposited irrevocably in trust in same-day funds with the Paying Agent. In the case of a Dividend Default, the following shall apply:
1. Each Dividend Period that commences during a Default Period will be a Standard Dividend Period.
2. The dividend rate for each Dividend Period that commences and concludes during a Default Period will be equal to the Default Rate.
3. In the event a Dividend Period commences during a Default Period and such Dividend Period continues after such Default Period has ended (a) the dividend rate for the portion of such Dividend Period that occurs during the Default Period will be the Default Rate and (b) the dividend rate for the portion of such Dividend Period that falls outside the Default Period will be (i) the Applicable Rate, in the case of the Dividend Period during which a default with respect to the previous period occurs, or (ii) the Maximum Rate, in the case of any other Dividend Period commencing during a Default Period.
4. The commencement of a Default Period will not by itself cause the commencement of a new Dividend Period.
5. No Auction will be held during an applicable Default Period; provided, however, that if a Default Period shall end prior to the end of a Standard Dividend Period that had commenced during such Default Period, an Auction will be held on the last day of such Standard Dividend Period.
(iii) No Default Period with respect to a Dividend Default or Redemption Default shall be deemed to have commenced, unless such default is due solely to the willful failure of the Corporation, if the amount of any dividend or any Redemption Price due 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 shares of Series C Preferred Stock 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 share of Series C Preferred Stock 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 relevant Applicable Rate, Default Rate or Maximum Rate, as the case may be, 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 share of Series C Preferred Stock was Outstanding and for which the Applicable Rate, Maximum 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 share of Series C Preferred Stock 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 360.
(d) Any dividend payment made on shares of Series C Preferred Stock shall first be credited against the earliest accumulated but unpaid dividends due with respect to such shares.
(e) For so long as shares of the Series C Preferred Stock are Outstanding, except as otherwise contemplated by Article I of these Articles Supplementary, the Corporation shall not pay 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 Stock or other stock, if any, ranking junior to the Series C Preferred Stock as to dividends and upon liquidation) with respect to Common Stock or any other capital stock of the Corporation ranking junior to the Series C Preferred Stock as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Stock or other capital stock ranking junior to the Series C Preferred Stock (except by conversion into or exchange for shares of the Corporation ranking junior to the Series C Preferred Stock 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 Basic Maintenance Amount and the 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 Stock (or shall have been declared and sufficient funds for the payment thereof deposited with the applicable Paying Agent) and (iii) the Corporation has redeemed the full number of shares of Preferred Stock to be redeemed mandatorily pursuant to any provision for mandatory redemption contained herein, including, without limitation, any such provision contained in paragraph 3(a)(ii).
(f) No full dividends shall be declared or paid on the Series C Preferred Stock for any Dividend Period or part thereof, unless full cumulative dividends due through the most recent Dividend Payment Dates therefor for all Outstanding shares of series of Preferred Stock of the Corporation ranking on a parity with the Series C Preferred Stock as to the payment of dividends have been or contemporaneously are declared and paid through the most recent Dividend Payment Dates therefor. If full cumulative dividends due have not been paid on all Outstanding shares of such Preferred Stock, any dividends being paid on such shares of Preferred Stock (including the Series C Preferred Stock) will be paid as nearly pro rata as possible in proportion to the respective amounts of dividends accumulated but unpaid on each such series of Preferred Stock then outstanding on the relevant Dividend Payment Date.
3. Redemption.
(a) (i) Optional Redemption. 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, shares of Series C Preferred Stock by delivering a notice of redemption not less than 7 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 Assets 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 Stock 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 Basic Maintenance Amount and the 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) shall be applicable in such circumstances in the event the Corporation makes the deposit and takes the other action required thereby.
(ii) Mandatory Redemption. So long as shares of Series C
Preferred Stock are Outstanding, if the Corporation fails (A) as of any
Valuation Date to meet the Basic Maintenance Test and such failure is not
cured by the 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
Series C 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 Basic Maintenance Amount Cure Date
or Series C Asset Coverage Cure Date, a "Cure Date"), Preferred Stock, which
at the Corporation's determination may include Series C Preferred Stock, 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, subject to the
limitations of the 1940 Act and Maryland law, from among all series of
Preferred Stock then Outstanding and may include any proportion of Series C
Preferred Stock or any other series of Preferred Stock. 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 Stock 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 Basic Maintenance Test, the 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 Stock 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;
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 shares of Series C Preferred Stock,
which when aggregated with other shares of Preferred Stock redeemed by the
Corporation, permits the Corporation to have (x) Eligible Assets with Adjusted
Value with respect to the Preferred Stock remaining Outstanding of as great as
110% of the Basic Maintenance Amount and (y) Asset Coverage with respect to
the Pre ferred Stock remaining Outstanding of as much 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 Stock relating to: (A) a failure to meet the Basic Maintenance Test, no later than 30 days after the Corporation last met the Basic Maintenance Test, (B) a failure to meet the Asset Coverage, no later than 30 days after the Series C 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 on such redemption date the number of shares of Series C Preferred Stock and other Preferred Stock with respect to which it has given notice of redemption as it shall have legally available funds, or is otherwise able, to redeem ratably on the basis of Redemption Price from each holder whose shares are to be redeemed and the remainder of the Series C Preferred Stock and 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 Stock pursuant to paragraph 3(b) to Holders of shares of Series C Preferred Stock to be redeemed. The Corporation will deposit with the Paying Agent funds sufficient to redeem the specified number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock are to be redeemed pursuant to this 3(a)(iii), the number of shares of Series C Preferred Stock to be redeemed shall be redeemed pro rata from the Holders of such shares in proportion to the number of shares of Series C Preferred Stock 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 Stock 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 7th 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 shares of Series C Preferred Stock 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 Stock 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 or percentage of shares of Series C Preferred Stock 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 of these Articles Supplementary under which redemption shall be made. If fewer than all the Outstanding shares of Series C Preferred Stock held by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall also specify the number or percentage of shares of Series C Preferred Stock to be redeemed from such Holder. 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.
(c) Notwithstanding the provisions of paragraph 3(a), the Corporation shall not redeem shares of Preferred Stock unless all accumulated and unpaid dividends on all Outstanding shares of Series C Preferred Stock for all applicable past Dividend Periods (whether or not earned or declared by the Corporation) have been or are contemporaneously paid or declared and Deposit Assets for the payment of such dividends have been deposited with the Paying Agent; 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 shares of Series C Preferred Stock 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 Basic Maintenance Test or the Asset Coverage), and all rights of the Holders of the shares of Series C Preferred Stock 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 shares of Series C Preferred Stock called for redemption on such date and (ii) such other amounts, if any, to which Holders of the Series C Preferred Stock 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 shares of Series C Preferred Stock 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) A Default Period with respect to the Outstanding shares of Series C Preferred Stock 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 preceding the redemption date specified in the Notice of Redemption (the "Redemption Date") or the full amount of any Redemption Price payable on such Redemption Date (a "Redemption Default"); provided, that no Redemption Default shall be deemed to have occurred in respect of Series C Preferred Stock when the related Redemption Notice provides that the redemption of such Series C Preferred Stock is subject to one or more conditions precedent and each such condition precedent shall not have been satisfied at the time or times or in the manner specified in such Notice of Redemption. To the extent a Redemption Default occurs with respect to Series C Preferred Stock or that any redemption for which Notice of Redemption has been given 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. Notwithstanding the fact that a Redemption Default has occurred and is continuing or theat the Corporation has otherwise failed to redeem shares of Series C Preferred Stock for which a Notice of Redemption has been given (other than because of the failure of a condition precedent set forth in such Notice of Redemption), dividends may be declared and if so declared will be paid on Series C Preferred Stock, which shall include those shares of Series C Preferred Stock 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 shares of Series C Preferred Stock called for redemption shall be held in trust by the Paying Agent for the benefit of Holders of the Series C Preferred Stock 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).
(g) So long as the Series C Preferred Stock is 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 Stock 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 shares of Series C Preferred Stock for which Notice of Redemption has been given and the Corporation meets the Asset Coverage and the Basic Maintenance Test after giving effect to such purchase or acquisition on the date thereof. Any shares of Series C Preferred Stock which are purchased, redeemed or otherwise acquired by the Corporation shall have no voting rights. If fewer than all the Outstanding shares of Series C Preferred Stock 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 Stock 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 Stock 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 (i) the net proceeds from the sale of such stock (or such portion thereof needed to redeem or repurchase the Outstanding shares of Series C Preferred Stock) are deposited with the Auction Agent, Notice of Redemption as contemplated by paragraph 3(b) has been delivered prior thereto or is sent promptly thereafter, and such proceeds are used to redeem all Outstanding shares of Series C Preferred Stock or (ii) the Corporation would meet the Asset Coverage, the Basic Maintenance Test and the requirements of paragraph 9.
4. Designation of Dividend Period.
(a) The initial Dividend Period for the Series C Preferred Stock
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 Stock; 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
Stock shall have been cured as provided for herein, (iii) Sufficient Clearing
Orders shall have existed in an Auction held for the Series C Preferred Stock
on the Auction Date immediately preceding the first day of such proposed
Special Dividend Period, (iv) if the Corporation shall have mailed a Notice of
Redemption with respect to any shares of Series C Preferred Stock, the
Redemption Price with respect to such shares shall have been deposited with
the Paying Agent and (v) 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 Basic
Maintenance Amount, and the Corporation has consulted with the Broker-Dealers
and has provided notice of such designation and a 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 Stock 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 C Preferred Stock through different Broker-Dealers), advises the Auction Agent of such transfer. Any certificates representing Series C Preferred Stock 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) General.
Except as otherwise provided by law or as specified in the Charter, each Holder of Series C Preferred Stock 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 Common Stock 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 Stock, 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 as a class. Subject to paragraph 6(b), the Holders of outstanding shares of capital stock of the Corporation, including the Holders of Outstanding shares of Preferred Stock, includ ing Series C Preferred Stock, voting as a single class, shall elect the balance of the directors.
(b) Right to Elect Majority of Board of Directors.
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 Pre ferred 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. The Corporation and the Board of Directors shall take all necessary action, including amending the Corporation's by-laws, to effect an increase in the number of directors as described in the preceding sentence. 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 Stock 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) Right to Vote with Respect to Certain Other Matters.
So long as the Series C Preferred Stock is 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, consolida tion 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 Stock or any other Preferred Stock. To the
extent permitted under the 1940 Act, in the event shares of more than one
series of Preferred Stock are Outstanding, the Corporation shall not effect
any of the actions set forth in the preceding sentence which materially
adverse ly 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 Stock, 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. 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 Stock, 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 Stock) 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) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the Holders of shares of Preferred Stock, including the Series C Preferred Stock, 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 Stock, 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 Stock, 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 120 days after the original record date.
(ii) For purposes of determining any rights of the Holders of the shares of Preferred Stock, including the Series C Preferred Stock, 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 share of Series C Preferred Stock which is not Outstanding shall not be counted.
(iii) 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 Stock, 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 Stock, 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.
(iv) 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 Stock, pursuant to paragraph 6(b) above shall expire, 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 Stock, to elect additional directors pursuant to paragraph 6(b) above shall cease, subject to the provisions of the last sentence of paragraph 6(b). Upon the expiration of the terms of the directors elected by the holders of Preferred Stock pursuant to paragraph 6(b) above, the number of directors shall be automatically reduced to the number and composition of directors on the Board immediately preceding such Voting Period.
(e) Exclusive Remedy.
Unless otherwise required by law, the Holders of Series C Preferred Stock shall not have any rights or preferences other than those specifically set forth herein. The Holders of Series C Preferred Stock 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 Stock, the exclusive remedy of the Holders shall be the right to vote for directors pursuant to the provisions of this paragraph 6.
(f) Notification to Rating Agency.
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 Stock is 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 Stock 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 Stock or any other stock of the Corporation ranking junior to the Series C Preferred Stock 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 there on), 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 shares of Series C Preferred Stock, and any other Outstanding class or series of Preferred Stock ranking on a parity with the Series C Preferred Stock as to payment upon liquidation, shall be insufficient to permit the payment in full to such Holders of Series C Preferred Stock 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 Stock 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 Hold ers of shares of Series C Preferred Stock, no dividends or distributions will be made to holders of shares of the Common Stock or any other stock of the Corporation ranking junior to the Series C Preferred Stock as to liquidation.
8. Auction Agent.
For so long as shares of the Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of the Series C Preferred Stock are Outstanding, the Corporation shall make the following determinations:
(i) Asset Coverage as follows:
(A) As of each Valuation Date, the Corporation shall determine whether the Asset Coverage is met as of that date.
(B) The Corporation shall deliver to each Rating Agency an
"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 Series C Asset Coverage Cure Date
following a failure to meet Asset Coverage. Such 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) Basic Maintenance Amount as follows:
(A) For so long as the Series C Preferred Stock is rated by Moody's and/or Fitch at the Corporation's request, the Corporation shall maintain, on each Valuation Date, Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount, as of such Valuation Date. Upon any failure to main tain Eligible Assets having an Adjusted Value at least equal to the 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 Basic Maintenance Amount on or prior to the 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 Basic Maintenance Amount, and on the fifth Business Day after the Basic Maintenance Amount Cure Date with respect to such Valuation Date, the Corporation shall complete and deliver to each Rating Agency a Basic Maintenance Report as of the date of such failure or such Basic Maintenance Amount Cure Date, as the case may be, which will be deemed to have been delivered to such Rating Agency, as the case may be, if such Rating Agency receives a copy or facsimile or other electronic transcription or transmission thereof and on the same day the Corporation mails or sends to such Rating Agency for delivery on the next Business Day the full Basic Maintenance Report. The Corporation shall also deliver a Basic Maintenance Report to each Rating Agency as of any Annual Valuation Date, in each case on or before the fifth Business Day after such day. A failure by the Corporation to deliver a Basic Maintenance Report pursuant to the preceding sentence shall be deemed to be delivery of a Basic Maintenance Report indicating the Discounted Value for all assets of the Corporation is less than the Basic Maintenance Amount, as of the relevant Valuation Date.
(C) Within ten Business Days after the date of delivery of a Basic Maintenance Report in accordance with paragraph 9(a)(ii)(B) relating to any Annual Valuation Date, the Corporation shall cause the Independent Accountant to send an Accountant's Confirmation to each Rating Agency with respect to such Basic Maintenance Report.
(D) Within ten Business Days after the date of delivery of a Basic Maintenance Report in accordance with paragraph 9(a)(ii)(B) relating to each, if any, Valuation Date on which the Corporation failed to satisfy the Basic Maintenance Amount and the Basic Maintenance Amount Cure Date with respect to such failure to satisfy the Basic Maintenance Amount, the Corporation shall cause the Independent Accountant to provide to each Rating Agency an Accountant's Confirmation as to such Basic Maintenance Report.
(E) If any Accountant's Confirmation delivered pursuant to paragraph (C) or (D) of this paragraph 9(a)(ii) does not agree with the Corporation's calculation of the 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 Basic Maintenance Report to the relevant Rating Agency 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 Stock, the Corporation shall complete and deliver to each Rating Agency a 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 Stock or (2) the ratio of the Discounted Value of Eligible Assets in respect of any Rating Agency to the 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 Basic Maintenance Report as of the date of either such event.
(b) Failure to Meet Asset Coverage Requirements.
If the Corporation fails to have Asset Coverage as provided in paragraph 9(a)(i) or to have Eligible Assets having an Adjusted Value at least equal to the Basic Maintenance Amount as provided in paragraph 9(a)(ii)(A) and such failure is not cured by the applicable Cure Date, Preferred Stock, which at the Corporation's determination may include any proportion of Series C Preferred Stock, will be subject to mandatory redemption as set forth in paragraph 3.
(c) Status of Series C Preferred Stock 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 share of the Series C Preferred Stock or other Preferred Stock 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 (or applicable dividend-disbursing agent) and the requisite Notice of Redemption shall have been given, and (ii) such Deposit Assets deposited with the Paying Agent (or dividend-disbursing agent) shall not be included.
10. Certain Other Restrictions.
(a) For so long as the shares of Series C Preferred are 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 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 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 Basic Maintenance Amount or (iii) declare or pay any dividend or other distribution on any Common Stock or repurchase any Common Stock, 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 paragraph 9(a)(ii).
(b) For so long as the shares of Series C Preferred Stock 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 that is maintained at all times in an amount equal to at least 100% of the then 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.
(c) For so long as the shares of Series C Preferred Stock 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 Person 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 the shares of Series C Preferred Stock are Out standing, 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 the shares Series C Preferred Stock are Out standing, 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 shares of Series C Preferred Stock and other Preferred Stock then Outstanding, provided that (i) the Corporation shall, immediately after giving effect to the issuance of such addi tional shares of Preferred Stock and to its receipt and application of the proceeds thereof including, without limitation, to the Redemption of Preferred Stock for which a Redemption Notice has been mailed prior to such issuance, have an "asset cover age" for all senior securities which are stock, as defined in Section 18(h) of the 1940 Act, of at least 200% of the shares of Series C Preferred Stock and all other Preferred Stock of the Corporation then Outstanding, and (ii) no such additional Preferred Stock (including any additional Series C Preferred Stock) 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 shares of Series C Preferred Stock 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.
Unless the context or use indicates another or different meaning or intent, each of the following terms when used in these Articles Supplementary shall have the meaning ascribed to it below, whether such term is used in the singular or plural and regardless of tense:
"'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 seven 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 Basic Maintenance Reports substantially to the effect that:
(a) the Independent Accountant has read the Basic Maintenance Report or Reports prepared by the Administrator during the referenced calendar year that are referred to in such letter;
(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 a Pricing 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 has it 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; and (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 applicable 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.
"ADRs" means U.S. dollar-denominated American Depository Receipts.
"Adviser" means Gabelli Funds, LLC, a New York limited liability company, or such other Person that is then serving as the investment adviser of 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.
"Annual Valuation Date" means the Valuation Date each calendar year so designated by the Corporation, commencing in the calendar year 2003.
"Applicable Rate" means, with respect to the Series C Preferred Stock, 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, or an Auction does not take place with respect to such Dividend Period because of the commencement of a Default Period, the Maximum Rate and (iii) if all shares of Series C Preferred Stock are the subject of Submitted Hold Orders for the Auction in respect thereof, the All Hold Rate.
"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 shares of Outstanding shares of Series C Preferred Stock (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 stock), 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.
"Asset Coverage Certificate" means the certificate required to be delivered by the Corporation pursuant to paragraph 9(a)(i)(B) of Article I of these Articles Supplementary.
"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" 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 that the preceding Auction Date would have been if not for the advancement procedure; 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; provided further, however, that the Auction Date following a Default Period shall be the last Business Day in the Standard Dividend Period that commenced during such Default Period. Notwithstanding the foregoing, in the event 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 will be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events).
"Auction Procedures" means the procedures for conducting Auctions as set forth in Article II of these Articles Supplementary.
"Basic Maintenance Amount" means, with respect to the shares of
Series C Preferred Stock, 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 Out standing 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 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 shares of Preferred Stock then Outstanding during the 70
days fol lowing 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 (or specifically excluded
by) 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 March 12, 2003 ated 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. Basic Maintenance Amount shall, for the purposes
of these Articles Supplementary, have a correlative meaning with respect to
any other class or series of Preferred Stock.
"Basic Maintenance Amount Cure Date" means, with respect to the shares of Series C Preferred Stock, 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, and shall, for the purposes of these Articles Supplementary, have a correlative meaning with respect to any other class or series of Preferred Stock.
"Basic Maintenance Test" means, with respect to the shares of Series C Preferred Stock, a test which is met if the lower of the aggregate Discounted Values of the Moody's Eligible Assets or the Fitch Eligible Assets if both Moody's and Fitch are then rating the shares of Series C Preferred Stock at the request of the Corporation, or the Eligible Assets of whichever of Moody's or Fitch is then doing so if only one of Moody's or Fitch is then rating the Series C Preferred Stock at the request of the Corporation, meets or exceeds the Basic Maintenance Amount.
"Basic Maintenance Report" or "Report" means, with respect to the shares of Series C Preferred Stock, a report prepared by the Administrator which sets forth, as of the related Valuation Date, Moody's Eligible Assets and Fitch Eligible Assets sufficient to meet or exceed the Basic Maintenance Amount, the Market Value and Discounted Value thereof (seriatim and in the aggregate), and the Basic Maintenance Amount, and shall, for the purposes of these Articles Supplementary, have a correlative meaning with respect to any other class or series of Preferred Stock.
"Beneficial Owner," with respect to the shares of Series C Preferred Stock, 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 Stock.
"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 Articles of Amendment and Restatement of the Corporation, as amended or supplemented (including these Articles Supplementary), as filed with the State Department of Assessments and Taxation of the State of Maryland.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the shares of the Corporation's common stock, par value $.001 per share.
"Corporation" means The Gabelli Convertible and Income Securities Fund Inc., a Maryland corporation.
"Cure Date" has the meaning set forth in paragraph 3(a)(ii) of Article I of these Articles Supplementary.
"Date of Original Issue" means [__] and, for the purposes of these Articles Supplementary, shall have a correlative meaning with respect to any other class or series of Preferred Stock.
"Default" has the meaning set forth in paragraph 2(c)(ii) of Article I of these Articles Supplementary.
"Default Period" means a Dividend Default or a Redemption Default.
"Default Rate" has the meaning set forth in paragraph 2(c)(iii) of Article I of these Articles Supplementary.
"Deposit Assets" means cash, Short-Term Money Market Instruments and U.S. Government Obligations. Except for determining whether the Corporation has Eligible Assets with an Adjusted Value equal to or greater than the Basic Maintenance Amount, each Deposit Asset shall be deemed to have a value equal to its principal or face amount payable at maturity plus any interest payable thereon after delivery of such Deposit Asset but only if payable on or prior to the applicable payment date in advance of which the relevant deposit is made.
"Discount Factor" means (a) so long as Moody's is rating the shares of the shares of the Series C Preferred Stock at the Corporation's request, the Moody's Discount Factor, (b) so long as Fitch is rating the Series C Preferred Stock at the Corporation's request, the Fitch Discount Factor, and/or (c) 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) such other formula for determining the discounted value of an Eligible
Asset as may be established by an applicable Rating Agency, 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" means with respect to the Series C Auction Rate Preferred, any date on which dividends declared by the Board of Directors thereon are payable pursuant to the provisions of paragraph 2(b) of Article I of these Articles Supplementary and shall for the purposes of these Articles Supplementary have a correlative meaning with respect to any other class or series of Preferred Stock.
"Dividend Period" means, with respect to Series C Preferred Stock, 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 day prior to the next succeeding Business Day, and shall, for the purposes of these Articles Supplementary, have a correlative meaning with respect to any other class or series of Preferred Stock.
"Eligible Assets" means Moody's Eligible Assets (if Moody's is then rating the Series C Preferred Stock at the request of the Corporation), Fitch Eligible Assets (if Fitch is then rating the Series C Preferred Stock at the request of the Corporation), and/or Other Rating Agency Eligible Assets, whichever is applicable.
"Fitch" means Fitch Ratings.
"Fitch Discount Factor" means, for the purposes of determining the Discounted Value of any Fitch Eligible Asset, the percentage determined as follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the securities set forth below will be the percentage provided in writing by Fitch.
(a) Corporate debt securities. The percentage determined by reference to the rating of a corporate debt security in accordance with the table set forth below.
NOT
RATED
OR
TERM TO MATURITY OF CORPORATE BELOW
DEBT SECURITY UNRATED (1) AAA AA A BBB BB BB
------------------------- ------ ------ ------ ------ ------ ------
3 years or less (but longer than 1 year)........... 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years)........... 111.11 112.99 114.94 116.96 134.24 151.52
7 years or less (but longer than 5 years)........... 113.64 115.61 117.65 119.76 135.66 151.52
10 years or less (but longer than 7 years).......... 115.61 117.65 119.76 121.95 136.74 151.52
15 years or less (but longer than 10 years)......... 119.76 121.95 124.22 126.58 139.05 151.52
More than 15 years.................................. 124.22 126.58 129.03 131.58 144.55 151.52
|
(1) If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any Rating Agency, the Corporation will use the percentage set forth under "Unrated" in this table.
(b) Convertible debt securities. The Fitch Discount Factor applied to
convertible debt securities is (i) 200% for investment grade convertibles and
(ii) 222% for below investment grade convertibles so long as such convertible
debt securities have neither (1) conversion premium greater than 100% nor (2)
have a yield to maturity or yield to worst of >15.00% above the relevant
Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have conversion premiums of greater than 100% is (i) 152% for investment grade convertibles and (ii) 179% for below investment grade convertibles so long as such convertible debt securities do not have a yield to maturity or yield to worst of > 15.00% above the relevant Treasury curve. The Fitch Discount Factor applied to convertible debt securities which have a yield to maturity or yield to worst of > 15.00% above the relevant Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any Rating Agency, the Corporation will treat the security as if it were below investment grade.
(c) Preferred securities: The percentage determined by reference to the rating of a preferred security in accordance with the table set forth below.
NOT
RATED
OR
BELOW
NOT RATED OR BELOW PREFERRED SECURITY(1) AAA AA A BBB BB BB
---------------------------------------- ----- ------- ------- ------ ------- -------
Taxable Preferred.................................... 130.58% 133.19% 135.91% 138.73% 153.23% 161.08%
Dividend-Received Deduction (DRD) Preferred.......... 163.40% 163.40% 163.40% 163.40% 201.21% 201.21%
|
(1) If a security is not rated by Fitch but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a Fitch rating of BBB+ will be used). If a security is not rated by Fitch but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a Fitch rating of BB- will be used). If a security is not rated by any Rating Agency, the Corporation will use the percentage set forth under "Unrated" in this table.
(d) U.S. Government Obligations and U.S. Treasury Strips:
DISCOUNT TIME REMAINING TO MATURITY FACTOR
1 year or less........................................................... 100% 2 years or less (but longer than 1 year)................................. 103% 3 years or less (but longer than 2 years)................................ 105% 4 years or less (but longer than 3 years)................................ 107% 5 years or less (but longer than 4 years)................................ 109% 7 years or less (but longer than 5 years)................................ 112% 10 years or less (but longer than 7 years)............................... 114% 15 years or less (but longer than 10 years).............................. 122% 20 years or less (but longer than 15 years).............................. 130% 25 years or less (but longer than 20 years).............................. 146% Greater than 30 years.................................................... 154% |
(e) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without limitation Debt
Securities, Short-Term Money Market Instruments and municipal debt
obligations, will be (i) 100%, so long as such portfolio securities mature or
have a demand feature at par exercisable within the Fitch Exposure Period;
(ii) 115%, so long as such portfolio securities mature or have a demand
feature at par not exercisable within the Fitch Exposure Period; and (iii)
125%, so long as such portfolio securities neither mature nor have a demand
feature at par exercisable within the Fitch Exposure Period. A Fitch Discount
Factor of 100% will be applied to cash.
(f) Rule 144A Securities: The Fitch Discount Factor applied to Rule 144A Securities will be 110% of the Fitch Discount Factor which would apply were the securities registered under the 1933 Act.
(g) Foreign Bonds: The Fitch Discount Factor (i) for a Foreign Bond
the principal of which (if not denominated in U.S. dollars) is subject to a
currency hedging transaction will be the Fitch Discount Factor that would
otherwise apply to such Foreign Bonds in accordance with this definition and
(ii) for (1) a Foreign Bond the principal of which (if not denominated in U.S.
dollars) is not subject to a currency hedging transaction and (2) a bond
issued in a currency other than U.S. dollars by a corporation, limited
liability company or limited partnership domiciled in, or the government or
any agency, instrumentality or political subdivision of, a nation other than
an Approved Foreign Nation, will be 370%.
"Fitch Eligible Assets" means:
(a) cash (including interest and dividends due on assets rated
(i) BBB or higher by Fitch or the equivalent by another Rating Agency if the
payment date is within five Business Days of the Valuation Date, (ii) A or
higher by Fitch or the equivalent by another Rating Agency if the payment date
is within thirty days of the Valuation Date, and (iii) A+ or higher by Fitch
or the equivalent by another Rating Agency if the payment date is within the
Fitch Exposure Period) and receivables for Fitch Eligible Assets sold if the
receivable is due within five Business Days of the Valuation Date, and if the
trades which generated such receivables are settled within five Business Days;
(b) Short-Term Money Market Instruments so long as (i) such securities are rated at least F1+ by Fitch or the equivalent by another Rating Agency, (ii) in the case of demand deposits, time deposits and overnight funds, the supporting entity is rated at least A by Fitch or the equivalent by another Rating Agency, or (iii) in all other cases, the supporting entity (1) is rated at least A by Fitch or the equivalent by another Rating Agency and the security matures within one month, (2) is rated at least A by Fitch or the equivalent by another Rating Agency and the security matures within three months or (3) is rated at least AA by Fitch or the equivalent by another Rating Agency and the security matures within six months;
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) debt securities if such securities have been registered under the 1933 Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the 1933 Act as determined by the Corporation's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors of the Corporation; and such securities are issued by (i) a U.S. corporation, limited liability company or limited partnership, (ii) a corporation, limited liability company or limited partnership domiciled in Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom (the "Approved Foreign Nations"), (iii) the government of any Approved Foreign Nation or any of its agencies, instrumentalities or political subdivisions (the debt securities of Approved Foreign Nation issuers being referred to collectively as "Foreign Bonds"), (iv) a corporation, limited liability company or limited partnership domiciled in Canada or (v) the Canadian government or any of its agencies, instrumentalities or political subdivisions (the debt securities of Canadian issuers being referred to collectively as "Canadian Bonds"). Foreign Bonds held by the Corporation will qualify as Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held by the Corporation will qualify as Fitch Eligible Assets only up to a maximum of 20% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. Notwithstanding the limitations in the two preceding sentences, Foreign Bonds and Canadian Bonds held by the Corporation will qualify as Fitch Eligible Assets only up to a maximum of 30% of the aggregate Market Value of all assets constituting Fitch Eligible Assets. In addition, bonds which are issued in connection with a reorganization under U.S. federal bankruptcy law ("Reorganization Bonds") will be considered debt securities constituting Fitch Eligible Assets if (1) they provide for periodic payment of interest in cash in U.S. dollars or Euros; (2) they do not provide for conversion or exchange into equity capital at any time over their lives; (3) they have been registered under the 1933 Act or are restricted as to resale under federal securities laws but are eligible for trading under Rule 144A promulgated pursuant to the 1933 Act as determined by the Corporation's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors of the Corporation; (4) they were issued by a U.S. corporation, limited liability company or limited partnership; and (5) at the time of purchase at least one year had elapsed since the issuer's reorganization. Reorganization Bonds may also be considered debt securities constituting Fitch Eligible Assets if they have been approved by Fitch, which approval shall not be unreasonably withheld. All debt securities satisfying the foregoing requirements and restrictions of this paragraph (d) are herein referred to as "Debt Securities."
(e) Preferred stocks if (i) dividends on such preferred stock are cumulative, (ii) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive equity capital at any time over the respective lives of such securities, (iii) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a preferred stock has a senior debt rating or preferred stock rating from Fitch of BBB- or higher or the equivalent rating by another Rating Agency. In addition, the preferred stocks issue must be at least $50 million;
(f) Asset-backed and mortgage-backed securities;
(g) Rule 144A Securities;
(h) Bank Loans;
(i) Municipal debt obligation that (i) pays interest in cash
(ii) is part of an issue of municipal debt obligations of at least $5 million,
except for municipal debt obligations rated below A by Fitch or the equivalent
rating by another Rating Agency, in which case the minimum issue size is $10
million;
(j) Tradable credit baskets (e.g., Traded Custody Receipts or TRACERS and Targeted Return Index Securities Trust or TRAINS);
(k) Convertible debt and convertible preferred stocks;
(l) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in this definition may be included in Fitch Eligible Assets, but, with respect to any financial contract, only upon receipt by the Corporation of a writing from Fitch specifying any conditions on including such financial contract in Fitch Eligible Assets and assuring the Corporation that including such financial contract in the manner so specified would not affect the credit rating assigned by Fitch to the Series C Auction Rate Preferred;
(m) Interest rate swaps entered into according to International Swap Dealers Association ("ISDA") standards if (i) the counterparty to the swap transaction has a short-term rating of not less than F1 by Fitch or the equivalent by another, Nationally Recognized Statistical Ratings Organization ("NRSRO"), or, if the swap counterparty does not have a short-term rating, the counterparty's senior unsecured long-term debt rating is AA or higher by Fitch or the equivalent by another NRSRO and (ii) the original aggregate notional amount of the interest rate swap transaction or transactions is not greater than the liquidation preference of the shares of Series C Auction Rate Preferred originally issued.
Where the Corporation sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Fitch Eligible Asset and the amount the Corporation is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Corporation purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Corporation thereby will constitute a Fitch Eligible Asset if the long-term debt of such other party is rated at least A- by Fitch or the equivalent by another Rating Agency and such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible Asset to the extent that it has been irrevocably deposited for the payment of (a)(i) through (a)(iv) under the definition of Basic Maintenance Amount or to the extent it is subject to any liens, except for (1) liens which are being contested in good faith by appropriate proceedings and which Fitch has indicated to the Corporation will not affect the status of such asset as a Fitch Eligible Asset, (2) liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (3) liens to secure payment for services rendered or cash advanced to the Corporation by its investment manager or portfolio manager, the Corporation's custodian, transfer agent or registrar or the Auction Agent and (4) liens arising by virtue of any repurchase agreement.
Portfolio holdings as described above must be within the following diversification and issue size requirements in order to be included in Fitch's Eligible Assets:
MAXIMUM MAXIMUM MAXIMUM
MINIMUM SINGLE SINGLE ISSUE SIZE ($ IN
SECURITY ISSUER (1) INDUSTRY (1)(2) MILLION) (3)
---------------------- ---------- --------------- ----------------
AAA................... 100% 100% $100
AA-................... 20 75 100
A-.................... 10 50 100
BBB-.................. 6 25 100
BB-................... 4 16 50
B-.................... 3 12 50
CCC................... 2 8 50
|
(1) Percentages represent a portion of the aggregate market value of corporate
debt securities.
(2) Industries are determined according to Fitch's Industry Classifications,
as defined herein.
(3) Preferred stock has a minimum issue size of $50 million.
"Fitch Exposure Period" means the period commencing on (and including) a given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" means purchases or sales of exchange-traded financial futures contracts based on any index approved by Fitch or Treasury Bonds, and purchases, writings or sales of exchange-traded put options on such futures contracts, any index approved by Fitch or Treasury Bonds and purchases, writings or sales of exchange-traded call options on such financial futures contracts, any index approved by Fitch or Treasury bonds ("Fitch Hedging Transactions"), subject to the following limitations:
(a) The Corporation may not engage in any Fitch Hedging Transaction based on any index approved by Fitch (other than transactions that terminate a futures contract or option held by the Corporation by the Corporation's taking the opposite position thereto ("closing transactions")) that would cause the Corporation at the time of such transaction to own or have sold outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal.
(b) The Corporation will not engage in any Fitch Hedging Transaction based on Treasury Bonds (other than closing transactions) that would cause the Corporation at the time of such transaction to own or have sold:
(i) Outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate market value exceeding 20% of the aggregate market value of Fitch Eligible Assets owned by the Corporation and rated AA by Fitch (or, if not rated by Fitch Ratings, rated Aa by Moody's; or, if not rated by Moody's, rated AAA by S&P) or
(ii) Outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate market value exceeding 40% of the aggregate market value of all Fitch Eligible Assets owned by the Corporation (other than Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and rated A or BBB by Fitch (or, if not rated by Fitch Ratings, rated Baa by Moody's; or, if not rated by Moody's, rated A or AA by S&P) (for purposes of the foregoing clauses (a) and (b), the Corporation shall be deemed to own futures contracts that underlie any outstanding options written by the Corporation);
(c) The Corporation may engage in closing transactions to close out any outstanding financial futures contract based on any index approved by Fitch if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Fitch and the Corporation.
(d) The Corporation may not enter into an option or futures transaction unless, after giving effect thereto, the Corporation would continue to have Fitch Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
"Fitch Industry Classifications" means, for the purposes of determining Fitch Eligible Assets, each of the following industry classifications:
1. Aerospace & Defense
2. Automobiles
3. Banking, Finance & Real Estate
4. Broadcasting & Media
5. Building & Materials
6. Cable
7. Chemicals
8. Computers & Electronics
9. Consumer Products
10. Energy
11. Environmental Services
12. Farming & Agriculture
13. Food, Beverage & Tobacco
14. Gaming, Lodging & Restaurants
15. Healthcare & Pharmaceuticals
16. Industrial/Manufacturing
17. Insurance
18. Leisure & Entertainment
19. Metals & Mining
20. Miscellaneous
21. Paper & Forest Products
22. Retail
23. Sovereign
24. Supermarkets & Drugstores
25. Telecommunications
26. Textiles & Furniture
27. Transportation
28. Utilities
"Holder" means, with respect to shares of the Preferred Stock, including shares of the Series C Preferred Stock, 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 Accountant" 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 share of Series C Preferred Stock, have the meaning set forth in paragraph 7(a) of Article I of these Articles Supplementary and shall, for the purposes of these Articles Supplementary, 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 to the Administrator by two recognized
securities dealers with a minimum capitalization of $25,000,000 (or otherwise
approved for such purpose by Moody's and Fitch) or by one such securities
dealer and any other source (provided that the utilization of such source
would not adversely affect Moody's and Fitch's then-current rating of the
Series C Preferred Stock), at least one of which shall be provided in writing
or by telecopy, telex, other electronic transcription, computer obtained quota
tion 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 repurchase agreements) and commercial paper, with a maturity of 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, compa rable interest rates and maturities provided by two recognized securities dealers having minimum capitalization of $25,000,000 (or otherwise approved for such purpose by Moody's and Fitch) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and Fitch's then-current rating of the Series C Preferred Stock) to the Administrator, at least one of which shall be provided in writing or by telecopy, telex, other electronic transcrip tion, 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 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 Fitch) or by one such dealer and any other source (provided that the utilization of such source would not adversely affect Moody's and Fitch's then-current rating of the Series C Preferred Stock) 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, plus (ii) accrued interest on such indebtedness.
"Maximum Rate" means, on any date on which the Applicable Rate is determined, the applicable percentage of (i) in the case of a dividend period of 184 days or less, 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 Fitch 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 Corporation would be in compliance with the 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 Fitch 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% |
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Discount Factor" means, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows. According to Moody's guidelines, in addition to standard monthly reporting, the Corporation must notify Moody's if the portfolio coverage ratio of the discounted value of Moody's Eligible Assets to liabilities is less than 130%. Computation of rating agency asset coverage ratio requires use of the Diversification Table prior to applying discount factors noted below and after identifying Moody's eligible assets for purposes of completing basic maintenance tests. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth below will be the percentage provided in writing by Moody's.
(a) Convertible securities (including convertible preferreds):
DISCOUNT FACTORS (1)
RATINGS(2) UTILITY INDUSTRIAL FINANCIAL TRANSPORTATION
------------------ -------- ---------- --------- --------------
Aaa............... 162% 256% 233% 250%
Aa................ 167% 261% 238% 265%
A................. 172% 266% 243% 275%
Baa............... 188% 282% 259% 285%
Ba................ 195% 290% 265% 290%
B................. 199% 293% 270% 295%
NR(3)............. 300% 300% 300% 300%
|
(1) Discount factors are for 7-week exposure period.
(2) If a convertible security is unrated by Moody's but is rated by S&P,
a rating two numeric ratings below the S&P rating will be used (e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used;
where the S&P rating is AA+, a Moody's rating of Aa3 will be used).
(3) Unrated fixed-income and convertible securities, which are rated by
neither Moody's nor S&P, are limited to 10% of discounted Moody's
Eligible Assets. If a corporate debt security is unrated by both
Moody's and S&P, the Corporation will use the percentage set forth
under "Unrated" in this table.
Upon conversion to common stock, the discount Factors applicable to common stock will apply:
COMMON STOCKS UTILITY INDUSTRIAL FINANCIAL
----------------------------- ---------- ------------ ------------
7-week exposure period....... 170% 264% 241%
|
(b) Corporate Debt Securities (non-convertible): The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
MOODY'S RATING CATEGORY(1)
TERMS TO MATURITY OF
CORPORATE DEBT SECURITY Aaa Aa A Baa Ba B UNRATED(2)
------------------------------------------------ ---- ---- ---- ---- ---- ---- ---------
1 year or less.................................. 109% 112% 115% 118% 119% 125% 225%
2 years or less (but longer than 1 year)........ 115 118 122 125 127 133 225
3 years or less (but longer than 2 years)....... 120 123 127 131 133 140 225
4 years or less (but longer than 3 years)....... 126 129 133 138 140 147 225
5 years or less (but longer than 4 years)....... 132 135 139 144 146 154 225
7 years or less (but longer than 5 years)....... 139 143 147 152 156 164 225
10 years or less (but longer than 7 years)...... 145 150 155 160 164 173 225
15 years or less (but longer than 10 years)..... 150 155 160 165 170 180 225
20 years or less (but longer than 15 years)..... 150 155 160 165 170 190 225
30 years or less (but longer than 20 years)..... 150 155 160 165 170 191 225
Greater than 30 years........................... 165 173 181 189 205 221 225
|
(1) If a corporate debt security is unrated by Moody's but is rated by
S&P, a rating two numeric ratings below the S&P rating will be used
(e.g., where the S&P rating is AAA, a Moody's rating of Aa2 will be
used; where the S&P rating is AA+, a Moody's rating of Aa3 will be
used).
(2) Unrated corporate debt securities, which are corporate debt
securities rated by neither Moody's nor S&P, are limited to 10% of
discounted Moody's Eligible Assets. If a corporate debt security is
unrated by both Moody's and S&P, the Corporation will use the
percentage set forth under "Unrated" in this table.
The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of such securities.
(c) Preferred Stock: The Moody's Discount Factor for preferred stock shall be (i) for preferred stocks issued by a utility, 146%; (ii) for preferred stocks of industrial and financial issuers, 209%; (iii) for preferred stocks issued by real estate related issuers, 154%; and (iv) for auction rate preferred stocks, 350%.
(d) U.S. Government Obligations and U.S. Treasury Strips:
U.S. GOVERNMENT U.S.
SECURITIES TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less.................................. 107% 107%
2 years or less (but longer than 1 year)........ 113 115
3 years or less (but longer than 2 years)....... 118 121
4 years or less (but longer than 3 years)....... 123 128
5 years or less (but longer than 4 years)....... 128 135
7 years or less (but longer than 5 years)....... 135 147
10 years or less (but longer than 7 years)...... 141 163
15 years or less (but longer than 10 years)..... 146 191
20 years or less (but longer than 15 years)..... 154 218
30 years or less (but longer than 20 years)..... 154 244
|
(e) Short-Term Instruments and Cash: The Moody's Discount Factor applied to short-term portfolio securities, including without limitation short-term corporate debt securities, Short-Term Money Market Instruments and short-term municipal debt obligations, will be (i) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (ii) 115%, so long as such portfolio securities mature or have a demand feature at par not exercisable within the Moody's Exposure Period; and (iii) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash. Moody's rated Rule 2a-7 money market funds will also have a discount factor of 100%.
(f) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A Securities for Rule 144A Securities will be 130% of the Moody's Discount Factor which would apply were the securities registered under the 1933 Act.
"Moody's Eligible Assets" means:
(a) cash (including interest and dividends due on assets rated
(i) Baa3 or higher by Moody's if the payment date is within five Business Days
of the Valuation Date, (ii) A2 or higher if the payment date is within thirty
days of the Valuation Date, and (iii) A1 or higher if the payment date is
within the Moody's Exposure Period) and receivables for Moody's Eligible
Assets sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are (1)
settled through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (2) (A) with
counterparties having a Moody's long-term debt rating of at least Baa3 or (B)
with counterparties having a Moody's Short-Term Money Market Instrument rating
of at least P-1;
(b) Short-Term Money Market Instruments, so long as (i) such
securities are rated at least P-1, (ii) in the case of demand deposits, time
deposits and overnight funds, the supporting entity is rated at least A2, or
(iii) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security matures
within three months or (3) is rated at least Aa3 and the security matures
within six months. In addition, Moody's rated Rule 2a-7 money market funds are
also eligible investments.
(c) U.S. Government Obligations and U.S. Treasury Strips;
(d) Rule 144A Securities;
(e) Corporate debt securities if (i) such securities are rated B3 or higher by Moody's; (ii) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's or S&P; (iii) for debt securities rated Ba1 and below, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (iv) such securities have been registered under the 1933 Act or are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the 1933 Act as determined by the Corporation's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Directors, except that such securities that are not subject to U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded; and (v) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (1) corporate debt securities not rated at least B3 by Moody's shall be considered to be Moody's Eligible Assets only to the extent the Market Value of such corporate debt securities does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; provided, however, that if the Market Value of such corporate debt securities exceeds 10% of the aggregate Market Value of all Moody's Eligible Assets, a portion of such corporate debt securities (selected by the Corporation) shall not be considered Moody's Eligible Assets, so that the Market Value of such corporate debt securities (excluding such portion) does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; and (2) corporate debt securities rated by neither Moody's nor S&P shall be considered to be Moody's Eligible Assets only to the extent such securities are issued by entities which (A) have not filed for bankruptcy within the past three years, (B) are current on all principal and interest in their fixed income obligations, (C) are current on all preferred stock dividends, and (D) possess a current, unqualified auditor's report without qualified, explanatory language.
(f) Convertible bonds, provided that (i) the issuer of common stock must have a Moody's senior unsecured debt of B3 or better, or an S&P rating of BB or better, (ii) the common stocks must be traded on the NYSE, AMEX, or NASDAQ, (iii) dividends must be paid in U.S. dollars, (iv) the portfolio of convertible bonds must be diversified as set forth in Figure 1 below, (v) the company shall not hold shares exceeding the average weekly trading volume during the preceding month, (vi) synthetic convertibles are excluded from asset eligibility.
CONVERTIBLE BONDS DIVERSIFICATION GUIDELINES
--------------------------------------------------------------------------------
MAXIMUM SINGLE MAXIMUM SINGLE MAXIMUM SINGLE
TYPE ISSUER (%) (1) INDUSTRY (%) STATE (%) (1)
------------------ ----------------- ---------------- -----------------
Utility........... 4 50 7(2)
Other............. 6 20 n/a
|
(1) Percentage represent a portion of the aggregate market value and
number of outstanding shares of the convertible stock portfolio.
(2) Utility companies operating in more than one state should be
diversified according to the state in which they generate the largest
part of their revenues. Publicly available information on utility
company revenues by state is available from the Uniform Statistical
Report (USR) or the Federal Energy Regulation commission (FERC).
(g) Preferred stocks if (i) dividends on such preferred stock are cumulative, (ii) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, equity capital at any time over the respective lives of such securities, (iii) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (iv) the issuer of such a preferred stock has a senior debt rating from Moody's of Baa1 or higher or a preferred stock rating from Moody's of Baa3 or higher and (v) such preferred stock has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 (if the issuer of such preferred stock has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred stock without such a dividend history would also be eligible). In addition, the preferred stocks must have the following diversification requirements: (1) the preferred stock issue must be greater than $50 million and (2) the minimum holding by the Corporation of each issue of preferred stock is $500,000 and the maximum holding of preferred stock of each issue is $5 million. In addition, preferred stocks issued by transportation companies will not be considered Moody's Eligible Assets.
(h) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the Investment Company Act, not otherwise provided for in this definition but only upon receipt by the Corporation of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Corporation that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the shares of Series C Auction Rate Preferred.
(i) Interest rate swaps entered into according to International Swap Dealers Association ("ISDA") standards if (i) the counterparty to the swap transaction has a short-term rating of not less than P-1 or, if the counterparty does not have a short-term rating, the counterparty's senior unsecured long-term debt rating is Aa3 or higher and (ii) the original aggregate notional amount of the interest rate swap transaction or transactions is not to be greater than the liquidation preference of the shares of Preferred Shares originally issued. The interest rate swap transaction will be marked-to-market daily.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Moody's Eligible Assets:
MAXIMUM MAXIMUM
MAXIMUM SINGLE SINGLE MAXIMUM
SINGLE INDUSTRY(3)(4) INDUSTRY (3)(4) ISSUE SIZE
RATINGS(1) ISSUER(2)(3) NON-UTILITY UTILITY ($ IN MILLION) (5)
--------------------------- ------------- --------------- ---------------- ------------------
Aaa........................ 100% 100% 100% $100
Aa......................... 20 60 30 100
A.......................... 10 40 25 100
Baa........................ 6 20 20 100
Ba......................... 4 12 12 50 (6)
B1-B2...................... 3 8 8 50 (6)
B3 or below................ 2 5 5 50 (6)
|
(1) Refers to the preferred stock and senior debt rating of the portfolio
holding.
(2) Companies subject to common ownership of 25% or more are considered as
one issuer.
(3) Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
(4) Industries are determined according to Moody's Industry Classifications,
as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50 million.
(6) Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Corporation's total assets.
"Moody's Hedging Transactions" means purchases or sales of exchange- traded financial futures contracts based on any index approved by Moody's or Treasury Bonds, and purchases, writings or sales of exchange-traded put options on such financial futures contracts, any index approved by Moody's or Treasury Bonds, and purchases, writings or sales of exchange-traded call options on such financial futures contracts, any index approved by Moody's or Treasury Bonds, subject to the following limitations:
(a) the Corporation will not engage in any Moody's Hedging Transaction based on any index approved by Moody's (other than Closing Transactions) that would cause the Corporation at the time of such transaction to own or have sold:
(i) Outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal; or
(ii) Outstanding financial futures contracts based on any index approved by Moody's having a Market Value exceeding 50% of the Market Value of all portfolio securities of the Corporation constituting Moody's Eligible Assets owned by the Corporation;
(b) The Corporation will not engage in any Moody's Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Corporation at the time of such transaction to own or have sold:
(i) Outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by the Corporation and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S & P); or
(ii) Outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 50% of the aggregate Market Value of all portfolio securities of the Corporation constituting Moody's Eligible Assets owned by the Corporation (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by S&P);
(c) The Corporation will engage in Closing Transactions to close out any outstanding financial futures contract based on any index approved by Moody's if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Moody's and the Corporation;
(d) The Corporation will engage in a Closing Transaction to close out any outstanding financial futures contract by no later than the fifth Business Day of the month in which such contract expires and will engage in a Closing Transaction to close out any outstanding option on a financial futures contract by no later than the first Business Day of the month in which such option expires;
(e) The Corporation will engage in Moody's Hedging Transactions only with respect to financial futures contracts or options thereon having the next settlement date or the settlement date immediately thereafter;
(f) The Corporation (i) will not engage in options and futures transactions for leveraging or speculative purposes, except that an option or futures transaction shall not for these purposes be considered a leveraged position or speculative and (ii) will not write any call options or sell any financial futures contracts for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and
(g) The Corporation will not enter into an option or futures transaction unless, after giving effect thereto, the Corporation would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
"Moody's Industry Classifications" means, for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Series C Auction Rate Preferred shares).
1. Aerospace and Defense: Major Contractor, Subsystems, Research, Aircraft Manufacturing, Arms, Ammunition.
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts Manufacturing, Personal Use Trailers, Motor Homes, Dealers.
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan, Agency, Factoring, Receivables.
4. 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.
5. 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.
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural), Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints, Varnish, Fabricating Containers.
7. Packaging and Glass: Glass, Fiberglass, Containers made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass.
8. Personal and Non-Durable Consumer Products (Manufacturing Only): Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies.
9. Diversified/Conglomerate Manufacturing.
10. Diversified/Conglomerate Service.
11. Diversified Natural Resources, Precious Metals and Minerals: Fabricating, Distribution.
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and Waste Disposal.
13. Electronics: Computer Hardware, Electric Equipment, Components, Controllers, Motors, Household Appliances, Information Service Communication Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology.
14. Finance: Investment Brokerage, Leasing, Syndication, Securities.
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture Chemicals, Agricultural Equipment, Fertilizers.
16. Grocery: Grocery Stores, Convenience Food Stores.
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital Supplies, Medical Equipment.
18. Home and Office Furnishings, Housewares, and Durable Consumer Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges.
19. Hotels, Motels, Inns and Gaming.
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety.
21. Leisure, Amusement, Motion Pictures, Entertainment:
Boating, Bowling, Billiards, Musical Instruments,
Fishing, Photo Equipment, Records, Tapes, Sports,
Outdoor Equipment (Camping), Tourism, Resorts,
Games, Toy Manufacturing, Motion Picture Production
Theaters, Motion Picture Distribution.
22. Machinery (Non-Agricultural, Non-Construction, Non- Electronic): Industrial, Machine Tools, Steam Generators.
23. 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 of the foregoing.
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling.
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, T.V., Cable Broadcasting Equipment.
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport.
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order Catalog, Showroom.
28. Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular.
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes.
30. Personal Transportation: Air, Bus, Rail, Car Rental.
31. Utilities: Electric, Water, Hydro Power, Gas.
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies.
The Corporation will use SIC codes in determining which industry classification is applicable to a particular investment in consultation with the Independent Accountant and Moody's, to the extent the Corporation considers necessary.
"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.
"Non-Call Period" means a period determined by the Board of Directors after consultation with the Broker-Dealers, during which the Series C Preferred Stock subject to such Special Dividend Period is 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 Stock pursuant to paragraph 3 of Article I of these Articles Supplementary.
"Other Rating Agency" means any rating agency other than Moody's or Fitch then providing a rating for the Series C Preferred Stock 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 Stock.
"Outstanding" means, as of any date, shares of 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 shares of auction rate Preferred Stock 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 shares auction rate Preferred Stock, including shares of the Series C Preferred Stock, any such shares theretofore delivered to the applicable auction agent for cancellation or with respect to which the Corporation has given notice of redemption and irrevocably deposited with the applicable 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 any subsidiary of the Corporation is the holder or Existing Holder, as applicable, will be disregarded and deemed not Outstanding and (ii) in connection with any auction, any auction rate Preferred Stock as to which any Person known to the auction agent to be a subsidiary of the Corporation is the holder or Existing Holder, as applicable, will be disregarded and not 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 and, with respect to any other class or series of Preferred Stock, the Person appointed by the Corporation as dividend-disbursing or paying agent with respect to such class or series.
"Person" 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 shares of Series C Preferred Stock.
"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.
"Pricing Service" means any of the following: Bloomberg Financial Service, 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.
"Rating Agency" means Moody's and Fitch as long as such rating agency is then rating the Series C Preferred Stock at the Corporation's request or any other rating agency then rating the Series C Preferred Stock at the Corporation's request.
"Redemption Date" has the meaning set forth in paragraph 3(e) of Article I of these Articles Supplementary.
"Redemption Default" has the meaning set forth in paragraph 3(e) 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, and shall, for the purposes of these Articles Supplementary, have a correlative meaning with respect to any other class or series of Preferred Stock.
"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 184 days or fewer or the applicable Treasury Index Rate for a Dividend Period of longer than 184 days and, with respect to the determination of the Maximum Rate, the "AA" Financial Composite Commercial Paper Rate or the Treasury Index Rate, as appropriate.
"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 & Poor's Ratings Services, or its successors at law.
"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 shares of the Series C Preferred Stock.
"Series C Asset Coverage Cure Date" means, with respect to the failure by the Corporation to maintain 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.
"Series C Preferred Stock" means shares of 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 month, or such other date as the Corporation and Rating Agencies may agree to for purposes of determining the 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 that do not reference a specific Article of these Articles Supplementary or another document shall refer to the Article of these Articles Supplementary in which the reference occurs, unless the context otherwise requires.
Article II: Auction Procedures
1. Certain Definitions. Unless the context or use indicates another or different meaning or intent, each of the following terms when used in these Articles Supplementary shall have the meaning ascribed to it below, whether such term is used in the singular or plural and regardless of tense:
"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 Stock, 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 shares of Series C Preferred Stock 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 Stock 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 Stock or (b) any other Person who may be interested in acquiring Series C Preferred Stock 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 shares of Series C Preferred Stock are the subject of Submitted Hold Orders or that the number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock that are subject of Submitted Bids by Existing Holders specifying one or more rates higher than the Maximum Rate and (b) the number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock which, when added to the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock:
(i) each Beneficial Owner of shares of Series C Preferred Stock may submit to its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares of Series C Preferred Stock, 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 shares of Series C Preferred Stock, 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 shares of Series C Preferred Stock, 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 shares of Series C Preferred Stock, 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 shares of Series C Preferred Stock subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell if:
(A) the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock to be determined as set forth in paragraph 5(a)(iv) if the Applicable Rate for Series C Preferred Stock determined on such Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 Stock subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of Series C Preferred Stock specified in such Sell Order; or
(B) such number or a lesser number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to an Auction on any Auction Date shall constitute an irrevocable offer to purchase if:
(A) the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 Stock 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 shares of Series C Preferred Stock that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of Series C Preferred Stock:
(A) the number of shares of Series C Preferred Stock, if any, subject to any Hold Order of such Existing Holder;
(B) the number of shares of Series C Preferred Stock, if any, subject to any Bid of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares of Series C Preferred Stock, 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 Stock, the rate and number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock held by such Existing Holder, and if the number of shares subject to such Hold Orders exceeds the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock held by such Existing Holder;
(ii) (A) any Bid for Series C Preferred Stock shall be considered valid up to and including the excess of the number of Outstanding shares of Series C Preferred Stock held by such Existing Holder over the number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock is submitted to the Auction Agent with the same rate and the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 specified therein; and
(iii) all Sell Orders for shares of Series C Preferred Stock shall be considered valid up to and including the excess of the number of Outstanding shares of Series C Preferred Stock held by such Existing Holder over the sum of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock, 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 shares of Series C Preferred Stock over the number of Outstanding shares of Series C Preferred Stock subject to Submitted Hold Orders (such excess being hereinafter referred to as the "Available Preferred Shares");
(ii)from the Submitted Orders for shares of Series C Preferred Stock whether:
(A) the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to Submitted Bids of Existing Holders specifying one or more rates higher than the Maximum Rate; and
(C) the number of Outstanding shares of Series C Preferred Stock subject to Submitted Sell Orders (in the event such excess or such equality exists (other than because the number of shares of Series C Preferred Stock in clauses (a)(ii)(A) and (B) above is zero because all of the Outstanding shares of Series C Preferred Stock 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., New York City time, on each Auction Date, the Auction Agent shall advise the Corporation of the Maximum Rate for shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 Stock subject to such Submitted Bids;
(ii)Existing Holders' Submitted Bids for shares Series C Preferred Stock 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 Stock subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of Series C Preferred Stock specifying any rate that is lower than the Winning Bid Rate shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of Series C Preferred Stock specifying a rate that is equal to the Winning Bid Rate shall be rejected, thus entitling such Existing Holder to continue to hold the shares of Series C Preferred Stock subject to such Submitted Bid, unless the number of Outstanding shares of Series C Preferred Stock subject to all such Submitted Bids shall be greater than the number of shares of Series C Preferred Stock ("remaining shares") in the excess of the Available Preferred Shares over the number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to such Submitted Bid, but only in an amount equal to the shares of Series C Preferred Stock obtained by multiplying the number of remaining shares by a fraction, the numerator of which shall be the number of Outstanding shares of Series C Preferred Stock held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the aggregate number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock in the excess of the Available Preferred Shares over the number of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to such Submitted Bid and the denominator of which shall be the aggregate number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock shall be rejected:
(i) Existing Holders' Submitted Bids for shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to such Submitted Bids;
(ii)Potential Holders' Submitted Bids for shares of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to such Submitted Bid or Submitted Sell Order, but in both cases only in an amount equal to the number of shares of Series C Preferred Stock obtained by multiplying the number of shares of Series C Preferred Stock subject to Submitted Bids described in paragraph 5(b)(ii) by a fraction, the numerator of which shall be the number of Outstanding shares of Series C Preferred Stock 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 shares of Series C Preferred Stock subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of Series C Preferred Stock 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 share of Series C Preferred Stock 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 shares of Series C Preferred Stock 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 share of Series C Preferred Stock on any Auction Date, the Auction Agent shall, in such manner as it shall determine in its sole discretion, allocate shares of 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 Stock on such Auction Date.
(f) Based on the results of each Auction for shares of Series C Preferred Stock, 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 Stock. Notwithstanding any provision of the Auction Procedures to the contrary, in the event an Existing Holder or Beneficial Owner of shares of Series C Preferred Stock 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 shares of Series C Preferred Stock that have been made in respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for shares of Series C Preferred Stock 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 shares of Series C Preferred Stock or to pay for shares of Series C Preferred Stock sold or purchased pursuant to the Auction Procedures or otherwise.
6. Transfer of Series C Preferred Stock.
Unless otherwise permitted by the Corporation, a Beneficial
Owner or an Existing Holder may sell, transfer or otherwise dispose of shares
of Series C Preferred Stock 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 shares of Series C Preferred
Stock 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, 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 shares of Common Stock and is not adverse to the Holders of shares 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 shares of Series C Preferred Stock. 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, 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 Corpo ration in writing separately (a) of such adjustments and (b) that the revised calcula tion 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 applicable percentage 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 shares of the Series C Preferred Stock, 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 Basic Maintenance 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 shares of Series C Preferred Stock 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 Stock or any other capital stock of the Corporation or adversely affect the then current rating on the Series C Preferred Stock by any Rating Agency.
IN WITNESS WHEREOF, The Gabelli Convertible and Income Securities Fund 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 March 12, 2003.
By ______________________________
Name: Bruce N. Alpert
Title: President
Attest:
________________________________
Name: James E. McKee
Title: Secretary
|
[Articles Supplementary]
EX-99(d)(ii)
CERTIFICATE NUMBER NUMBER OF SHARES
Series B [__]% Cumulative Preferred Stock $.001 Par Value Per Share $25.00 Liquidation Preference Per Share
Cusip No. 36240B307
This certifies that Cede & Co. is the owner of 1,000,000 fully paid and non-assessable Shares of Series B [__]% Cumulative Preferred Stock, par value $.001 per share, liquidation preference $25.00 per share, of The Gabelli Convertible and Income Securities Fund 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.
Upon request, and without charge, the Fund will furnish a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitation as to dividends, qualifications, and terms and conditions of redemption of the securities represented by this Certificate.
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 March 2003.
____________________________,
As Transfer Agent and Registrar THE GABELLI CONVERTIBLE AND
INCOME SECURITIES FUND INC.
By:___________________________ By:_________________________
Authorized Signature Name: Bruce Alpert
Title: Treasurer and Vice President
Attest:_____________________
Name: James McKee
Title: Secretary
|
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK AUTHORIZED TO BE ISSUED AND, WITH RESPECT TO THE CLASSES OF STOCK WHICH MAY BE ISSUED INA SERIES, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SUCH SERIES, SO FAR AS THE SAME HAVE BEEN FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE.
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS AND NEW YORK, NEW YORK
TRANSFER FORM
FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers _______ Shares of Series B 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 B 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 B 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.
EX-99(d)(iii)
CERTIFICATE NUMBER NUMBER OF SHARES
Series C Auction Rate Cumulative Preferred Stock $.001 Par Value Per Share $25,000 Liquidation Preference Per Share
Cusip No. 36240B406
This certifies that Cede & Co. is the owner of 51,000 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 Convertible and Income Securities Fund 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.
Upon request, and without charge, the Fund will furnish a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitation as to dividends, qualifications, and terms and conditions of redemption of the securities represented by this Certificate.
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 March 2003.
____________________________,
As Transfer Agent and Registrar THE GABELLI CONVERTIBLE AND
INCOME SECURITIES FUND INC.
By:________________________________
By:___________________________ Name: Bruce Alpert
Authorized Signature Title: Treasurer and Vice President
Attest:____________________________
Name: James McKee
Title: Secretary
|
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK AUTHORIZED TO BE ISSUED AND, WITH RESPECT TO THE CLASSES OF STOCK WHICH MAY BE ISSUED INA SERIES, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SUCH SERIES, SO FAR AS THE SAME HAVE BEEN FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE.
SERIES C AUCTION RATE CUMULATIVE 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 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.
Exhibit 99(h)
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
1,000,000 Shares Series B [ ]% Cumulative Preferred Stock, Liquidation Preference $25 Per Share
1,000 Shares Series C Auction Rate Cumulative Preferred Stock Liquidation Preference $25,000 Per Share
March [ ], 2003
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 Convertible and Income Securities Fund Inc., a Maryland corporation (the "Fund"), proposes, upon the terms and conditions set forth herein, to issue and sell an aggregate of 1,000,000 shares (the "Series B Shares") of its Series B [ ]% Cumulative Preferred Stock, liquidation preference $25 per share, $0.001 par value per share (the "Series B Preferred") and an aggregate of 1,000 shares (the "Series C Shares" and together with the Series B Shares, the "Shares") of its Series C Auction Rate Cumulative Preferred Stock, liquidation preference $25,000 per share, $0.001 par value per share (the "Series C Auction Rate 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 of each of the Series B Shares and Series C Shares to be adopted in connection with the issuance of the Shares (collectively, 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 State Street Bank and Trust Company, a registrar, transfer agency and dividend reinvestment plan with Equiserve Trust Company, N.A., 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. 333-102494 and 811-05715) 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 March [ ], 2003 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 Series B Share and a purchase price of $[ ] per Series C 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 10:00 A.M., New York City time, on March [ ], 2003 (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 B Preferred, prior to the Closing Date, to be assigned a rating of Aaa by Moody's Investors Service, Inc. ("Moody's") and the Series C Auction Rate Preferred, prior to the Closing Date, to be assigned a rating of Aaa by Moody's and a rating of AAA by Fitch, Inc. ("Fitch", and together with Moody's, the "Rating Agencies").
(p) The Fund will use its best efforts to have the Series B Shares listed, subject to notice of issuance, on the NYSE on or before [ ], 2003.
(q) The Fund's registration statement on Form 8-A, under the 1934 Act, has become effective.
(r) 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.
(s) 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 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 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 that 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 that 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 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, opinions 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 B Preferred and the Series C Auction Rate 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 B Preferred and Series C Auction Rate Preferred" and "The Auction of Series C Auction Rate Preferred";
(iii) 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;
(iv) 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;
(v) 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;
(vi) 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;
(vii) The 1940 Act Notification, the Registration Statement, the Prospectus and the Fund's Registration Statement on Form 8-A under the 1934 Act 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;
(viii) 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;
(ix) 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;
(x) 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;
(xi) The Fund is duly registered with the Commission under the 1940 Act as a closed-end 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 Objective 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;
(xii) 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;
(xiii) 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;
(xiv) If the Fund operates as described in the Prospectus, the Fund will qualify as a regulated investment company under the Code; and
(xv) 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 B Preferred and Series C Auction Rate Preferred" and "The Auction of Series C Auction Rate Preferred";
(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 the Auction Agency Agreement and to issue, sell and deliver the Shares to the Underwriters as provided for herein;
(vii) Each of this Agreement and the Auction Agency 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 and the Auction Agency Agreement by the Fund, compliance by the Fund with the provisions hereof or thereof 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 at the time of the execution of this Agreement, a letter dated such date from PricewaterhouseCoopers LLP, in form and substance satisfactory to you, containing statements and information to the effect that:
(i) They are independent certified public accountants with respect to the Fund within the meaning of the 1933 Act and 1940 Act, and the applicable rules and regulations thereunder adopted by the Commission;
(ii) In their opinion, the financial statements of the Fund audited by them and included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and 1940 Act and the related rules and regulations adopted by the Commission;
(iii) They will perform the procedures (but not an audit in accordance with generally accepted auditing standards) consisting of:
(A) Reading the minutes of meetings of the Board of Directors of the Fund as set forth in the minute books through a specified date not more than three business days prior to the date of delivery of such letter;
(B) Making inquiries of certain officials of the Fund who have responsibility for financial and accounting matters regarding changes in the capital stock, net assets or long-term liabilities of the Fund as compared with the amounts shown in the latest balance sheet included in the Registration Statement or for the period from the date of the latest income statement included in the Registration Statement to a specified date not more than three business days prior to the delivery of such letter.
(iv) The letter shall also state that the information set forth under the captions "Financial Highlights", "Capitalization", "Ratings and Asset Coverage" and "Asset Maintenance Requirements" which is expressed in dollars (or percentages derived from such dollar amounts) and has been obtained from accounting records which are subject to controls over financial reporting or which has been derived directly from such accounting records by analysis or computation, is in agreement with such records or computations made therefrom, and such other procedures as the Underwriters may request and PricewaterhouseCoopers LLP are willing to perform and report upon.
(j) On the Closing Date, you shall have received from PricewaterhouseCoopers LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (i) of this Section 9, except that the specified date referred to shall be a date not more than three business days prior to Closing Date.
(k) (i) No order suspending the effectiveness of 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(k) and in Section 9(l) hereof.
(l) 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.
(m) The Fund shall have delivered and you shall have received evidence satisfactory to you that the Series B Shares are rated at least Aaa by Moody's and the Series C Shares are rated at least Aaa by Moody's and rated at least AAA by Fitch 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.
(n) 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 and the listing of the Series B Shares on
the New York Stock Exchange; (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, the stabilization legend on the inside cover page and the statements in the first, third, eighth and ninth 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 that 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 CONVERTIBLE AND INCOME
SECURITIES FUND INC.
By:_____________________________
Name:
Title:
GABELLI FUNDS, LLC
By:_____________________________
Name:
Title:
Name: 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: _______________________________
Name: Robert F. Bush, Jr.
Title: Director
SCHEDULE I
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
--------------------------------- -------------------------- -------------------
Underwriter Number of Number of
Series B Shares Series C Shares
--------------------------------- -------------------------- -------------------
Salomon Smith Barney Inc.
--------------------------------- -------------------------- -------------------
Gabelli & Company, Inc.
--------------------------------- -------------------------- -------------------
|
EX-99(k)(ii)
AUCTION AGENCY AGREEMENT
dated as of March __, 2003
Relating to
Series C Auction Rate Cumulative Preferred Stock
of
The Bank of New York, as Auction Agent
AUCTION AGENCY AGREEMENT
This Auction Agency Agreement (this "Agreement"), dated as of March __, 2003, is between The Gabelli Convertible and Income Securities Fund 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 1,000 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, each of the following terms shall have the meaning ascribed to it below, 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) "Commercial Paper Dealers" shall mean (i) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (ii) in lieu of any thereof, its respective affiliate or successor; and (iii) 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
(i) "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.
(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, as Agent of 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) a list of Holders as a result 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 (1) in a notice substantially in the form of Exhibit B to the Broker-Dealer Agreements by a Broker-Dealer of such transfer or (2) in a notice substantially in the form of Exhibit C 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 (i) the
applicable Maximum Rate and (ii)
when applicable, the Reference Rate or
the Treasury Index Rate, 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) No 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"), 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. On the date hereof the Rate Multiple is 150%. 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 will indicate, in a notice in the form of Exhibit H 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, 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.
On each Auction Date, the Auction Agent shall determine the Maximum Rate. 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.
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 C 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 D 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 E hereto, or shall fail to timely deliver either such notice or a notice in the form of Exhibit D hereto, the Auction Agent shall deliver a notice in the form of Exhibit E 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.
In the event the Fund fails to deliver amounts to the Auction Agent in accordance with the Articles Supplementary, which failure, but for the Fund delivering such amounts plus all applicable late charges to the Auction Agent by the applicable Cure Date, would result in a Default (a "Potential Default"), (a) all amounts payable by the Fund to the holders of Preferred Shares with respect to such Potential Default or Default, (b) the dividend rate or dividend rates applicable to the Dividend Period or Dividend Periods with respect to which such Potential Default or Default occurs, and (c) the dividend rate for the Dividend Period immediately following the Dividend Period during which all amounts payable by the Fund (including, without limitation, any Dividend Rate applicable to such period that is not determined at Auction, and applicable late charges, together, the "Late Charge") with respect to such Potential Default or Default are delivered by the Fund to the Auction Agent, shall be as set forth in the Articles Supplementary.
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 Intentionally Omitted.
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 this 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 this Agreement or will have been required in connection with the issuance of Preferred Shares;
(e) the execution and delivery of this 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 Amendment and Restatement (as amended) 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 this 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:
(a) 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
(b) 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 this 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 this 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 gross negligence or willful misconduct. 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).
(d) The Auction Agent, in any of its various capacities, shall hold funds uninvested unless otherwise directed by the Corporation.
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 this 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 this Agreement is unlimited unless it shall be terminated as provided in this Section 7.1. The Corporation may terminate this 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 this 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 this 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 this 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 (a) communications authorized to be by telephone pursuant to this Agreement or the Auction Procedures and (b) 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 Convertible and Income Securities
Fund Inc.
One Corporate Center
Rye, New York 10580-1422
Attention: Bruce N. Alpert
Telephone No.: 212-921-5158
Telecopier No.: 914-921-5100
If to the Auction Agent, The Bank of New York
100 Church Street, 8th Floor
New York, New York 10286
Telephone: 212-437-6166
Telecopier: 212-437-6155
|
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.
This 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) 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 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.
This 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 Corporation'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: (a) personally identifiable financial information; (b) any list, description, or other grouping of consumers that is derived from using any personally identifiable information that is not publically available; and (c) 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 governed by, and interpreted and construed in accordance with, the substantive law of the State of New York. The parties agree that all actions and proceedings arising out of this 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 CONVERTIBLE AND
INCOME SECURITIES FUND INC.
THE BANK OF NEW YORK
[Auction Agency Agreement]
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 Agency Agreement and each Broker- Dealer Agreement. Nothing contained in this Exhibit B constitutes a representation by the Corporation that in each Auction each party referred to herein will actually perform the procedures described herein to be performed by such party.
(a) By approximately 3:00 p.m., New York City time, 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 Agency Agreement and the Broker- Dealer Agreements.
EXHIBIT C
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTICE OF PROPOSED CHANGE OF
LENGTH OF DIVIDEND PERIOD OF
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
The Gabelli Convertible and Income Securities Fund 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., New York City time, 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 CONVERTIBLE AND
INCOME SECURITIES FUND INC.
Dated: __________, 20__
EXHIBIT D
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND 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.
Capitalized terms not defined herein shall have the respective meanings specified in the Articles Supplementary or Auction Agency Agreement, as the case may be.
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]
THE GABELLI CONVERTIBLE AND
INCOME SECURITIES FUND INC.
Dated: __________, 20__
EXHIBIT E
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND 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 Convertible and Income Securities Fund 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 CONVERTIBLE AND
INCOME SECURITIES FUND INC.
Dated: __________, 20___
EXHIBIT F
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTICE OF CURE OF DEFAULT ON
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that The Gabelli Convertible and Income Securities Fund Inc. (the "Corporation") has cured its Potential 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 CONVERTIBLE AND
INCOME SECURITIES FUND INC.
Dated: __________, 20___
EXHIBIT G
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
NOTICE OF CURE OF DEFAULT ON
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK
("Preferred Shares")
NOTICE IS HEREBY GIVEN that The Gabelli Convertible and Income Securities Fund 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 CONVERTIBLE AND
INCOME SECURITIES FUND INC.
Dated: __________, 20___
EXHIBIT H
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND 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 Convertible and Income Securities Fund'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 CONVERTIBLE AND
INCOME SECURITIES FUND 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 preferred shares.
EX-99(k)(iii)
BROKER-DEALER AGREEMENT
between
Dated as of [__]
Relating to
SERIES C AUCTION RATE CUMULATIVE PREFERRED STOCK OF
THE GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
BROKER-DEALER AGREEMENT dated as of ________ (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 February __, 2003, (the "Auction Agency Agreement") between the The Gabelli
Convertible and Income Securities Fund 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 as follows.
(a) 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.
(b) BD has policies and procedures in place that are reasonably designed to comply with its obligations under the provisions of the USA Patriot Act, the Bank Secrecy Act ("BSA") and any other anti-money laundering law, rule or regulation applicable to broker dealers under the BSA, or otherwise.
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 Orders 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. The Auction Agent shall have no duty to monitor whether or not the BD has complied with the provisions of this Section 2.1(e).
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, and shall promptly confirm such advice in writing, of (i) the Maximum Rate and (ii) when applicable, the Reference 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 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 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 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 (i) the
applicable Maximum Rate and
(ii) when applicable, the
Reference Rate or the
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
1:00 p.m. determinations pursuant to
4(a) of the Auction Procedures.
By approximately Auction Agent advises the
3:30 p.m. 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 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' orders 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 immediately 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 immediately 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, 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 C 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 D 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 next preceding the first day of a 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 E to the Auction Agency Agreement, or shall fail to timely deliver either such notice or a notice in the form of Exhibit D to the Auction Agency Agreement, such Auction Agent shall deliver a notice in the form of Exhibit E to the Auction Agency Agreement to BD promptly after being notified by the Corporation on such second Business Day.
2.6 Intentionally Omitted.
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 F 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[; provided, however that no delivery of notice in the form of Exhibit F shall be required if, prior to one Business Day after its receipt of the payment from the Corporation, the Auction Agent has otherwise informed BD of its receipt of payment from the Corporation.]
(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 G 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, 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.
(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.
(f) The Auction Agent shall in no event 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.
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 of judgment 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: 100 Church Street, 8th Floor
New York, New York 10286
Attention: Dealing and Trading Group - Auction Desk
Telephone No.: 212-437-6166
Facsimile No.: 212-437-6155
If to the The Gabelli Convertible and Income
Corporation, Securities Fund Inc.
addressed: One Corporate Center
Rye, New York 10580-1422
Attention: Bruce N. Alpert
Telephone No.: 212-921-5158
Facsimile No.: 914-921-5100
|
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
By:______________________________
Name: Joseph Panepinto
Title: Vice President
By:______________________________
Name:
Title:
[Broker-Dealer Agreement]
Exhibit A
To BROKER-DEALER
AGREEMENT
AUCTION BID FORM
(Submit only one Order on this Order Form) THE
GABELLI CONVERTIBLE AND INCOME SECURITIES FUND INC.
Series C Auction Rate Cumulative Preferred Stock ("Preferred Shares")
To: The Bank of New York Date of Auction
100 Church Street, 8th Floor ______________
New York, New York 10286
Attention: Dealing and Trading Group -
Auction Desk
Telephone No.: 212-437-6166
Telecopier No.: 212-437-6155
|
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 CONVERTIBLE AND INCOME SECURITIES FUND 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 CONVERTIBLE AND
| INCOME SECURITIES FUND 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 CONVERTIBLE AND INCOME SECURITIES FUND 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:
EX-99(k)(iv)
The Depository Trust Company A subsidiary of The Depository Trust & Clearing Corporation
BLANKET ISSUER LETTER OF REPRESENTATIONS
[To be Completed by Issuer]
The Gabelli Convertible and Income Securities Fund Inc.
[Name of Issuer]
The Depository Trust Company
General Counsel's Office; 49th Floor
55 Water Street
New York, NY 10041-0099
Ladies and Gentlemen:
This letter sets forth our understanding with respect to all issues (the "Securities") that Issuer shall request be made eligible for deposit by The Depository Trust Company ("DTC").
To induce DTC to accept the Securities as eligible for deposit at DTC, and to act in accordance with DTC's Rules with respect to the Securities, Issuer represents to DTC that Issuer will comply with the requirements stated in DTC's Operational Arrangements, as they may be amended from time to time.
Note: Very truly yours,
----
Schedule A contains statements The Gabelli Convertible and Income Securities Fund Inc.
that DTC believes accurately -------------------------------------------------------
describe DTC, the method of (Issuer)
effecting book-entry transfers of
securities distributed through DTC, By:
and certain related matters. ----------------------------------------------------
(Authorized Officer's Signature)
Received and Accepted:
THE DEPOSITORY TRUST COMPANY Bruce N. Alpert
-------------------------------------------------------
(Print Name)
By:
--------------------------------
One Corporate Center
-------------------------------------------------------
(Street Address)
Rye, New York 10580-1422
-------------------------------------------------------
(City) (State) (Country) (Zip Code)
(914) 921-5100
-------------------------------------------------------
(Phone Number)
Balpert@gabelli.com
-------------------------------------------------------
(E-mail Address)
|
SCHEDULE A
(To Blanket Issuer Letter of Representations)
1. The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the securities (the "Securities"). The Securities will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for [each issue of] the Securities, [each] in the aggregate principal amount of such issue, and will be deposited with DTC. [If, however, the aggregate principal amount of [any] issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.]
2. DTC, the world's largest depository, 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. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corpora tions that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.
3. Purchases of Securities under the DTC system must be made by or through Direct Partici pants, which will receive a credit for the Securities on DTC's records. The ownership interest of each actual purchaser of each Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transac tion, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.
4. To facilitate subsequent transfers, all Securities deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
5. 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. [Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.]
[6. Redemption notices shall be sent to DTC. If less than all of the Securities within an issue are being redeemed, DTCs practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.]
7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Securities unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).
8. Redemption proceeds, distributions, and dividend payments on the Securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTCs practice is to credit Direct Participants' accounts upon DTCs receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC [nor its nominee], Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
[9. A Beneficial Owner shall give notice to elect to have its Securities
purchased or tendered, through its Participant, to [Tender/Remarketing] Agent,
and shall effect delivery of such Securities by causing the Direct Participant
to transfer the Participant's interest in the Securities, on DTC's records, to
[Ten der/Remarketing] Agent. The requirement for physical delivery of
Securities in connection with an optional tender or a mandatory purchase will
be deemed satisfied when the ownership rights in the Securities are
transferred by Direct Participants on DTC's records and followed by a
book-entry credit of tendered Securities to [Tender/Remarketing] Agent's DTC
account.]
10. DTC may discontinue providing its services as depository with respect to the Securities at any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.
11. Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered.
12. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.
EX-99(l)
[Letterhead of Miles & Stockbridge P.C.]
March 12, 2003
The Gabelli Convertible and Income Securities Fund Inc.
One Corporate Center
Rye, New York 10580-1422
Ladies and Gentlemen:
We have acted as special Maryland counsel to The Gabelli Convertible and Income Securities Fund Inc., a Maryland corporation (the "Company"), in connection with the registration of (i) 1,000,000 shares of the Company's Series B Cumulative Preferred Stock, liquidation preference $25.00 per share, $0.001 par value per share (the "Series B Preferred") and (ii) 1,000 shares of the Company's Series C Auction Rate Cumulative Preferred Stock, liquidation preference $25,000 per share, $0.001 par value per share (the "Series C Auction Rate Preferred") on its Registration Statement on Form N-2, (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940.
We have examined the Registration Statement, including the exhibits thereto, and such other documents, corporate records, laws and regulations, as we have deemed necessary for the purposes of giving the opinions set forth in this opinion letter. We have relied as to certain factual matters on information obtained from public officials, officers of the Company and other sources believed by us to be responsible. Based upon that examination and subject to the assumptions and qualifications set forth herein, we are of the opinion that:
1. The Company is a duly incorporated and validly existing under the laws of the State of Maryland.
2. The Series B Preferred and the Series C Auction Rate Preferred have been duly authorized by the Company's Board of Directors, and when the Shares have been issued and sold as contemplated by the Registration Statement and consideration therefor received by the Company, such shares will be legally issued, fully paid and nonassessable.
We express no opinion with respect to the laws of, or the effect or applicability of the laws of, any jurisdiction other than the laws of the State of Maryland.
The Gabelli Convertible Income Securities Fund Inc.
March 12, 2003
We hereby consent to the filing of this opinion letter with the Registration Statement as Exhibit 99 (l) thereto. 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 Securities 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.
By: /s/ John B. Frisch --------------------------- Principal |
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration Statement on Form N-2 of our report dated February 13, 2003, relating to the financial statements and financial highlights of The Gabelli Convertible and Income Securities Fund Inc. which appears in the December 31, 2002 Annual Report to Shareholders of The Gabelli Convertible and Income Securities Fund Inc. which are 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 the Prospectus and Statement of Additional Information incorporated by reference in such Registration Statement.
/s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York March 12, 2003 |