gabelli497.htm
Filed
Pursuant to Rule 497
Registration
Statement No. 333-149864
PROSPECTUS
SUPPLEMENT
(To
Prospectus dated August 6, 2008)
[GRAPHIC
OMITTED]
21,211,510
Rights
The
Gabelli Global Deal Fund
Subscription
Rights for Series A Cumulative Callable Preferred Shares
We
are issuing subscription rights (the "Rights") to our common shareholders to
purchase Series A Cumulative Callable Preferred Shares (the "Series A
Preferred" or the "Preferred Shares"). Our common shares are listed on the New
York Stock Exchange (the "NYSE") under the symbol "GDL." The last reported NYSE
sale price of our common shares on December 18, 2008 was
$12.76.
You
should read this Prospectus Supplement and the accompanying Prospectus before
deciding whether to invest in the Series A Preferred and retain
it for future reference. The Prospectus Supplement and the
accompanying Prospectus contain important information about
us. Material that has been incorporated by reference and other
information about us can be obtained from us by calling 800-GABELLI (422-3554)
or from the Securities and Exchange Commission's ("SEC") website
(http://www.sec.gov).
You
should review the information set forth under "Risk Factors and Special
Considerations" on page 16 of the accompanying Prospectus before investing in
the Series A Preferred.
Neither
the SEC nor any state securities commission has approved or disapproved these
securities or determined if this Prospectus Supplement is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Subscription price
of Preferred Shares to shareholders exercising Rights
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$50.00
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$106,057,550
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Underwriting
discounts and commissions (1)
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$0.25
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$530,288
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Proceeds,
before expenses, to the Fund (2)
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$49.75
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$105,527,262
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(1)
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Based
on a Dealer Manager solicitation fee of $0.25 per Series A Preferred
Share.
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| (2) |
The
aggregate expenses of the offering (excluding underwriting discounts and
commissions) are estimated to be
$500,000. |
The
Series A Preferred Shares are expected to be ready for delivery in
book-entry form through the Depository Trust Company on or
about February 13, 2009. If the offer is extended, the Series A
Preferred Shares are expected to be ready for delivery in book-entry form
through the Depository Trust Company on or about February 27, 2009.
December 24, 2008
You should rely only on the
information contained or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus. The Fund has not authorized anyone to provide you with different
information. The Fund is not making an offer to sell these securities in any
state where the offer or sale is not
permitted. You should not assume that the information contained in this
Prospectus Supplement and the accompanying Prospectus is accurate as of any date
other than the date of this Prospectus Supplement and the accompanying Prospectus,
respectively.
TABLE
OF CONTENTS
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Page
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SUMMARY
OF THE TERMS OF THE RIGHTS OFFERING
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Q-4
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TERMS
OF THE SERIES A PREFERRED SHARES
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Q-5
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| DESCRIPTION
OF THE RIGHTS OFFERING |
Q-6
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USE
OF PROCEEDS
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Q-6
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CAPITALIZATION
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Q-14
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ASSET
COVERAGE RATIO
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Q-14
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SPECIAL
CHARACTERISTICS AND RISKS OF THE RIGHTS
OFFERING
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Q-14
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TAXATION
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Q-14
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UNDERWRITING
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Q-14
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LEGAL
MATTERS
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Q-14
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Page
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PROSPECTUS
SUMMARY
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1
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FINANCIAL
HIGHLIGHTS
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8
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USE
OF PROCEEDS
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8
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THE
FUND
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9
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INVESTMENT
OBJECTIVE AND POLICIES
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9
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RISK
FACTORS AND SPECIAL CONSIDERATIONS
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16
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HOW
THE FUND MANAGES RISK
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23
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MANAGEMENT
OF THE FUND
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24
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PORTFOLIO
TRANSACTIONS
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28
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DIVIDENDS
AND DISTRIBUTIONS
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28
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AUTOMATIC
DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
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28
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DESCRIPTION
OF THE SECURITIES
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30
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TAXATION
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39
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ANTI-TAKEOVER
PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
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42
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CLOSED-END
FUND STRUCTURE
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43
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REPURCHASE
OF COMMON SHARES
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43
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NET
ASSET VALUE
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43
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CUSTODIAN,
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
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45
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PLAN
OF DISTRIBUTION
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45
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LEGAL
MATTERS
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47
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INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
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47
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ADDITIONAL
INFORMATION
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47
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PRIVACY
PRINCIPLES OF THE FUND
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47
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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47
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TABLE
OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
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49
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APPENDIX
A CORPORATE BOND RATINGS
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A-1
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SUMMARY
OF THE TERMS OF THE RIGHTS OFFERING
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Offering
Subscription
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One
transferable subscription right (a “Right”) will be issued for each common
share of the Fund held on the record date and are expected to trade
in the NASDAQ Capital Market ("NASDAQ"). These
Rights will allow common shareholders to subscribe for new
Series A Cumulative Callable Preferred Shares (the
"Series A Preferred" or “Preferred Shares”) of the
Fund. 21,211,510 common shares of the Fund are outstanding as
of November 30, 2008. Ten Rights will be required to purchase one
Preferred Share. An over-subscription privilege will be
offered. 2,121,151 Preferred Shares of the Fund will be issued
if all Rights are exercised. See "Terms of the
Offering."
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| |
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| Amount
of Offering |
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$106,057,550 |
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Title
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Subscription
Rights to Purchase
Series A Cumulative
Callable Preferred Shares
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Subscription Price
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Rights
may be exercised at a price of $50.00 per Preferred Share (the
"Subscription Price"). See "Terms of the
Offering."
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Rights
will be issued to holders of record of the Fund's common shares
on December 19, 2008 (the "Record Date"). See "Terms of the
Offering."
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Number
of Rights Issued
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Rights
will be issued in respect of each common share of the Fund outstanding on
the Record Date. See "Terms of the
Offering."
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Number
of Rights Required to Purchase One
Preferred Share
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A
holder of Rights may purchase one Preferred Share of the Fund for
every 10 Rights exercised. See "Terms of the
Offering."
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| Over-Subscription
Privilege |
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Rights
holders who are Record Date Shareholders are entitled to subscribe
for additional Preferred Shares at the same Subscription Price, subject to
certain limitations and subject to allotment. To the extent
sufficient Preferred Shares are not available to fulfill all
over-subscription requests, unsubscribed Preferred Shares will be
allocated pro-rata among those common shareholders who over-subscribe
based on the number of the Fund’s common shares owned on the Record Date.
See "Over-Subscription Privilege." |
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Transfer
of Rights
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The
Rights will be transferable. See "Terms of the Offering," "Sales by
Rights Agent," and "Method of Transferring Rights."
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Subscription Period
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The
Rights may be exercised at any time after issuance and prior to expiration
of the Rights, which will be 5:00 PM Eastern Time on February 2, 2009. See
"Terms of the Offering" and "Method of Exercise of
Rights."
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| |
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| Solicitation
Fee |
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$0.25
per Preferred Share to broker-dealers that have executed and delivered a
soliciting dealer agreement and have solicited the exercise of
Rights. |
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| Taxation/ERISA |
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See
"Employee Plan Considerations." |
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Rights
Agent
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Computershare
Trust Company, N.A. See "Rights
Agent."
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TERMS
OF THE PREFERRED SHARES
| Issue |
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Series A
Cumulative Callable
Preferred Shares |
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| Mandatory
Redemption |
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February
16, 2016. |
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Dividend
Rate
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The
annual dividend rate will be 8.50%.
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Dividend
Payment Dates
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Distributions will be made when, as and if
declared on March 26, June 26, September 26, and December 26 of each
year, commencing March 26, 2009.
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Liquidation
Preference
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$50.00 per
share.
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Optional
Redemption
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The
Fund may on any one or more occasions and at any time redeem all or any
part of the Preferred Shares, upon not less than 30 nor more than 60 days'
prior notice, at the liquidation preference, plus any accumulated and
unpaid dividends.
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Stock
Exchange Listing
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An
application will be made to list
the Series A Preferred on the NYSE. The Series A Preferred is
expected to commence trading on the NYSE within 60 days of the date of
this Prospectus
Supplement.
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DESCRIPTION
OF THE RIGHTS OFFERING
Terms
of the Offering
The
Fund is issuing to shareholders of record as of December 19, 2008 ("the Record
Date", and such shareholders, the "Record Date Shareholders") Rights to
subscribe for the Preferred Shares. Each Record Date Shareholder is being issued
one transferable Right for each common share owned on the Record Date. The Right
entitles the holder to acquire for $50.00 (the "Subscription Price") one
Preferred Share for each 10 Rights held rounded up to the nearest number of
Rights evenly divisible by 10. Fractional shares will not be issued upon the
exercise of the Rights. Accordingly, Preferred Shares may be
purchased only pursuant to the exercise of Rights in integral multiples of 10.
In the case of common shares held of record by Cede & Co. ("Cede"), as
nominee for the Depository Trust Company ("DTC"), or any other depository or
nominee, the number of Rights issued to Cede or such other depository or nominee
will be adjusted to permit rounding up (to the nearest number of Rights evenly
divisible by 10) of the Rights to be received by beneficial owners for whom it
is the holder of record only if Cede or such other depository or nominee
provides to the Fund on or before the close of business on December 29, 2008
written representation of the number of Rights required for such rounding.
Rights may be exercised at any time during the period which commences on
December 19, 2008, and ends at 5:00 PM Eastern Time on February 2, 2009 (the
"Subscription Period"). The right to acquire one additional Preferred Share for
10 Rights held during the Subscription Period at the Subscription Price will be
referred to in the remainder of this prospectus supplement as the
"Subscription."
Rights
will be evidenced by subscription certificates ("Subscription Certificates").
The number of Rights issued to each holder will be stated on the Subscription
Certificate delivered to the holder. The method by which Rights may be exercised
and shares paid for is set forth below in "Method of Exercise of Rights" and
"Payment for Shares." A Rights holder will have no right to rescind a purchase
after Computershare Trust Company, N.A. (the "Rights Agent") has received
payment. See "Payment for Shares" below. It is anticipated that the Preferred
Shares issued pursuant to an exercise of Rights will be listed on the
NYSE.
Rights
holders who are Record Date Shareholders are entitled to subscribe for
additional Preferred Shares at the same Subscription Price pursuant to the
over-subscription privilege, subject to certain limitations and subject to
allotment. See “Over-Subscription Privilege” below.
For
purposes of determining the maximum number of shares a shareholder may acquire
pursuant to the offer, broker-dealers, trust companies, banks or others whose
shares are held of record by Cede or by any other depository or nominee will be
deemed to be the holders of the Rights that are held by Cede or such other
depository or nominee on their behalf.
The
Rights are transferable until 5:00 PM Eastern Time February 2, 2009 (the
"Expiration Date") and are expected to be admitted for trading through the
NASDAQ. Assuming a market exists for the Rights, the Rights may be purchased and
sold through usual brokerage channels and sold through the Rights Agent.
Although no assurance can be given that a market for the Rights will develop,
trading in the Rights through the NASDAQ is expected to begin three
business days before the Record Date and may be conducted until the close of
trading through the last NASDAQ trading day prior to the Expiration Date.
Trading of the Rights through the NASDAQ is expected to be conducted on a
when-issued basis until and including the date on which the Subscription
Certificates are mailed to Record Date Shareholders and thereafter
is expected to be conducted on a regular way basis until and including the last
NASDAQ trading day prior to the Expiration Date. The method by which Rights may
be transferred is set forth below under "Method of Transferring
Rights." The common shares are expected to begin trading ex-Rights two business
days prior to the Record Date.
Nominees
who hold the Fund's common shares for the account of others, such as banks,
broker-dealers, trustees or depositories for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the nominee will complete the
Subscription Certificate and submit it to the Rights Agent with proper payment.
In addition, beneficial owners of the common shares or Rights held through such
a nominee should contact the nominee and request the nominee to effect
transactions in accordance with such beneficial owner's
instructions.
Participants in the
Fund's Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (the
"Plan") will be issued Rights in respect of the common shares held in
their accounts in the Plan. Participants
wishing to exercise these Rights must exercise the Rights in accordance with the
procedures set forth above in "Method of Exercise of Rights" and "Payment for
Shares."
Important
Dates
to Remember
Please note that the dates
in the table below may change if the rights offering is extended.
| EVENT |
DATE |
| |
|
| Record
Date |
December 19,
2008 |
| Subscription
Period |
December 19,
2008 through February 2, 2009** |
| Expiration
Date* |
February 2,
2009** |
| Payment for
Guarantees of Delivery Due* |
February 5,
2009** |
| Confirmation
Date |
February 13,
2009** |
__________________
* A
shareholder exercising Rights must deliver by 5:00 PM Eastern Time
on February 2, 2009 either (a) a Subscription Certificate and payment
for shares or (b) a notice of guaranteed delivery.
** Unless the offer is
extended to a date no later than February 17, 2009
Over-Subscription
Privilege
Rights holders who
are Record Date Shareholders are entitled to subscribe for additional Preferred
Shares at the same Subscription Price pursuant to the over-subscription
privilege, subject to certain limitations and subject to
allotment.
Record Date Shareholders
who are fully exercising their Rights during the subscription period should
indicate, on the subscription certificate which they submit with respect to the
exercise of the Rights issued to them, how many Preferred Shares they are
willing to acquire pursuant to the over-subscription privilege. Rights
acquired in the secondary market may not participate in the over-subscription
privilege.
To the extent sufficient
Preferred Shares are not available to fulfill all over-subscription
requests, unsubscribed Preferred Shares will be allocated pro-rata among those
Record Date Shareholders who over-subscribe based on the number of the Fund's
common shares owned on the Record Date. The
allocation process may involve a series of allocations in order to assure that
the total number of Preferred Shares available for
over-subscriptions is distributed on a pro rata basis.
Banks, broker-dealers,
trustees and other nominee holders of rights will be required to certify to
the Rights Agent, before any over-subscription privilege may be exercised
with respect to any particular beneficial owner, as to the aggregate number of
Rights exercised during the Subscription Period and the number of Preferred
Shares subscribed for pursuant to the over-subscription privilege by such beneficial
owner and that such beneficial owner’s Subscription was exercised in full.
Nominee holder over-subscription forms and beneficial owner certification forms
will be distributed to banks, broker-dealers, trustees and other nominee holders
of rights with the Subscription Certificates. Nominees should also notify
holders purchasing Rights in the secondary market that such Rights may not
participate in the over-subscription privilege.
The Fund will not offer or
sell any Preferred Shares that are not
subscribed for during the Subscription Period or pursuant to the
over-subscription privilege.
The Fund has been advised
that the Investment Adviser and each of the Fund’s Trustees may
exercise some or all of the Rights initially issued to them, and may request
additional Preferred Shares pursuant to the over-subscription privilege. In
addition, Mario J. Gabelli or his affiliated entities may also purchase
Preferred Shares during the Subscription Period and pursuant to the
over-subscription privilege.
Sales
by Rights Agent
Holders
of Rights who are unable or do not wish to exercise any or all of their Rights
may instruct the Rights Agent to sell any unexercised Rights. The Subscription
Certificates representing the Rights to be sold by the Rights Agent must be
received on or before January 29, 2009. Upon the timely receipt of the
appropriate instructions to sell Rights, the Rights Agent will use its best
efforts to complete the sale and will remit the proceeds of sale, net of
commissions, to the holders. If the Rights can be sold, sales of the Rights will
be deemed to have been effected at the weighted average price received by the
Rights Agent on the day such Rights are sold. The selling Rights holder will pay
all brokerage commissions incurred by the Rights Agent. These sales may be
effected by the Rights Agent through Gabelli & Company, Inc., (the "Dealer
Manager") a registered broker-dealer and an affiliate of the Investment Adviser,
at a commission of up to $0.01 per Right, provided that, if the Rights trade at
a value of $0.01 or less at the time of such sale, then no commission will be
charged. The Dealer Manager may also act on behalf of its clients to
purchase or sell Rights in the open market and be compensated for its services.
The Rights Agent will automatically attempt to sell any unexercised Rights that
remain unclaimed as a result of Subscription Certificates being returned by the
postal authorities as undeliverable as of the fourth business day prior to the
Expiration Date. These sales will be made net of commissions on behalf of the
nonclaiming holders of Rights. Proceeds from those sales will be held by
American Stock Transfer & Trust Company, in its capacity as the Fund's
transfer agent, for the account of the nonclaiming holder of rights until the
proceeds are either claimed or escheated. There can be no assurance that the
Rights Agent will be able to complete the sale of any of these Rights and
neither the Fund nor the Rights Agent has guaranteed any minimum sales price for
the Rights. All of these Rights will be sold at the market price, if any,
through an exchange or market trading the Rights.
Method
of Transferring Rights
The
Rights evidenced by a single Subscription Certificate may be transferred in
whole by endorsing the Subscription Certificate for transfer in accordance with
the accompanying instructions. A portion of the Rights evidenced by a single
Subscription Certificate (but not fractional Rights) may be transferred by
delivering to the Rights Agent a Subscription Certificate properly endorsed for
transfer, with instructions to register the portion of the Rights evidenced
thereby in the name of the transferee (and to issue a new Subscription
Certificate to the transferee evidencing the transferred Rights). In this event,
a new Subscription Certificate evidencing the balance of the Rights will be
issued to the Rights holder or, if the Rights holder so instructs, to an
additional transferee.
Holders
wishing to transfer all or a portion of their Rights (but not fractional Rights)
should allow at least three business days prior to the Expiration Date for (i)
the transfer instructions to be received and processed by the Rights Agent, (ii)
a new Subscription Certificate to be issued and transmitted to the transferee or
transferees with respect to transferred Rights, and to the transferor with
respect to retained Rights, if any, and (iii) the Rights evidenced by the new
Subscription Certificates to be exercised or sold by the recipients thereof.
Neither the Fund nor the Rights Agent shall have any liability to a transferee
or transferor of Rights if Subscription Certificates are not received in time
for exercise or sale prior to the Expiration Date.
Except
for the fees charged by the Rights Agent (which will be paid by the Fund as
described below), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase, sale
or exercise of Rights will be for the account of the transferor of the Rights,
and none of these commissions, fees or expenses will be paid by the Fund or the
Rights Agent.
The
Fund anticipates that the Rights will be eligible for transfer through, and that
the exercise of the Subscription may be effected through, the facilities of DTC
(Rights exercised through DTC are referred to as "DTC Exercised
Rights").
Rights
Agent
The
Rights Agent is Computershare Trust Company, N.A. The Rights Agent will receive
from the Fund an
amount estimated to be $50,000 comprised of the fee for its services and
the
reimbursement for certain expenses related to the rights offering. INQUIRIES BY
ALL HOLDERS
OF RIGHTS SHOULD BE DIRECTED TO: THE INFORMATION AGENT, GEORGESON, FLOOR
26, 199 WATER STREET, NEW YORK, NY, 10038; HOLDERS MAY
ALSO CONSULT THEIR BROKERS OR NOMINEES.
Method of Exercise of
Rights
Rights
may be exercised by completing and signing the reverse side of the
Subscription Certificate and mailing it in the envelope provided, or otherwise
delivering the completed and signed Subscription Certificate to the Rights
Agent, together with payment for the Preferred Shares as
described below under "Payment for Shares." Rights may also be exercised through
a Rights holder's broker, who may charge the Rights holder a servicing fee in
connection with such exercise.
Completed
Subscription Certificates must be received by
the Rights Agent prior to 5:00 PM Eastern Time, on the Expiration Date (unless
payment is effected by means of a notice of guaranteed delivery as described
below under "Payment for Shares"). The Subscription Certificate and payment
should be delivered to the Rights Agent at the following address:
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If
By Mail:
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The
Gabelli Global Deal Fund
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Attn:
Corporate Actions
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P.O.
Box 859208
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Braintree,
MA 02185-9208
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If
By Overnight Courier:
|
The
Gabelli Global Deal Fund
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Attn:
Corporate Actions
|
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161
Bay State Drive
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Braintree,
MA 02184
|
Payment
for Shares
Holders
of Rights who acquire Preferred Shares in the Subscription may choose between
the following methods of payment:
|
|
(1)
|
A
subscription will be accepted by the Rights Agent if, prior to 5:00 PM
Eastern Time, on the Expiration Date, the Rights Agent has received a
written notice of guaranteed delivery from a bank,
a trust company, or a NYSE member, guaranteeing delivery of (i) payment of
the full Subscription Price for the Preferred Shares subscribed for in the
Subscription and, if eligible, for any additional Preferred Shares
subscribed for pursuant to the over-subscription privilege, and (ii) a
properly completed and executed Subscription Certificate. The Rights Agent
will not honor a notice of guaranteed delivery if a properly completed and
executed Subscription Certificate and full payment is not received by the
Rights Agent by the close of business on the third business day after the
Expiration Date. The notice of guaranteed delivery may be delivered to the
Rights Agent in the same manner as Subscription Certificates at the
addresses set forth above, or may be transmitted to the Rights Agent by
facsimile transmission (fax number (781) 930-4942; telephone number to
confirm receipt (781)
930-4900.)
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(2)
|
Alternatively,
a holder of Rights can send the Subscription Certificate together with
payment in the form of a check for the Preferred Shares subscribed for in
the Subscription and, if eligible, for any additional Preferred Shares
subscribed for pursuant to the over-subscription privilege, to the Rights
Agent based on the Subscription Price of $50.00 per Preferred Share.
To be accepted, the payment, together with the executed
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Subscription
Certificate, must be received by the Rights Agent at the addresses noted
above prior to 5:00 PM Eastern Time on the Expiration Date. The Rights
Agent will deposit all share purchase checks received by it prior to
the final due date into a segregated interest-bearing account pending
proration and distribution of Preferred Shares. The Rights Agent
will not accept cash as a means of payment for Preferred
Shares.
|
EXCEPT
AS OTHERWISE SET FORTH BELOW, A PAYMENT PURSUANT TO THIS METHOD MUST BE IN
UNITED STATE DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
CONTINENTAL UNITED STATES, MUST BE PAYABLE TO THE GABELLI GLOBAL DEAL FUND AND
MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
Any
payment required from a holder of Rights must be received by the Rights Agent
prior to 5:00 PM Eastern Time on the Expiration Date, or if the Rights holder
has elected to make payment by means of a notice of guaranteed delivery, by the
close of business on the third business day after the Expiration Date. All
payments by a holder of Rights must be in United States dollars by money order
or check drawn on a bank located in the continental United States and payable to
The Gabelli Global Deal Fund except that holders of Rights who are residents of
Canada may make payment in United States dollars by money order or check drawn
on a bank located in Canada. Whichever of the two methods of payment described
above is used, issuance and delivery of certificates for the Preferred Shares
purchased are subject to collection of checks and actual payment pursuant to any
notice of guaranteed delivery.
Within
ten business days following the Expiration Date (the "Confirmation Date"), a
confirmation will be sent by the Rights Agent to each holder of Rights (or, if
the common shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee), showing (i) the number of Preferred
Shares acquired pursuant to the Subscription, (ii) the number of Preferred
Shares, if any, acquired pursuant to the over-subscription privilege, and (iii)
the per share and total purchase price for the Preferred Shares. Any payment
required from a holder of Rights must be received by the Rights Agent on the
Expiration Date, or if the Rights holder has elected to make payment by means of
a notice of guaranteed delivery, on the third business day after the Expiration
Date. Any excess payment to be refunded by the Fund to a holder of Rights, or to
be paid to a holder of Rights as a result of sales of Rights on his behalf by
the Rights Agent, and all interest accrued on the holder's excess payment will
be mailed by the Rights Agent to the holder within fifteen business days after
the Expiration Date. Interest on the excess payment will accrue through the date
that is one business day prior to the mail date of the reimbursement check. If
any Rights holder exercises its right to acquire Preferred Shares pursuant to
the over-subscription privilege, any excess payment which would otherwise be
refunded to the Rights holder will be applied by the Fund toward payment for
Preferred Shares acquired pursuant to exercise of the over-subscription
privilege.
A
Rights holder will have no right to rescind a purchase after the Rights Agent
has received payment either by means of a notice of guaranteed delivery or a
check.
If
a holder of Rights who acquires Preferred Shares pursuant to the Subscription
does not make payment of any amounts due, the Fund reserves the right to take
any or all of the following actions: (i) find other purchasers for such
subscribed-for and unpaid-for Preferred Shares; (ii) apply any payment actually
received by it toward the purchase of the greatest whole number of Preferred
Shares which could be acquired by such holder upon exercise of the Subscription
or over-subscription privilege; (iii) sell all or a portion of the Preferred
Shares purchased by the holder, in the open market, and apply the proceeds to
the amounts owed; and (iv) exercise any and all other rights or remedies to
which it may be entitled, including, without limitation, the right to set off
against payments actually received by it with respect to such subscribed
Preferred Shares and to enforce the relevant guaranty of payment.
Holders
who hold common shares for the account of others, such as broker-dealers,
trustees or depositories for securities, should notify the respective beneficial
owners of the common shares as soon as possible to ascertain such beneficial
owners' intentions and to obtain instructions with respect to the Rights. If the
beneficial owner so instructs, the record holder of the Rights should complete
Subscription Certificates and submit them to the Rights Agent with the proper
payment. In addition, beneficial owners of common shares or
Rights held through such a holder should contact the holder and request the
holder to effect transactions in accordance with the beneficial
owner's instructions. Banks, broker-dealers, trustees and other nominee
holders that hold common shares of the Fund for the accounts of others are
advised to notify those persons that purchase Rights in the secondary market
that such Rights may not participate in the over-subscription
privilege.
The
instructions accompanying the Subscription Certificates should be read carefully
and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
FUND.
The
method of delivery of Subscription Certificates and payment of the subscription
price to the Rights Agent will be at the election and risk of the Rights
holders, but if sent by mail it is recommended that the certificates and
payments be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery to
the Rights Agent and clearance of payment prior to 5:00 PM Eastern Time, on the
Expiration Date. Because uncertified personal checks may take at least five
business days to clear, you are strongly urged to pay, or arrange for payment,
by means of a certified or cashier's check or money order.
All
questions concerning the timeliness, validity, form and eligibility of any
exercise of Rights will be determined by the Fund, whose determinations will be
final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. Neither the Fund nor the Rights Agent will be under any
duty to give notification of any defect or irregularity in connection with the
submission of Subscription Certificates or incur any liability for failure to
give such notification.
Foreign
Restrictions
Subscription
Certificates will only be mailed to Record Date Shareholders whose addresses are
within the United States and Canada (other than an APO or FPO address). Record
Date Shareholders whose addresses are outside the United States and Canada or
who have an APO or FPO address and who wish to subscribe to the rights offering
either in part or in full should contact the Rights Agent by written instruction
or recorded telephone conversation no later than three business days prior to
the Expiration Date. The Fund will determine whether the offering may be made to
any such shareholder. If the Rights Agent has received no instruction by the
third business day prior to the Expiration Date or the Fund has determined that
the rights offering may not be made to a particular shareholder, the Rights
Agent will attempt to sell all of such shareholder's Rights and remit the net
proceeds, if any, to such shareholders. If the Rights can be sold, sales of
these Rights will be deemed to have been effected at the weighted average price
received by the Rights Agent on the day the Rights are sold, less any applicable
brokerage commissions, taxes and other expenses.
Under
the securities laws of the Province of Ontario, investors residing in Ontario
may, subject to compliance with all applicable regulatory requirements, transfer
either the Rights or the Preferred Shares to be acquired upon the exercise of
such Rights (i) through a dealer registered in Ontario that effects the
transaction through the facilities of the NYSE or other exchange or market
outside of Canada; (ii) to a person or company outside of Canada, or (iii)
through certain other means as provided under and in compliance with Ontario
securities laws.
Employee
Plan
Considerations
Rights
holders that are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), including corporate
savings and 401(k) plans, Keogh Plans of self-employed individuals and
Individual Retirement Accounts ("IRA") (each a "Benefit Plan" and collectively,
"Benefit Plans"), should be aware that additional contributions of
cash in order to exercise Rights may be treated as Benefit Plan contributions
and, when taken together with contributions previously made, may subject
a Benefit Plan to excise taxes for excess or nondeductible contributions.
In the case of Benefit Plans qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), additional cash
contributions could cause the maximum contribution limitations
of Section 415 of the Code or other qualification rules to be violated.
Benefit Plans contemplating making additional cash contributions to exercise
Rights should consult with their counsel prior to making such contributions.
Benefit
Plans and other tax exempt entities, including governmental plans,
should also be aware that if they borrow in order to finance their exercise
of Rights, they may become subject to the tax on unrelated business taxable
income ("UBTI") under Section 511 of the Code. If any portion of an IRA
is
used as security for a loan, the portion so used is also treated as distributed
to the IRA depositor.
ERISA
contains prudence and diversification requirements and ERISA and the
Code contain prohibited transaction rules that may impact the exercise of
Rights.
Among the prohibited transaction exemptions issued by the Department of
Labor
that may exempt a Benefit Plan's exercise of Rights are Prohibited Transaction
Exemption 84-24 (governing purchases of shares in investment companies)
and Prohibited Transaction Exemption 75-1 (covering sales of securities).
Due
to the complexity of these rules and the penalties for noncompliance,
Benefit Plans should consult with their counsel regarding the consequences
of their exercise of Rights under ERISA and the Code.
USE
OF PROCEEDS
We
estimate the total net proceeds of the offering to be $105,027,262, based on
the Subscription Price of $50.00 per share and after deduction of the
underwriting discounts, solicitation fees and commissions 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 debt securities and
instruments. The Investment Adviser anticipates that the investment
of the proceeds will be made in accordance with the Fund's investment objective
and policies as appropriate investment opportunities are identified, which is
expected to be substantially completed within three months; however, changes in
market conditions could
result in the Fund's anticipated investment period extending to as long as six
months.
CAPITALIZATION
The following table
sets forth the unaudited capitalization of the Fund as of November 30,
2008, and its adjusted capitalization assuming the Series A Preferred
offered in this Prospectus Supplement had been issued.
| |
|
|
|
|
|
|
|
|
| |
|
As
of November 30,
2008
|
|
| |
|
(unaudited)
|
|
| |
|
Actual
|
|
|
As
adjusted
|
|
| |
|
|
|
|
|
|
|
|
|
Preferred
shares, $0.001 par value per share, unlimited shares
authorized.
(The “Actual” column reflects the
Fund’s outstanding capitalization as of November 30, 2008;
the “As adjusted” column assumes the issuance of 2,121,151
shares of Series A Preferred,
$50 liquidation preference per share)
|
|
|
0
|
|
|
|
106,057,550
|
|
|
Shareholders’
equity applicable to common shares:
|
|
|
|
|
|
|
|
|
|
Common
shares, $0.001 par value per share; unlimited shares
authorized, 21,211,510 shares outstanding
|
|
|
21,212
|
|
|
|
21,212
|
|
|
Paid-in
surplus*
|
|
|
392,297,968 |
|
|
|
391,267,680
|
|
|
Net
unrealized appreciation (depreciation)
|
|
|
(44,439,413)
|
|
|
|
(44,439,413)
|
|
| |
|
|
|
|
|
|
|
|
|
Net
assets attributable to common shares
|
|
|
347,879,767
|
|
|
|
346,849,479
|
|
|
Liquidation
preference of preferred shares
|
|
|
0
|
|
|
|
106,057,550
|
|
| |
|
|
|
|
|
|
|
|
|
Net
assets, plus the liquidation preference of preferred
shares
|
|
|
347,879,767
|
|
|
|
452,907,029
|
|
______________
|
|
|
|
|
*
|
|
As
adjusted paid-in surplus reflects a deduction for the estimated
solicitation fees to broker-dealers of $530,288 and estimated offering
expenses of the Series A Preferred of
$500,000.
|
For
financial reporting purposes, the Fund
is required to deduct the liquidation preference of its outstanding preferred
shares from “net assets,” so long as the senior securities have redemption
features that are not solely within the control of the Fund. For all regulatory
purposes, the Fund’s preferred shares will be treated as equity (rather than
debt).
ASSET
COVERAGE RATIO
Pursuant to the Investment
Company Act of 1940, as amended (the "1940 Act"), the Fund will not be permitted
to declare any dividend, or declare any other distribution, upon any outstanding
common shares, unless, in every such case, the Preferred Shares
have at the time of declaration of any such dividend or distribution or at the
time of any such purchase an asset coverage of at least 200% ("1940 Act Asset
Coverage Requirement") after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. The Preferred
Shares are expected to have an initial asset coverage on the date of issuance of
approximately 427%.
SPECIAL
CHARACTERISTICS AND RISKS OF THE RIGHTS
Risk is
inherent in all investing. Therefore, before investing in the
Series A Preferred you should consider the risks carefully. See “Risk
Factors and Special Considerations” in the Prospectus. Primary risks specially
associated with an investment in the Series A Preferred
include:
The
market price for the Series A Preferred will be influenced by changes in
interest rates, the perceived credit quality of the Series A Preferred
and other factors and may be higher or lower than the liquidation preference of
the Series A Preferred.
Prior to
this offering, there has been no public market for the
Series A Preferred. An application will be made to list the
Series A Preferred on the NYSE. However, during an initial period
which is not expected to exceed 30 days after the date of its issuance, the
Series A Preferred will not be listed on any securities exchange. The
dealer-manager may make a market in the Series A Preferred; however,
it has no obligation to do so. No assurances can be provided that listing
on any securities exchange or market making by the dealer-manager will result in
the market for Series A Preferred being liquid at any
time.
You will
have no right to require the Fund to repurchase or redeem your shares of
Series A Preferred at any time.
The Fund
may not meet the asset coverage requirements or earn sufficient income from its
investments to make distributions on the
Series A Preferred.
The Fund
generally may redeem the Series A Preferred at any time. In addition,
the Fund may at any time redeem shares of Series A Preferred to the
extent necessary to meet regulatory asset coverage requirements. For example, if
the value of the Fund’s investment portfolio declines, thereby reducing the
asset coverage for the Series A Preferred, the Fund may be obligated
under the terms of the Series A Preferred to redeem shares of the
Series A Preferred. Investors may not be able
to reinvest the proceeds of any redemption in an investment providing the same
or a better rate than that of the
Series A Preferred.
The
Series A Preferred is not an obligation of the Fund. The
Series A Preferred is junior in respect of distributions 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 A Preferred for the full redemption
price.
TAXATION
Please
refer to the "Taxation" sections in the Fund Prospectus and Fund
Statement of Additional Information for a description of the consequences of
investing in the preferred shares of the Fund.
UNDERWRITING
Gabelli & Company,
Inc., which is a broker-dealer and member of the Financial Industry
Regulatory Authority will act as dealer manager for the rights
offering. Under the terms and subject to the conditions contained in the
Dealer Manager Agreement among the Fund, the Investment Adviser, and the Dealer
Manager (the "Dealer Manager Agreement"), the Dealer Manager will provide
financial structuring services and marketing services in connection with the
offering and will solicit the exercise of Rights and participation in the
over-subscription privilege. The Fund has agreed to pay the Dealer Manager
a fee for its financial structuring,
marketing and soliciting services equal
to $0.25 per 10 Rights exercised pursuant to the rights
offering. The Dealer Manager fee will be borne by the Fund and indirectly
by all of the Fund's shareholders, including those who do not exercise their
Rights.
The Dealer
Manager will reallow to other broker-dealers that have executed and delivered a
soliciting dealer agreement and have solicited the exercise of Rights
solicitation fees equal to $0.25 for each Preferred Share issued pursuant
to exercise of Rights as a result of their soliciting efforts, subject to a
maximum fee based on the number of common shares held by each broker-dealer
through DTC on the Record Date. Fees will be paid to the broker-dealer
designated on the applicable portion of the Subscription Certificates or, in the
absence of such designation, will be retained by the Dealer
Manager.
The Fund
and the Investment Adviser have each agreed to indemnify the Dealer Manager or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). The
Dealer Manager Agreement also provides that the
Dealer Manager will not be subject to any liability to the Fund in rendering the
services contemplated by the Dealer Manager Agreement except for any act of bad
faith, willful misconduct or gross negligence of the Dealer Manager or reckless
disregard by the Dealer Manager of its obligations and duties under the Dealer
Manager Agreement.
Prior to
the expiration of the rights offering, the Dealer Manager may independently
offer for sale Rights or Preferred Shares to be acquired by it through
purchasing and exercising Rights, at prices it sets. The Dealer
Manager's fee for its financial structuring, marketing and soliciting services
is independent of any gains or losses that may be realized by the Dealer Manager
through the purchase and exercise of Rights or purchase and sale of Preferred
Shares.
In the
ordinary course of their businesses, the Dealer Manager and/or its
affiliates may engage in investment banking or financial transactions with the
Fund, the Investment Adviser and their affiliates.
The
principal business address of Gabelli & Company, Inc. is One Corporate
Center, Rye, New York 10580-1422.
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, counsel to the Fund in connection with this rights
offering. Certain legal matters in connection with this rights offering
will be passed on for the underwriters by Skadden, Arps, Slate, Meagher &
Flom LLP, New York, New York.
Base
Prospectus dated August 6, 2008
PROSPECTUS
$200,000,000
The
Gabelli Global Deal Fund
Preferred
Shares of Beneficial Interest, Notes and Subscription Rights
Investment
Objective. The Gabelli Global Deal Fund, or the “Fund,” is a
non-diversified, closed-end management investment company, formed as a Delaware
statutory trust, registered under the Investment Company Act of 1940. The Fund’s
investment objective is to achieve absolute returns in various market conditions
without excessive risk of capital. Absolute returns are defined as positive
total returns, regardless of the direction of securities markets. The Fund will
seek to achieve its objective by investing primarily in merger arbitrage
transactions and, to a lesser extent, in corporate reorganizations involving
stubs, spin-offs and liquidations. Gabelli Funds, LLC serves as “Investment
Adviser” to the Fund. An investment in the Fund is not appropriate for all
investors. We cannot assure you that the Fund will achieve its
objective.
We
may offer, from time to time, in one or more offerings, our preferred shares,
par value $0.001 per share, our promissory notes, or our
subscription rights to purchase our preferred shares, which we refer to
collectively as the "securities." Securities may be offered at prices
and on terms to be set forth in one or more supplements to this Prospectus (each
a "Prospectus Supplement"). You should read this Prospectus and the
applicable Prospectus Supplement carefully before you invest in our
securities.
Our
securities may be offered directly to one or more purchasers, including existing
shareholders in a rights offering, through agents designated from time to time
by us, or to or through underwriters or dealers. The Prospectus
Supplement relating to the offering will identify any agents or underwriters
involved in the sale of our securities, and will set forth any applicable
purchase price, fee, commission or discount arrangement between us and our
agents or underwriters, or among our underwriters, or the basis upon which such
amount may be calculated. The Prospectus Supplement relating to any
sale of preferred shares will set forth the liquidation preference and
information about the dividend period, dividend rate, any call protection or
non-call period and other matters. The Prospectus Supplement relating
to any sale of notes will set forth the principal amount, interest rate,
interest payment dates, prepayment protection (if any), and other
matters. The Prospectus Supplement relating to any offering of
subscription rights will set forth the number of preferred shares issuable upon
the exercise of each right and the other terms of such rights offering. We may
not sell any of our securities through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the
particular offering of our securities. Our common shares are listed
on the New York Stock Exchange (the "NYSE") under the symbol
"GDL". On December 18, 2008, the last reported NYSE sale price of our
common shares was $12.76. Shares
of closed-end funds often trade at a discount from net asset
value. This creates a risk of loss for an investor purchasing shares
in a public offering.
Investing
in the Fund's securities involves risks. See "Risk Factors and
Special Considerations" for factors that should be considered before investing
in securities of the Fund.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
This
prospectus may not be used to consummate sales of securities by us through
agents, underwriters or dealers unless accompanied by a Prospectus
Supplement.
This
prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. You should read
this prospectus, which contains important information about the Fund, before
deciding whether to invest in the securities, and retain it for future
reference. A Statement of Additional Information, dated August
4, 2008, containing additional information about the Fund, has been filed with
the Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of our
annual and semi-annual reports, request a free copy of the Statement of
Additional Information, the table of contents of which is on page 49 of
this prospectus, request other information about us and make shareholder
inquiries by calling (800) GABELLI (422-3554) or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities and
Exchange Commission's web site (http://www.sec.gov).
Our
securities and notes do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
You
should rely only on the information contained or incorporated by reference in
this prospectus. The Fund has not authorized anyone to provide you
with different information. The Fund is not making an offer to sell
these securities in any state where the offer or sale is not
permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date of this
prospectus.
TABLE
OF CONTENTS
| |
Page
|
| |
|
|
PROSPECTUS
SUMMARY
|
1
|
|
FINANCIAL
HIGHLIGHTS
|
8
|
|
USE
OF PROCEEDS
|
8
|
|
THE
FUND
|
9
|
|
INVESTMENT
OBJECTIVE AND POLICIES
|
9
|
|
RISK
FACTORS AND SPECIAL CONSIDERATIONS
|
16
|
|
HOW
THE FUND MANAGES RISK
|
23
|
|
MANAGEMENT
OF THE FUND
|
24
|
|
PORTFOLIO
TRANSACTIONS
|
28
|
|
DIVIDENDS
AND DISTRIBUTIONS
|
28
|
|
AUTOMATIC
DIVIDEND REINVESTMENT AND VOLUNTARY CASH PURCHASE PLAN
|
28
|
|
DESCRIPTION
OF THE SECURITIES
|
30
|
|
TAXATION
|
39
|
|
ANTI-TAKEOVER
PROVISIONS OF THE FUND'S GOVERNING DOCUMENTS
|
42
|
|
CLOSED-END
FUND STRUCTURE
|
43
|
|
REPURCHASE
OF COMMON SHARES
|
43
|
|
NET
ASSET VALUE
|
43
|
|
CUSTODIAN,
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
|
45
|
|
PLAN
OF DISTRIBUTION
|
45
|
|
LEGAL
MATTERS
|
47
|
|
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
|
47
|
|
ADDITIONAL
INFORMATION
|
47
|
|
PRIVACY
PRINCIPLES OF THE FUND
|
47
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
47
|
|
TABLE
OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
|
49
|
|
APPENDIX
A CORPORATE BOND RATINGS
|
A-1
|
PROSPECTUS
SUMMARY
This is only a
summary. This summary does not contain all of the information that
you should consider before investing in our shares. You should review
the more detailed information contained in this prospectus and the Statement of
Additional Information,
dated August 4, 2008 (the "SAI").
|
The
Fund
|
The
Gabelli Global Deal Fund is a non-diversified, closed-end management
investment company organized under the laws of the State of
Delaware on October 17, 2006. Throughout this
prospectus, we refer to The Gabelli Global Deal Fund as the "Fund" or as
"we." See "The Fund."
|
|
|
The
Fund’s outstanding common shares, par value $0.001 per share, are listed
on the New York Stock Exchange under the symbol
"GDL." On December 18, 2008, the last reported NYSE sale
price of our common shares was $12.76. As of
November 30, 2008, the net assets of the Fund attributable to its common
shares were $347,879,767. As of November 30, 2008, the Fund had
outstanding 21,211,510 common shares.
|
|
The
Offering
|
We
may offer, from time to time, in one or more offerings, our preferred
shares, $0.001 par value per share, our notes or our
subscription rights to purchase our preferred shares, which we refer to
collectively as the "securities." The shares and notes may be
offered at prices and on terms to be set forth in one or more supplements
to this Prospectus (each a "Prospectus Supplement"). You should
read this Prospectus and the applicable Prospectus Supplement carefully
before you invest in our securities. Our securities may be
offered directly to one or more purchasers, including existing
shareholders in a rights offering, through agents designated from time to
time by us or to or through underwriters or dealers. The
Prospectus Supplement relating to the offering will identify any agents,
underwriters or dealers involved in the sale of our shares, and will set
forth any applicable purchase price, fee, commission or discount
arrangement between us and our agents or underwriters, or among our
underwriters, or the basis upon which such amount may be
calculated. The Prospectus Supplement relating to any sale of
preferred shares will set forth the liquidation preference and information
about the dividend period, dividend rate, any call protection or non-call
period and other matters. The Prospectus Supplement relating to
any sale of notes will set forth information about the principal amount,
interest rate, and call protection or non-call period and other matters.
The Prospectus Supplement relating to any offering of subscription
rights will set forth the number of preferred shares issuable upon the
exercise of each right and the other terms of such rights offering. We may
not sell any of our securities through agents, underwriters or dealers
without delivery of a Prospectus Supplement describing the method and
terms of the particular offering.
|
|
Investment
Objective
|
The
Fund’s investment objective is to achieve absolute returns in various
market conditions without excessive risk of capital. Absolute returns are
defined as positive total returns, regardless of the direction of
securities markets. To achieve its investment objective, the Fund, under
normal market conditions, will invest primarily in securities of companies
(both domestic and foreign) involved in publicly announced mergers,
takeovers, tender offers and leveraged buyouts and, to a lesser extent, in
corporate reorganizations involving stubs, spin-offs and liquidations. The
key determinants of the profitability of a merger arbitrage transaction
are the probability that the deal will close, the length of time to
closing, the likelihood that the deal price will be increased or decreased
and the level of short-term interest rates.
Merger
arbitrage is a highly specialized investment approach generally designed
to profit from the successful completion of proposed mergers, takeovers,
tender offers and leveraged buyouts. Broadly speaking, an investor
purchases the stock of a company in the process of being acquired by
another company in anticipation of capturing the spread between the
current market price and the acquisition price. A “stub” refers to a small
stake in a target company division or subsidiary that is not purchased by
an acquirer in a merger, takeover or leveraged buyout. The arbitrageur may
buy the stub, and if the acquiring company is successful in boosting the
target company’s appeal, the shares will benefit from a boost in price and
the arbitrageur will profit. A spin-off occurs when an independent company
is created from an existing part of another company through a distribution
of new shares. An arbitrageur may benefit from the share price
differential in the same manner as in traditional merger arbitrage if,
upon completion of the spin-off, the separate securities trade for more in
the aggregate than the former single security. Finally, when a company
makes the decision to liquidate, or sell all of its assets, it is often
worth more in liquidation than as an ongoing entity. An arbitrageur
benefits when the company is able to distribute more than the price at
which the stock is trading at the time the arbitrageur acquires its
position. In order to minimize market exposure and volatility of such
merger arbitrage strategies, the Fund may utilize hedging strategies, such
as short selling and the use of options and futures. The Fund may hold a
significant portion of its assets in liquid money market securities, which
may include affiliated or unaffiliated money market mutual
funds.
|
| |
As
a non-diversified investment company, the Investment Company Act of 1940
(the “1940 Act”) does not limit the proportion of the Fund’s assets it may
invest in securities of a single issuer, however, certain tax
diversification requirements will apply at the end of each
quarter.
The
Investment Adviser believes that blending traditional merger arbitrage for
announced deals with strategies that focus on stubs, spin-offs and
liquidations will produce absolute returns in excess of short-term
interest rates with less volatility than the returns typically associated
with conventional equity investing. A systematic and disciplined arbitrage
program may produce attractive rates of return even in flat or down
markets. The Investment Adviser will consider a number of factors in
selecting merger arbitrage transactions in which to invest, including, but
not limited to, the credibility, strategic motivation, and financial
resources of the participants and the liquidity of the securities involved
in the transaction.
Under
normal circumstances, the Fund will invest at least 80% of its assets in
securities or hedging arrangements relating to companies involved in
corporate transactions or reorganizations, giving rise to the possibility
of realizing gains upon or within relatively short periods of time after
the completion of such transactions, or reorganizations. This policy is
not fundamental and may be changed by the Fund with notice of not less
than 60 days to its shareholders. In market cycles with scarce transaction
opportunities, the Fund may seek to accomplish its objective of achieving
absolute returns by temporarily investing in other assets, including, but
not limited to, short-term debt securities, which may make it less likely
for the Fund to achieve an attractive rate of return.
As
a global fund, the Fund may invest without limitation in the securities of
foreign and domestic issuers. The Fund’s investment strategy is to invest
in merger arbitrage transactions and corporate reorganizations throughout
the world. As the dollar volume and range of countries involved in
significant merger arbitrage and corporate reorganizations has increased
over the past several years, the Fund expects that its assets will usually
be invested in several countries. Under normal market conditions, the Fund
expects to have at least 40% of its assets invested in at least three
countries, other than the United States. To the extent that the majority
of mergers, takeovers, tender offers and leveraged buyouts and corporate
reorganizations are concentrated in any given geographic region, such as
Europe, North America or Asia, a relatively high proportion of the Fund’s
assets may be invested in that particular region. See “Investment
Objective and Policies.”
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Payment
on Notes
|
Under applicable
state law and our Charter, we may borrow money without prior approval of
holders of common and preferred shares. We may issue debt securities,
including notes, or other evidence of indebtedness and may secure any such
notes or borrowings by mortgaging, pledging or otherwise subjecting as
security our assets to the extent permitted by the 1940 Act or rating
agency guidelines. Any borrowings, including without limitation the notes,
will rank senior to the preferred shares and the common shares. The
prospectus supplement will describe the interest payment provisions
relating to notes. Interest on notes will be payable when due as described
in the related prospectus supplement. If we do not pay interest when due,
it will trigger an event of default and we will be restricted from
declaring dividends and making other distributions with respect to our
common shares and preferred shares.
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Dividends
and Distributions
|
Preferred Share
Distributions. Under current law, all preferred shares of the Fund
must have the same seniority with respect to distributions. Accordingly,
no full distribution will be declared or paid on any series of preferred
shares of the Fund for any dividend period, or part thereof, unless full
cumulative dividends due through the most recent dividend payment dates
for all series of outstanding preferred shares of the Fund are declared
and paid. If full cumulative distributions due have not been declared and
made on all outstanding preferred shares of the Fund, any distributions on
such preferred shares will be made as nearly pro rata as possible in
proportion to the respective amounts of distributions accumulated but
unmade on each such series of preferred shares on the relevant dividend
date.
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In
the event that for any calendar year the total distributions on the Fund's
preferred shares exceed the Fund's current and accumulated earnings and
profits, the excess distributions will generally be treated as a tax-free
return of capital (to the extent of the shareholder's tax basis in his or
her shares). The amount treated as a tax-free return of capital will
reduce a shareholder's adjusted tax basis in his or her preferred shares,
thereby increasing the shareholder's potential gain or reducing his or her
potential loss on the sale of the shares.
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Fixed Rate Preferred
Shares. Distributions on fixed rate preferred shares, at the
applicable annual rate of the per share liquidation preference, are
cumulative from the original issue date and are payable, when, as and if
declared by the Board of Trustees of the Fund (the "Board"), out of funds
legally available therefor.
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Variable
Rate Preferred Shares. The holders of
variable rate preferred shares are entitled to receive cash distributions,
stated at annual rates of the applicable per share liquidation preference,
that vary from dividend period to dividend period.
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Common
Share Distributions. In order to allow
its common shareholders to realize a predictable, but not assured, level
of cash flow and some periodic liquidity from their investment without
having to sell shares, the Board has adopted a policy, which may be
modified at any time, of paying quarterly distributions on its common
shares. For the fiscal year ended December 31, 2007, the Fund made
distributions of $1.20 per common share, none of which constituted a
return of capital. The composition of each distribution is
estimated based on earnings as of the record date for the distribution.
The actual composition of each distribution may change based on the Fund's
investment activity through the end of the calendar year. In
the event the Fund does not generate a total return from dividends
and interest received and net realized capital gains in an amount equal to
or in excess of its distribution in a given year, the Fund may return
capital as part of such distribution, which may have the effect of
decreasing the asset coverage per share with respect to the Fund’s
preferred shares. Any return of capital that is a component of a
distribution is not sourced from realized or unrealized profits of the
Fund and that portion should not be considered by investors as yield or
total return on their investment in the Fund. Shareholders should not
assume that a distribution from the Fund is comprised exclusively of net
profits.
Limitations on Distributions. If at any time
the Fund has notes outstanding, the Fund will be prohibited from
paying any distributions on any of its preferred shares or common shares
(other than in additional shares), and from repurchasing any of such
shares, unless, as provided in the 1940 Act, the value of its total
assets, less certain ordinary course liabilities, exceed 300% of the
amount of the debt outstanding and exceed 200% of the sum of the amount of
debt and preferred shares
outstanding.
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Tax
Treatment of Preferred
Share
Distributions
|
The
Fund expects that distributions on the preferred shares may consist of (i)
long-term capital gain (gain from the sale of a capital asset held longer
than 12 months), (ii) qualified dividend income (dividend income from
certain domestic and foreign corporations) and (iii) investment company
taxable income (other than qualified dividend income), including interest
income, short-term capital gain and income from certain hedging and
interest rate transactions. For individuals, the maximum federal income
tax rate on long-term capital gain is currently 15%, on qualified dividend
income is currently 15%, and on ordinary income (such as distributions
from investment company taxable income that are not eligible for treatment
as qualified dividend income) is currently 35%. Under current law, these
tax rates are scheduled to apply through 2010. The Fund expects that a
substantial portion of its income will consist of short-term capital
gains. We cannot assure you what percentage of the distributions paid on
the preferred shares, if any, will consist of tax advantaged qualified
dividend income or long-term capital gains or what the tax rates on
various types of income will be in future years. For a more detailed
discussion, see "Taxation."
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|
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. It
is anticipated that the investment of proceeds will be substantially
completed within three months; however, changes in market conditions could
result in the Fund's anticipated investment period extending to as long as
six months. See "Use of Proceeds."
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Exchange
Listing
|
The
Fund's common shares are listed on the NYSE under the trading or "ticker"
symbol "GDL." See "Description of the Securities." Future
series of fixed rate preferred shares and subscription rights would also
likely be listed on a stock exchange. Variable rate preferred
shares and notes will not likely be listed on a stock
exchange.
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Market
Price of
Shares
|
Common
shares of closed-end investment companies often trade at prices lower than
their net asset value. Common shares of closed-end investment
companies may trade during some periods at prices higher than their net
asset value and during other periods at prices lower than their net asset
value. The Fund cannot assure you that its common shares will
trade at a price higher than or equal to net asset value. The
Fund's net asset value will be reduced immediately following this offering
by the sales load and the amount of the offering expenses paid by the
Fund. See "Use of Proceeds."
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In
addition to net asset value, the market price of the Fund's common shares
may be affected by such factors as the Fund's dividend and distribution
levels (which are affected by expenses) and stability, market liquidity,
market supply and demand, unrealized gains, general market and economic
conditions and other factors. See "Risk Factors and Special
Considerations," "Description of the Securities" and "Repurchase of Common
Shares."
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|
Risk
Factors and
Special
Considerations
|
Risk
is inherent in all investing. Therefore, before investing in securities of
the Fund, you should consider the risks carefully.
Our Notes. An
investment in our notes is subject to special risks. There may not be
an established market for our notes. To the extent that our notes trade,
they may trade at a price either higher or lower than their principal
amount depending on interest rates, the rating (if any) on such notes and
other factors. See "Risk Factors and Special Considerations — Special
Risks to Holders of Notes."
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Our Fixed Rate Preferred
Shares. Prior to the
offering of any additional series of fixed rate preferred shares, there
will be no public market for such shares. During an initial
period, not expected to exceed 30 days after the date of initial issuance,
such shares may not be listed on any securities exchange. Consequently, an
investment in such shares may be illiquid during such
period. Fixed rate preferred shares may trade at a premium to
or discount from liquidation preference for a variety of reasons,
including changes in interest rates. See "Risk Factors and
Special Considerations — Special Risks to Holders of Fixed Rate Preferred
Shares."
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Our Variable Rate Preferred
Shares. In the event any auction-rate preferred shares
are issued, you may not be able to sell your auction-rate preferred shares
at an auction if the auction fails, i.e., if more auction-rate preferred
shares are offered for sale than there are buyers for those
shares. In the event any auction-rate preferred shares are
issued, if you try to sell your auction-rate preferred shares between
auctions, you may not be able to sell them for their liquidation
preference per share or such amount per share plus accumulated dividends.
Due to recent market turmoil, most auction-rate preferred share auctions have been unable to hold successful
auctions and holders of such shares have suffered reduced liquidity. See
"Risk Factors and Special Considerations — Special Risks to Holders of
Variable Rate Preferred Shares."
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| |
Our Subscription Rights.
There is a risk that changes in interest rates or changes in
the credit quality of the Fund may result in the underlying preferred
shares purchaseable upon exercise of the subscription rights being less
attractive to investors at the conclusion of the subscription
period. This may reduce or eliminate the value of the subscription
rights. Investors who receive subscription rights may find that
there is no market to sell rights they do not wish to exercise. If
investors exercise only a portion of the rights, the number of preferred
shares issued may be reduced, and the preferred shares may trade at less
favorable prices than larger offerings for similar
securities.
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Credit Quality
Ratings. In order to obtain and maintain attractive
credit quality ratings for preferred shares or borrowings, the Fund's
portfolio must satisfy over-collateralization tests established by the
relevant rating agencies. These tests are more difficult to
satisfy to the extent the Fund's portfolio securities are of lower credit
quality, longer maturity or not diversified by issuer and
industry. These guidelines could affect portfolio decisions and
may be more stringent than those imposed by the 1940 Act. A
rating (if any) by a rating agency does not eliminate or necessarily
mitigate the risks of investing in our preferred shares, and a rating may
not fully or accurately reflect all of the securities' credit risks. A
rating (if any) does not address liquidity or any other market risks of
the securities being rated. A rating agency could downgrade the rating of
our notes, which may make such securities less liquid in the secondary
market. If a rating agency downgrades the rating assigned to notes, we may
alter our portfolio or redeem the preferred securities under certain
circumstances. See "Risk Factors and Special Considerations — Credit
Quality Ratings."
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Common Share Repurchases.
Repurchases of common shares by the Fund may reduce the net
asset coverage of the notes and preferred shares, which could adversely
affect their liquidity or market prices. See "Risk Factors and Special
Considerations — Common Share Repurchases."
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Preferred Shares Subordinated
to Debt Securities. As provided in the 1940 Act, and
subject to compliance with the Fund's investment limitations, the Fund may
issue debt securities. In the event the Fund were to issue such
securities, the Fund's obligations to make distributions and, upon
liquidation of the Fund, liquidation payments in respect of its preferred
shares would be subordinate to the Fund's obligations to make any
principal and interest payments due and owing with respect to its
outstanding debt securities. Accordingly, the Fund's issuance
of debt securities would have the effect of creating special risks for the
Fund's preferred shareholders that would not be present in a capital
structure that did not include such securities. See "Risk
Factors and Special Considerations — Special Risks of Debt Securities to
Preferred Shares."
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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 shares and preferred shares, 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 U.S. federal income tax purposes. While the Fund intends to
redeem its preferred shares or prepay its notes only 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.
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| |
Common
Share Distribution Policy Risk. The Fund has adopted a policy,
which may be changed at any time by the Board, of paying quarterly
distributions on its common shares. In the event the Fund does not
generate a total return from dividends and interest received and net
realized capital gains in an amount equal to or in excess of
its distribution in a given year, the Fund may return capital as part
of such distribution, which may have the effect of decreasing the asset
coverage per share with respect to the Fund’s preferred shares. Any return
of capital should not be considered by investors as yield or total return
on their investment in the Fund. For the fiscal year ended December 31,
2007, the Fund made distributions of $1.20 per common share, none of which
constituted a return of capital. For the fiscal year ending December
31, 2008, the Fund has made distributions of $1.60 per common share.
Based on current earnings, the Fund expects a portion of the distributions
paid in 2008 to be deemed a non-taxable return of capital. The
composition of each distribution is estimated based on the earnings of the
Fund as of the record date for each distribution. The actual composition
of each of the current year’s distributions will be based on the Fund’s
investment activity through the end of the calendar
year.
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Leverage
Risk. The Fund intends to use financial leverage for
investment purposes by issuing preferred shares or debt securities. A
leveraged capital structure will create special risks not associated with
unleveraged funds having a 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
asset coverage for the preferred shares. Such volatility may
increase the likelihood of the Fund having to sell investments in order to
meet its obligations to make distributions on the preferred shares or
principal or interest payments on debt securities, or to redeem preferred
shares or repay debt, when it may be disadvantageous to do
so. The use of leverage magnifies both the favorable and
unfavorable effects of price movements in the investments made by the
Fund. To the extent that the Fund determines to employ leverage
in its investment operations, the Fund will be subject to substantial risk
of loss. The Fund cannot assure you that borrowings or the
issuance of preferred shares will result in a higher yield or return to
the holders of the common shares. Also, if the Fund is
utilizing leverage, a decline in net asset value could affect the ability
of the Fund to make common share distributions and such a failure to make
distributions could result in the Fund ceasing to qualify as a regulated
investment company under the Code. See
"Taxation."
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Preferred Share and Note
Risk. The issuance of preferred securities causes the
net asset value and market value of the common shares to become more
volatile. If the interest rate on the notes or the
dividend rate on the preferred shares approaches the net rate of return on
the Fund's investment portfolio, the benefit of leverage to the holders of
the common shares would be reduced. If the interest rate on the
notes or the dividend rate on the preferred shares exceeds the net rate of
return on the Fund's portfolio, the leverage will result in a lower rate
of return to the holders of common shares than if the Fund had not issued
preferred shares.
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Any
decline in the net asset value of the Fund's investments would be borne
entirely by the holders of common shares. Therefore, if the
market value of the Fund's portfolio declines, the leverage will result in
a greater decrease in net asset value to the holders of common shares than
if the Fund were not leveraged. This greater net asset value
decrease will also tend to cause a greater decline in the market price for
the common shares. The Fund might be in danger of failing to
maintain the required asset coverage of the notes or preferred shares or,
in an extreme case, the Fund's current investment income might not be
sufficient to meet the dividend requirements on the preferred
shares. In order to counteract such an event, the Fund might
need to liquidate investments in order to fund redemption of some or all
of the preferred shares.
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In addition, the
Fund would pay (and the holders of common shares would bear) all costs and
expenses relating to the issuance and ongoing maintenance of the preferred
shares, including any additional advisory fees on the incremental assets
attributable to such shares. Holders of notes and preferred shares
may have different interests than holders of common shares and at times
may have disproportionate influence over the Fund's affairs. In
the event the Fund fails to maintain the specified level of asset coverage
of any notes outstanding, the holders of the notes will have the right to
elect a majority of the Fund's trustees. In addition, holders of preferred
shares, voting separately as a single class, have the right to elect two
members of the Board at all times and in the event dividends become in
arrears for two full years would have the right (subject to the rights of
noteholders) to elect a majority of the Trustees until the arrearage is
completely eliminated. In addition, preferred shareholders have
class voting rights on certain matters, including changes in fundamental
investment restrictions and conversion of the Fund to open-end status, and
accordingly can veto any such changes. See "Risk Factors and Special
Considerations — Preferred Share and Note Risk."
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Special Risks Related to
Preferred Shares. Special risks associated with the Fund
investing in preferred shares include deferral of distributions or
dividend payments, in some cases the right of an issuer never to pay
missed dividends, subordination to debt and other liabilities,
illiquidity, limited voting rights and redemption by the
issuer. Because the Fund has no limit on its investment in
non-cumulative preferred shares, the amount of dividends the Fund pays may
be adversely affected if an issuer of non-cumulative preferred shares held
by the Fund determines not to pay dividends on such
shares. There is no assurance that dividends or distributions
on preferred shares in which the Fund invests will be declared or
otherwise made payable. See "Risk Factors and Special
Considerations — Risks of Investing in the Fund — Special Risks Related to
Preferred Shares."
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Merger
Arbitrage Risk. The principal risk associated with the
Fund’s investment strategy is that certain of the proposed reorganizations
in which the Fund invests may be renegotiated, terminated or involve a
longer time frame than originally contemplated, in which case losses may
be realized. The
investment policies of the Fund are expected to lead to frequent changes
in investments, which increase transaction costs to the Fund, and may also
result in accelerated recognition of short-term capital gain, which will
be taxable to shareholders when distributed by the Fund. See “Risk Factors and Special
Considerations — Risk of Investing in the Fund — Merger Arbitrage
Risk.”
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Non-Diversified
Status. As a non-diversified, closed-end management
investment company under the 1940 Act, the Fund may invest a greater
portion of its assets in a more limited number of issuers than may a
diversified fund, and accordingly, an investment in the Fund may, under
certain circumstances, present greater risk to an investor than an
investment in a diversified company. See "Risk Factors and
Special Considerations — Risks of Investing in the Fund — Non-Diversified
Status."
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Foreign Securities
Risk. The Fund has no limit on the amount of its net
assets it may invest in foreign securities. Investing in securities of
foreign companies (or 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 Considerations — Risks of Investing in the Fund
— Foreign Securities Risk."
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Lower Grade
Securities. The Fund has no limit on the amount of its
net assets it may invest in fixed-income securities rated below investment
grade by recognized statistical rating agencies or unrated securities of
comparable quality. However, the Fund does not expect these
investments to exceed 10% of its total assets. The prices of these lower
grade securities are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are
the prices of higher grade securities. Securities of below investment
grade quality are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal when due and therefore
involve a greater risk of default and are commonly referred to as "junk
bonds." See "Risk Factors and Special Considerations — Risks of Investing
in the Fund — Lower Grade Securities."
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Derivative
Transactions. The Fund may participate in certain
derivative transactions. Such transactions entail certain execution,
market, liquidity, hedging and tax risks. 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 or 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. See
"Risk Factors and Special Considerations — Risks of Investing in the Fund
— Special Risks of Derivative Transactions."
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Interest Rate
Transactions. The Fund may enter into an interest rate
swap or cap transaction with respect to all or a portion of any future
series of variable rate preferred shares. The use of interest
rate swaps and caps is a highly specialized activity that involves certain
risks to the Fund includi
ng,
among others, counterparty risk and early termination risk. See
"Risk Factors and Special Considerations — Risks of Investing in the Fund
—Swaps."
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Management
Risk. The Fund is subject to management risk because it
is an actively managed portfolio. The Investment Adviser will apply
investment techniques and risk analyses in making investment decisions for
the Fund, but there can be no guarantee that these will produce the
desired results. See "Risk Factors and Special Considerations — Risks of
Investing in the Fund — Management Risk."
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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. See
"Risk Factors and Special Considerations — Risks of Investing in the Fund
— Dependence on Key Personnel."
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Anti-Takeover
Provisions. The Fund's Governing Documents (as defined
herein) include provisions that could limit the ability of other entities
or persons to acquire control of the Fund or convert the Fund to an
open-end fund. See "Anti-Takeover Provisions of the Fund's Governing
Documents."
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The
Fund has elected and has qualified for, and intends to remain qualified
for, U.S. federal income tax purposes as a regulated investment company.
Qualification requires, among other things, compliance by the Fund with
certain distribution requirements. Statutory limitations on distributions
on the common shares if the Fund fails to satisfy the 1940 Act's asset
coverage requirements could jeopardize the Fund's ability to meet such
distribution requirements. The Fund presently intends, however, to
purchase or redeem preferred shares 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 U.S. federal income tax considerations.
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Management and
Fees
|
Gabelli
Funds, LLC serves as the Fund's Investment Adviser and its fee is
calculated on the basis of the Fund's managed assets, which includes all
of the assets of the Fund without deduction for borrowings, repurchase
transactions and other leveraging techniques, the liquidation value of any
outstanding preferred shares or other liabilities except for certain
ordinary course expenses. The fee may be higher when leverage is utilized,
giving the Investment Adviser an incentive to utilize such
leverage. The
base rate will be an annual rate of 0.50% of the Fund’s average weekly
managed assets payable monthly in arrears. In addition, the Investment
Adviser will be entitled to receive an annual performance fee as of the
end of each calendar year if the total return of the Fund on its common
shares during the calendar year in question exceeds the total return of an
index of three-month U.S. Treasury bills (the “T-Bill Index”) during the
same period. If the Fund’s total return for the calendar year
equals the total return of the T-Bill Index for the same period plus 3.0
percentage points (300 basis points), the Investment Adviser will
receive a performance fee of 0.75% of the Fund’s average weekly managed
assets during the period. This performance fee will be increased by 0.01
percentage point (one basis point) for each 0.04 percentage
point (four basis points) by which the Fund’s total return during the
period exceeds the T-Bill Index total return plus 3.0 percentage
points (300 basis points), up to a maximum performance fee of 1.50%
if the excess performance over the T-Bill Index is 6.0 percentage
points (600 basis points) or greater and will be decreased at the
same rate for the amount by which the Fund’s total return during the
period is less than the T-Bill Index total return plus 3.0 percentage
points (300 basis points), until no performance fee is payable if the
Fund’s total return is less than or equal to the T-Bill Index total
return. See “Management of the Fund.”
Under
the performance fee arrangement, the annual rate of the total fees paid to
the Investment Adviser can range from 0.50% to 2.00% of the Fund’s average
weekly managed assets.
|
Total
Investment Advisory Fee Rate
(as
a percentage of average weekly managed assets)
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T-Bill
Index
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|
|
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|
|
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|
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|
|
|
|
|
|
2%
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
|
3%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
|
4%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
|
5%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
|
|
6%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
|
|
7%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
|
|
8%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
|
Repurchase
of Common Shares
and
Anti-takeover Provisions
|
The
Fund's Board has authorized the Fund to repurchase its common shares in
the open market when the common shares are trading at a discount of 7.5%
or more from net asset value (or such other percentage as the Board may
determine from time to time). Although the Board has authorized such
repurchases, the Fund is not required to repurchase its common
shares. The Board has not established a limit on the number of
shares that could be purchased during such period. Such
repurchases are subject to certain notice and other requirements under the
1940 Act. See "Repurchase of Common Shares."
|
|
|
Certain
provisions of the Fund's Agreement and Declaration of Trust and By-Laws
(collectively, the "Governing Documents") may be regarded as
"anti-takeover" provisions. Pursuant to these provisions, only one of
three classes of trustees is elected each year, and the affirmative vote
of the holders of 75% of the outstanding shares of the Fund is
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 shareholder. These provisions may
have the effect of depriving Fund common shareholders of an opportunity to
sell their shares at a premium to the prevailing market price. See
"Anti-Takeover Provisions of the Fund's Governing Documents."
|
|
Custodian
|
The
Bank of New York Mellon (the "Custodian"), located at 135 Santilli
Highway, Everett, Massachusetts 02149, 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 receives a monthly fee based
upon, among other things, the average value of the total assets of the
Fund, plus certain charges.
|
|
Transfer
Agent and
Dividend
Disbursing Agent
|
American
Stock Transfer & Trust Company, located at 59 Maiden Lane, New York,
New York 10038, 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 shares of the Fund.
|
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 the fiscal year ended December 31, 2007, has been
audited by Ernst & Young LLP, the Fund's independent registered public
accounting firm, whose unqualified report on such Financial Statements is
incorporated by reference into the SAI.
Selected
data for a common share of beneficial interest outstanding throughout each
period:
Operating
Performance:
| |
|
| |
Six
Months Ended
June 30, 2008 (Unaudited)
|
|
Period
Ended
December 31, 2007
(d)
|
| |
|
|
|
| |
|
|
|
|
Net
asset value, beginning of period
|
$ 18.50
|
|
$ 19.06(e) |
|
Net
investment income (a)
|
0.09
|
|
0.37 |
|
Net
realized and unrealized gain (loss) on investments, swap contracts, and
foreign currency transactions
|
(0.25)
|
|
0.27 |
|
Total
from investment operations
|
(0.16)
|
|
0.64 |
|
|
|
|
|
|
Distributions
to Common Shareholders:
|
|
|
|
|
Net
investment income
|
(0.12)***
|
|
(0.30) |
|
Net
realized gains on investments, swap contracts, and foreign currency
transactions
|
(0.23)***
|
|
(0.90) |
|
Return of capital |
(0.45)*** |
|
— |
|
Total distributions to common shareholders
|
(0.80)
|
|
(1.20) |
|
|
|
|
|
|
Fund
Share Transactions:
|
|
|
|
|
Increase
in net asset value from common share transactions
|
0.00(f)
|
|
0.00(f) |
|
Net
Asset Value, End of Period
|
$ 17.54
|
|
$ 18.50 |
|
Net asset value total return*
|
(0.92)%
|
|
3.35% |
|
Market value, end of period
|
$ 15.51
|
|
$ 15.96 |
|
Total investment return**
|
2.11%
|
|
(14.55)% |
|
|
|
|
|
|
Ratios
to Average Net Assets and Supplemental Data:
|
|
|
|
|
Net
assets end of period (in 000's)
|
$373,018
|
|
$394,017 |
|
Ratio
of net investment income to average net assets
|
1.02%(g)
|
|
2.12%(g) |
|
Ratio
of operating expenses to average net assets (b)(c)
|
0.65%(g)
|
|
0.64%(g)
|
|
Portfolio
turnover rate
|
145%
|
|
177%**** |
_______________________
|
*
|
Based
on net asset value per share, at commencement of operations of $19.06 per
share, adjusted for reinvestment of distributions at the net asset value
per share on the ex-dividend dates. Total return for a period
of less than one year is not
annualized.
|
|
**
|
Based
on market value per share, at initial public offering of $20.00 per share,
adjusted for reinvestments of distributions at prices obtained under the
Fund's dividend reinvestment plan. Total return for a period of
less than one year is not
annualized.
|
|
***
|
Based
on current earnings and subject to change and recharacterization at fiscal
year end.
|
|
****
|
Effective
in 2008, a change in accounting policy was adopted with regard to the
calculation of the portfolio turnover rate. Had this policy been
adopted retroactively, the portfolio turnover rate for the period ended
December 31, 2007 would have been
411%.
|
|
(a)
|
Per
share amounts have been calculated using the average shares outstanding
method.
|
|
(b)
|
The
ratio does not include a reduction of expenses for custodian fee credits
on cash balances maintained with the custodian. Including such
custodian fee credits, the expense ratio for the six months ended June 30,
2008 and period ended December 31, 2007 would have been 0.64% and 0.63%,
respectively.
|
|
(c)
|
The
Fund incurred interest expense during the period ended December 31,
2007. If interest expense had not been incurred, the ratio of
operating expenses to average net assets would have been
0.62%.
|
|
(d)
|
The
Gabelli Global Deal Fund commenced investment operations on January 31,
2007.
|
|
(e)
|
The
beginning of the period NAV reflects a $0.04 reduction for costs
associated with the initial public
offering.
|
|
(f)
|
Amount
represents less than $0.005 per
share
|
USE
OF PROCEEDS
The
Investment Adviser expects that it will initially invest the proceeds of the
offering in high quality short-term debt securities and
instruments. The Investment Adviser anticipates that the investment
of the proceeds will be made in accordance with the Fund's investment objective
and policies as appropriate investment opportunities are identified, which is
expected to substantially be completed within three months; however, changes in
market conditions could result in the Fund's anticipated investment period
extending to as long as six months.
THE
FUND
The
Fund is a non-diversified, closed-end management investment company registered
under the 1940 Act. The Fund was organized as a Delaware statutory trust on
October 17, 2006, pursuant to an Agreement and Declaration of Trust governed by
the laws of the State of Delaware. The Fund commenced its investment operations
on January 31, 2007. The Fund’s principal office is located at One Corporate
Center, Rye, New York, 10580-1422 and its telephone number is (800)
422-3554.
INVESTMENT
OBJECTIVE AND POLICIES
Investment
Objective
The
Fund’s investment objective is to achieve absolute returns in various market
conditions without excessive risk of capital. Absolute returns are defined as
positive total returns, regardless of the direction of securities markets. The
Fund will seek to achieve its objective by investing primarily in merger
arbitrage transactions and, to a lesser extent, in corporate reorganizations
involving stubs, spin-offs and liquidations. Under normal circumstances, the
Fund will invest at least 80% of its assets in securities or hedging
arrangements relating to companies involved in corporate transactions or
reorganizations, giving rise to the possibility of realizing gains upon or
within relatively short periods of time after the completion of such
transactions or reorganizations.
The
Investment Adviser considers the Fund’s merger arbitrage investment results to
be less volatile than overall stock price movements. While some periods will be
more conducive to a merger arbitrage strategy than others, a systematic,
disciplined arbitrage program may produce attractive rates of return over time
even in flat or down markets. Except as otherwise stated, the Fund’s investment
objective and policies are not fundamental and may be changed without obtaining
approval from the Fund’s shareholders.
Investment
Methodology of the Fund
In
selecting transactions in which the Fund
will invest, the Investment Adviser normally will consider the following
factors, among others:
• the
probability that the targeted acquisition or other transaction will
close;
• the
length of time to closing;
• the
credibility, strategic motivation and financial resources of the
participants;
• the
liquidity of the securities involved in the transaction;
• the
issuer’s free cash flow and long-term earnings trends;
• the
likelihood of an overbid; and
• the
presence of a catalyst: something indigenous to the issuer, its industry, or
country to surface additional value.
The
Investment Adviser believes that blending traditional merger arbitrage for
announced deals with strategies that focus on stubs, spin-offs and liquidations
will produce absolute returns in excess of short-term interest rates with less
volatility than the returns typically associated with equity investing. A
systematic and disciplined arbitrage program may produce attractive rates of
return even in flat or down markets.
Certain
Investment Practices
Merger
Arbitrage. The Fund will invest in the equity securities of
companies which are involved in publicly announced mergers, takeovers and other
corporate reorganizations. Merger arbitrage is a highly specialized investment
approach generally designed to profit from the successful completion of proposed
mergers, takeovers, tender offers and leveraged buyouts. Although a variety of
strategies may be employed depending upon the nature of the reorganizations
selected for investment, the most common merger arbitrage activity involves
purchasing the shares of an announced acquisition target at a discount to their
expected value upon completion of the acquisition. Although investors can
utilize merger arbitrage techniques with respect to companies the investor
believes may soon become subject to a merger proposal or negotiated transaction,
the Fund intends to invest primarily in publicly announced
transactions.
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 but at a discount to what the stated or appraised value of the
securities would be if the contemplated transaction were completed. Investments
in these securities may be advantageous when the discount overstates the risk of
the contingencies involved; undervalues the securities, assets or cash to be
received by shareholders of the prospective portfolio company as a result of the
contemplated transaction; or 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
offering party and/or the dynamics and business climate when the offer or
proposal is in process. Since such investments are ordinarily short-term in
nature, they will tend to increase the turnover ratio of the Fund (which may
exceed 300%), thereby increasing its brokerage and other transaction expenses.
The Investment Adviser intends to select investments of this type which, in its
view, have reasonable prospects of capital appreciation which are significant in
relation to both the risk involved and the potential of available alternative
investments.
Depending
upon the level of merger activity and other economic and market conditions, the
Fund may temporarily invest a substantial portion of its assets in other
securities, including money market instruments such as Treasury bills and other
short-term obligations of the U.S. Government, its agencies or
instrumentalities; shares of one or more money market funds managed by the
Investment Adviser or unaffiliated managers; negotiable bank certificates of
deposit; prime commercial paper; and repurchase agreements with respect to the
above securities.
The
Fund may use hedging arrangements, including investments in options and futures,
in order to reduce the risk of adverse price movements in securities it holds,
with the goal of consistently achieving absolute returns. The Fund does not
anticipate that its investments in futures contracts will require aggregate
initial margins and premiums in excess of 5% of its assets or that the option
premiums paid with respect to outstanding options will exceed 10% of its assets
at any particular time.
As
a global fund, the Fund may invest without limitation in the securities of
foreign and domestic issuers. The Fund’s investment strategy is to invest in
merger arbitrage transactions and corporate reorganizations throughout the
world. As the dollar volume and range of countries involved in significant
merger arbitrage and corporate reorganizations has increased over the past
several years, the Fund expects that its assets will usually be invested in
several countries. Under normal market conditions, the Fund expects to have at
least 40% of its assets invested in at least three countries, other than the
United States. To the extent that the majority of mergers, takeovers, tender
offers and leveraged buyouts and corporate reorganizations are concentrated in
any given geographic region, such as Europe, North America or Asia, a relatively
high proportion of the Fund’s assets may be invested in that particular
region.
Foreign
Securities. The Fund may make unlimited investments in the
securities of non-United States issuers, which are generally denominated in
foreign currencies. See “Risk Factors and Special Considerations — Foreign
Securities Risk.” The Fund may purchase sponsored American Depository Receipts
(“ADRs”) or United States dollar denominated securities of foreign issuers. ADRs
are receipts issued by U.S. banks or trust companies in respect of securities of
foreign issuers held on deposit for use in the U.S. securities
markets.
Options. The Fund
may 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
over-the-counter (“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, in
return for a premium, gives the holder of the option the right to buy from the
writer of the call option the security or currency underlying the option at a
specified exercise price at any time during the term of the option. The writer
of the call option has the obligation, upon exercise of the option, to deliver
the underlying security or currency upon payment of the exercise price during
the option period. A put option is the reverse of a call option, giving the
holder the right, in return for a premium, to sell the underlying security to
the writer at a specified price and obligating the writer to purchase the
underlying security from the holder at that price.
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, with respect to
exchange-traded options, 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 on an exchange. 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, prevailing 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 investment 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 or in a private transaction. 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 persist 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.
The
sale of covered call options may also be used by the Fund to reduce the risks
associated with individual investments and to increase total investment
return.
In
the event the Fund sells a put option or enters into long futures contracts,
under current interpretations of the 1940 Act, an amount of cash, U.S.
Government Securities or other liquid securities equal to the market value of
the contract must be deposited and maintained in a segregated account with the
Fund's custodian to collateralize the positions, in order for the Fund to avoid
being treated as having issued senior security in the amount of its obligations.
For short positions in futures contracts and sales of call options, the Fund may
establish a segregated account (not with a futures commission merchant or
broker) with cash, U.S. Government Securities or other high grade debt
securities that, when added to amounts deposited with a futures commission
merchant or a broker as margin, equal the market value of the instruments or
currency underlying the futures contracts or call options, respectively (but are
no less than the stock price of the call option or the market price at which the
short positions were established).
Futures Contracts and Options on
Futures. The Fund may purchase and sell financial futures
contracts and options thereon which are traded on a commodities exchange or
board of trade for certain hedging and risk management purposes. 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. These
futures contracts and related options may be on debt securities, financial
indices, securities indices, U.S. government securities and foreign currencies.
The Investment Adviser has claimed an exclusion from the definition of the term
“commodity pool operator” under the Commodity Exchange Act and therefore is not
subject to registration under the Commodity Exchange Act. Accordingly, the
Fund’s investments in derivative instruments described in this prospectus and
the SAI are not limited by or subject to regulation under the Commodity Exchange
Act or otherwise regulated by the Commodity Futures Trading
Commission.
Swaps. The Fund
may enter into total rate of return, credit default or other types of swaps and
related derivatives for the purpose of hedging and risk
management. These transactions generally provide for the transfer
from one counterparty to another of certain risks inherent in the ownership of a
financial asset such as a common stock or debt instrument. Such risks
include, among other things, the risk of default and insolvency of the obligor
of such asset, the risk that the credit of the obligor or the underlying
collateral will decline or the risk that the common stock of the underlying issuer will decline in value. The transfer
of risk pursuant to
a
derivative of this type may be complete or partial, and may be for the life
of the related asset or for a shorter period. These derivatives may
be used as a risk management tool for a pool of financial assets, providing the
Fund with the opportunity to gain or reduce exposure to one or more reference
securities or other financial assets (each, a “Reference Asset”) without
actually owning or selling such assets in order, for example, to increase or
reduce a concentration risk or to diversify a portfolio. Conversely,
these derivatives may be used by the Fund to reduce exposure to an owned asset
without selling it.
Because the Fund would not own the
Reference Assets, the Fund may not have any voting rights with respect to the
Reference Assets, and in such cases all decisions related to the obligors or
issuers of the Reference Assets, including whether to exercise certain remedies,
will be controlled by the swap counterparties.
Total rate of return swaps and
similar derivatives are subject to many risks, including the possibility that
the market will move in a manner or direction that would have resulted in gain
for the Fund had the swap or other derivative not been utilized (in which case
it would have been better had the Fund not engaged in the interest rate hedging
transactions), the risk of imperfect correlation between the risk sought to be
hedged and the derivative transactions utilized, the possible inability of the
counterparty to fulfill its obligations under the swap and potential illiquidity
of the hedging instrument utilized, which may make it difficult for the Fund to
close out or unwind one or more hedging transactions.
Total rate of return swaps and
related derivatives are a relatively recent development in the financial
markets. Consequently, there are certain legal, tax and market
uncertainties that present risks in entering into such
arrangements. There is currently little or no case law or litigation
characterizing total rate of return swaps or related derivatives, interpreting
their provisions, or characterizing their tax treatment. In addition,
additional regulations and laws may apply to these types of derivatives that
have not previously been applied. There can be no assurance that
future decisions construing similar provisions to those in any swap agreement or
other related documents or additional regulations and laws will not have an
adverse effect on the Fund that utilizes these instruments.
Short Sales. The
Fund may make short sales of securities. A short sale is a transaction in which
the Fund sells a security it does not own in anticipation that the market price
of that security will decline. The market value of the securities sold short of
any one issuer will not exceed either 25% of the Fund’s total assets or 5% of
such issuer’s voting securities. The Fund also will not make a short sale, if,
after giving effect to such sale, the market value of all securities sold short
exceeds 50% of the value of its assets. The Fund may also make short sales
“against the box” without respect to such limitations. In this type of short
sale, at the time of the sale, the Fund owns, or has the immediate and
unconditional right to acquire at no additional cost, the identical
security.
The
Fund expects to make short sales both to obtain capital gains from anticipated
declines in securities and as a form of hedging to offset potential declines in
long positions in the same or similar securities. The short sale of a security
is considered a speculative investment technique. Short sales “against the box”
may be subject to special tax rules, one of the effects of which may be to
accelerate income to the Fund.
When
the Fund makes a short sale, it must borrow the security sold short and deliver
it to the broker-dealer through which it made the short sale in order to satisfy
its obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow particular securities and is often obligated to
deliver any payments received on such borrowed securities, such as
dividends.
If
the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss will be increased, by the transaction
costs incurred by the Fund, including the costs associated with providing
collateral to the broker-dealer (usually cash, United States government
securities or other highly liquid debt securities) and the maintenance of
collateral with its custodian. Although the Fund’s gain is limited to the price
at which it sold the security short, its potential loss is theoretically
unlimited.
Derivatives. Investments
in options, futures and swaps are often referred to as derivatives transactions.
The Fund expects that it will invest in these types of instruments primarily for
hedging and risk management purposes and that its investments in derivatives and
short sales for purposes unrelated to corporate transactions or reorganizations
will not exceed 5% of its total assets.
There
is no specific limit on the proportion of its assets that the Fund may use to
invest in derivatives and conduct short sales in connection with its investments
in corporate transactions and reorganizations, although the Fund expects that it
will not be required to utilize more than 10% of the assets it has invested in a
particular transaction to hedge its gains in such transaction.
Lower Grade
Securities. The Fund may make unlimited investments in fixed
income securities rated below investment grade by recognized statistical rating
agencies or unrated securities of comparable quality, including securities of
issuers in default, which are likely to have the lowest rating. However, the
Fund does not expect these investments to exceed 10% of its total assets. These
securities, which may be preferred shares or debt, are predominantly speculative
and involve major risk exposure to adverse conditions. Debt securities that are
rated lower than “BBB” by Standard & Poor’s Ratings Services, a division of
The McGraw-Hill Companies, Inc. (“S&P”), or lower than “Baa” by Moody’s
Investors Service, Inc. (“Moody’s”) or unrated securities considered by the
Investment Adviser to be of comparable quality, are commonly referred to as
“junk bonds.”
Generally,
such lower grade securities and unrated securities of comparable quality offer a
higher current yield than is offered by higher rated securities, but also (i)
will likely have some quality and protective characteristics that, in the
judgment of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer’s capacity to pay interest and repay
principal in accordance with the terms of the obligation. The market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher quality
bonds. In addition, such securities generally present a higher degree of credit
risk. The risk of loss due to default by these issuers is significantly greater
because such lower grade securities and unrated securities of comparable quality
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. In light of these risks, the Investment Adviser, in
evaluating the creditworthiness of an issue, whether rated or unrated, will take
various factors into consideration, which may include, as applicable, the
issuer’s operating history, financial resources and its sensitivity to economic
conditions and trends, the market support for the facility financed by the
issue, the perceived ability and integrity of the issuer’s management and
regulatory matters.
In
addition, the market value of securities in lower rated categories is more
volatile than that of higher quality securities, and the markets in which such
lower rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its portfolio and calculating its net asset value. Moreover,
the lack of a liquid trading market may restrict the availability of securities
for the Fund to purchase and may also have the effect of limiting the ability of
the Fund to sell securities at their fair value in response to changes in the
economy or the financial markets.
Lower
grade securities also present risks based on payment expectations. If an issuer
calls the obligation for redemption (often a feature of fixed income
securities), the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Also, as the principal
value of nonconvertible bonds and preferred shares moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by the Fund may decline proportionately more than a
portfolio consisting of higher rated securities. Investments in zero coupon
bonds may be more speculative and subject to greater fluctuations in value due
to changes in interest rates than bonds that pay regular income streams. Current
interest rates are relatively low and, therefore, it is possible that they will
rise in the future.
As
part of its investment in lower grade securities, the Fund may invest in
securities of issuers in default. The Fund will make an investment in securities
of issuers in default only when the Investment Adviser believes that such
issuers will honor their obligations or emerge from bankruptcy protection under
a plan pursuant to which the securities received by the Fund in exchange for its
defaulted securities will have a value in excess of the Fund’s investment. By
investing in securities of issuers in default, the Fund bears the risk that
these issuers will not continue to honor their obligations or emerge from
bankruptcy protection or that the value of the securities will not otherwise
appreciate.
In
addition to using recognized rating agencies and other sources, the Investment
Adviser also performs its own analysis of issues in seeking investments that it
believes to be underrated (and thus higher yielding) in light of the financial
condition of the issuer. Its analysis of issuers may include, among other
things, current and anticipated cash flow and borrowing requirements, value of
assets in relation to historical cost, strength of management, responsiveness to
business conditions, credit standing, and current anticipated results of
operations. In selecting investments for the Fund, the Investment Adviser may
also consider general business conditions, anticipated changes in interest rates
and the outlook for specific industries.
Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. In addition, it is possible that statistical rating
agencies may change their ratings of a particular issue to reflect subsequent
events. Moreover, such ratings do not assess the risk of a decline in market
value. None of these events will require the sale of the securities by the Fund,
although the Investment Adviser will consider these events in determining
whether the Fund should continue to hold the securities.
The
market for lower grade and comparable unrated securities has experienced periods
of significantly adverse price and liquidity several times, particularly at or
around times of economic recessions. Past market recessions have adversely
affected the value of such securities as well as the ability of certain issuers
of such securities to repay principal and pay interest thereon or to refinance
such securities. The market for those securities may react in a similar fashion
in the future.
Forward Foreign Currency Exchange
Contracts. There is no limit on the Fund’s ability to invest
in foreign currency exchange contracts, as the Fund may invest up to 100% of its
assets in transactions involving securities denominated in foreign currencies.
The Fund may hedge up to 100% of its currency exposure.
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 expects to invest in forward currency contracts for hedging or currency
risk management purposes and not in order to speculate on currency exchange rate
movements. The Fund will only enter into forward currency contracts with parties
which the Investment Adviser believes to be creditworthy. To ensure that its
forward currency contracts are not used to achieve investment leverage, the Fund
will segregate liquid assets consisting of cash, U.S. Government Securities or
other liquid securities with its custodian, or a designated sub-custodian, in an
amount at all times equal to or exceeding its commitment with respect to the
contracts.
Repurchase Agreement
Transactions. Repurchase agreements may be seen as loans by
the Fund collateralized by underlying debt securities. Under the terms of a
typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed price and time. This arrangement results in a fixed
rate of return to the Fund that is not subject to market fluctuations during the
holding period. The Fund bears a risk of loss in the event that the other party
to a repurchase agreement defaults on its obligations and the Fund is delayed in
or prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which it seeks to assert these rights. The
Investment Adviser, acting under the supervision of the Board, reviews the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate these risks and monitors on an ongoing basis
the value of the securities subject to repurchase agreements to ensure that the
value is maintained at the required level. The Fund will not enter into
repurchase agreements with the Investment Adviser or any of its
affiliates.
Leverage. As
provided in the 1940 Act and subject to certain exceptions, the Fund may issue
debt or preferred shares with the condition that immediately after issuance the
value of its total assets, less certain ordinary course liabilities, exceed 300%
of the amount of the debt outstanding and exceed 200% of the sum of the amount
of debt and preferred shares outstanding. Any such debt or preferred shares may
be convertible in accordance with Securities and Exchange Commission guidelines,
which may permit each fund to obtain leverage at attractive rates.
The
concept of leveraging is based on the premise that so long as the cost of the
leverage on the assets to be obtained by the leverage is lower than the return
earned by the Fund on these leveraged assets, the common shareholders will
benefit from the incremental return. Should the differential between the return
produced by the underlying assets and the cost of leverage narrow, the
incremental return will be reduced.
Furthermore,
if the cost of the leverage on the leveraged assets exceeds the return earned by
the Fund on these leveraged assets, the net asset value of the Fund will be
diminished. See “Risk Factors and Special Considerations — Leverage
Risk.”
An issuance of preferred shares may
subject the Fund to certain restrictions on investments imposed by guidelines of
one or more rating agencies that may issue ratings for any preferred securities
issued by the Fund.
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.
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). Higher
portfolio turnover may decrease the after-tax return to individual investors in
the Fund to the extent it results in a decrease of the long term capital gains
portion of distributions to shareholders.
For the partial year ended December 31,
2007, the portfolio turnover rate of the Fund was 177%. The Fund
anticipates that its portfolio turnover rate will be substantial and may exceed
300%.
The Fund has adopted certain investment
limitations designed to limit investment risk. 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 common shares and preferred shares,
if any, voting together as a single class. See “Investment Restrictions” in the
SAI for a complete list of the fundamental investment policies of the Fund.
Should the Fund issue debt, preferred shares or other leverage instruments in
the future, it may become subject to rating agency guidelines (if any) that are
more limiting than its fundamental investment restrictions in order to obtain
and maintain a desired rating on such leverage.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investors
should consider the following risk factors and special considerations associated
with investing in the Fund.
Special
Risks to Holders of Notes
There may not be an established market
for our notes. To the extent that our notes trade, they may trade at a price
either higher or lower than their principal amount depending on interest rates,
the rating (if any) on such notes and other factors.
Special
Risks to Holders of Fixed Rate Preferred Shares
Illiquidity Prior
to Exchange Listing. Prior to the offering of any additional
series of fixed rate preferred shares, there will be no public market for such
shares. In the event any fixed rate preferred shares are issued,
prior application will have been made to list such shares on the
NYSE. However, during an initial period, which is not expected to
exceed 30 days after the date of initial issuance, such shares may not be listed
on any securities exchange. During such period, the underwriters may make a
market in such shares, though, they will have no obligation to do
so. Consequently, an investment in such shares may be illiquid during
such period.
Market Price Fluctuation. Fixed rate
preferred shares may trade at a premium to or discount from liquidation
preference for a variety of reasons, including changes in interest
rates.
Special
Risks for Holders of Variable Rate Preferred Shares
Auction
Risk. In
the event any auction-rate preferred shares are issued, you may not be able to
sell your auction-rate preferred shares at an auction if the auction fails,
i.e., if more auction-rate preferred shares are offered for sale than there are
buyers for those shares. Also, if the auction is successful, and if
you place an order (a hold order) at an auction to retain auction-rate preferred
shares only at a specified rate that exceeds the rate set at the auction, you
will not retain your auction-rate preferred shares. 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. Moreover, the dividend period may be changed, subject to
certain conditions and with notice to the holders of the auction-rate preferred
shares, which could also affect the liquidity of your investment. Due to recent
market turmoil, most auction-rate preferred share auctions have been unable to
hold successful auctions and holders of such shares have suffered reduced
liquidity.
Secondary
Market
Risk. In
the event any auction-rate preferred shares are issued, if you try to sell your
auction-rate preferred shares between auctions, you may not be able to sell them
for their liquidation preference per share or such amount 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 auction-rate preferred shares are not required to maintain this market, and
the Fund is not required to redeem auction-rate preferred shares if either an
auction or an attempted secondary market sale fails because of a lack of
buyers. The auction-rate preferred shares will not be registered on a
stock exchange. If you sell your auction-rate preferred shares 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. Due to recent market turmoil, most
auction-rate preferred share auctions have been unable to hold successful
auctions and holders of such shares have suffered reduced
liquidity.
Special
Risks for
Holders of Subscription Rights
There is a risk that
changes in interest rates or changes in the credit quality of the Fund may
result in the underlying preferred shares purchaseable upon exercise of the
subscription rights being less attractive to investors at the conclusion of the
subscription period. This may reduce or eliminate the value of the
subscription rights. Investors who receive subscription rights may find
that there is no market to sell rights they do not wish to exercise. If
investors exercise only a portion of the rights, the number of preferred
shares issued may be reduced, and the preferred shares may trade at less
favorable prices than larger offerings for similar
securities.
Credit
Quality Ratings
In
order to obtain and maintain attractive credit quality ratings (if any) for
preferred shares or borrowings, the Fund's portfolio must satisfy
over-collateralization tests established by the relevant rating
agencies. These tests are more difficult to satisfy to the extent the
Fund's portfolio securities are of lower credit quality, longer maturity or not
diversified by issuer and industry. These guidelines could affect
portfolio decisions and may be more stringent than those imposed by the 1940
Act. A rating (if any) by a rating agency does not eliminate or
necessarily mitigate the risks of investing in our preferred shares, and a
rating may not fully or accurately reflect all of the securities' credit risks.
A rating (if any) does not address liquidity or any other market risks of the
securities being rated. A rating agency could downgrade the rating of our notes,
which may make such securities less liquid in the secondary market. If a rating
agency downgrades the rating assigned to notes, we may alter our portfolio or
redeem the preferred shares under certain circumstances.
Common
Stock Repurchases
Repurchases
of common stock by the Fund may reduce the net asset coverage of the notes and
preferred shares, which could adversely affect their liquidity or market
prices.
Special
Risks to Preferred Shares from Debt Securities Issuance
As
provided in the 1940 Act, and subject to compliance with the Fund's investment
limitations, the Fund may issue debt securities. In the event the
Fund were to issue such securities, the Fund's obligations to pay dividends or
make distributions and, upon liquidation of the Fund, liquidation payments in
respect of its preferred shares would be subordinate to the Fund's obligations
to make any principal and interest payments due and owing with respect to its
outstanding senior debt securities. Accordingly, the Fund's issuance
of debt securities would have the effect of creating special risks for the
Fund's preferred shareholders that would not be present in a capital structure
that did not include such securities.
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 shares and preferred shares, 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 U.S.
federal income tax purposes. While the Fund intends to redeem its
preferred shares or prepay its notes 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.
Common
Share Distribution Policy Risk.
The Fund
has adopted a policy, which may be changed at any time by the Board, of paying
quarterly distributions on its common shares. In the event the Fund does not
generate a total return from dividends and interest received and net realized
capital gains in an amount equal to or in excess of its distribution in a given
year, the Fund may return capital as part of such distribution, which may have
the effect of decreasing the asset coverage per share with respect to the Fund’s
preferred shares. Any return of capital should not be considered by investors as
yield or total return on their investment in the Fund. For the fiscal year ended
December 31, 2007, the Fund made distributions of $1.20 per common share, none
of which constituted a return of capital. For the fiscal year ending
December 31, 2008, the Fund has made distributions of $1.60 per common
share. Based on current earnings, the Fund expects a portion of the
distributions paid in 2008 to be deemed a non-taxable return of capital.
The composition of each distribution is estimated based on the earnings of the
Fund as of the record date for each distribution. The actual composition of each
of the current year’s distributions will be based on the Fund’s investment
activity through the end of the calendar year.
Leverage
Risk
The
use of leverage, which can be described as exposure to changes in price at a
ratio greater than the amount of equity invested, either through the issuance of
preferred shares, borrowing or other forms of market exposure, magnifies both
the favorable and unfavorable effects of price movements in the investments made
by the Fund. To the extent the Fund determines to employ leverage in its
investment operations, the Fund will be subject to substantial risks of
loss. The Fund cannot assure that borrowings or the issuance of
preferred shares will result in a higher yield or return to the holders of the
common shares.
Preferred Share and Note
Risk
The
issuance of preferred shares causes the net asset value and market value of the
common shares to become more volatile. If the interest rate on the
notes or the dividend rate on the preferred shares approaches the net rate of
return on the Fund's investment portfolio, the benefit of leverage to the
holders of the common shares would be reduced. If the interest rate
on the notes or the dividend rate on the preferred shares exceeds the net rate
of return on the Fund's portfolio, the leverage will result in a lower rate of
return to the holders of common shares than if the Fund had not issued preferred
shares.
Any
decline in the net asset value of the Fund's investments would be borne entirely
by the holders of common shares. Therefore, if the market value of
the Fund's portfolio declines, the leverage will result in a greater decrease in
net asset value to the holders of common shares than if the Fund were not
leveraged. This greater net asset value decrease will also tend to
cause a greater decline in the market price for the common shares. In
such a case, the Fund might be in danger of failing to maintain the required
asset coverage of the notes or preferred shares or, in an extreme case, the
Fund's current investment income might not be sufficient to meet the dividend
requirements on the preferred shares. In order to counteract such an
event, the Fund might need to liquidate investments in order to fund a
redemption of some or all of the preferred shares.
In
addition, the Fund would pay (and the holders of common shares will bear) all
costs and expenses relating to the issuance and ongoing maintenance of the
preferred shares and notes, including any additional advisory fees on the
incremental assets attributable to such securities.
Holders
of notes and preferred shares may have different interests than holders of
common shares and may at times have disproportionate influence over the Fund's
affairs. In the event the Fund fails to maintain 100% of asset
coverage of any notes outstanding, the holders of the notes will have the right
to elect a majority of the Fund's trustees. In addition, holders of preferred
shares, voting separately as a single class, would have the right to elect two
members of the Board at all times and in the event dividends become two full
years in arrears would have the right (subject to the rights of noteholders) to
elect a majority of the Trustees until such arrearage is completely
eliminated. In addition, preferred shareholders have class voting
rights on certain matters, including changes in fundamental investment
restrictions and conversion of the fund to open-end status, and accordingly can
veto any such changes.
Risks
of Investing in the Fund
Merger
Arbitrage Risk
The
Fund’s investment strategy involves investment techniques and securities
holdings that entail risks, in some cases different from the risks ordinarily
associated with investments in equity securities. The principal risk associated
with the Fund’s arbitrage investments is that certain of the proposed
reorganizations in which the Fund invests may be renegotiated, terminated or
involve a longer time frame than originally contemplated, in which case the Fund
may realize losses. Among the factors that affect the level of risk with respect
to the completion of the transaction are the deal spread and number of bidders,
the friendliness of the buyer and seller, the strategic rationale behind the
transaction, the existence of regulatory hurdles, the level of due diligence
completed on the target company and the ability of the buyer to finance the
transaction. If the spread between the purchase price and the current price of
the seller’s stock is small, the risk that the transaction will not be completed
may outweigh the potential return. If there is very little interest by other
potential buyers in the target company, the risk of loss may be higher than
where there are back-up buyers that would allow the arbitrageur to realize a
similar return if the current deal falls through. Unfriendly management of the
target company or change in friendly management in the middle of a deal
increases the risk that the deal will not be completed even if the target
company’s board has approved the transaction and may involve the risk of
litigation expense if the target company pursues litigation in an attempt to
prevent the deal from occurring. The underlying strategy behind the deal is also
a risk consideration because the less a target company will benefit from a
merger or acquisition, the greater the risk. There is also a risk that an
acquiring company may back out of an announced deal if, in the process of
completing its due diligence of the target company, it discovers something
undesirable about such company. In addition, merger transactions are also
subject to regulatory risk because a merger transaction often must be approved
by a regulatory body or pass governmental antitrust review. All of these factors
affect the timing and likelihood that the transaction will close. Even if the
Investment Adviser selects announced deals with the goal of mitigating the risks
that the transaction will fail to close, such risks may still delay the closing
of such transaction to a date later than the Fund originally anticipated,
reducing the level of desired return to the Fund.
In
recapitalizations, a corporation may restructure its balance sheet by selling
specific assets, significantly leveraging other assets and creating new classes
of equity securities to be distributed, together with a substantial payment in
cash or in debt securities, to existing shareholders. In connection with such
transactions, there is a risk that the value of the cash and new securities
distributed will not be as high as the cost of the Fund’s original investment or
that no such distribution will ultimately be made and the value of the Fund’s
investment will decline. To the extent an investment in a company that has
undertaken a recapitalization is retained by the Fund, the Fund’s risks will
generally be comparable to those associated with investments in highly leveraged
companies, generally including higher than average sensitivity to (i) short-term
interest rate fluctuations, (ii) downturns in the general economy or within a
particular industry or (iii) adverse developments within the company
itself.
Merger
arbitrage positions are also subject to the risk of overall market movements. To
the extent that a general increase or decline in equity values affects the
stocks involved in a merger arbitrage position differently, the position may be
exposed to loss.
Finally,
merger arbitrage strategies depend for success on the overall volume of global
merger activity, which has historically been cyclical in nature. During periods
when merger activity is low, it may be difficult or impossible to identify
opportunities for profit or to identify a sufficient number of such
opportunities to provide balance among potential merger transactions. To the
extent that the number of announced deals and corporate reorganizations
decreases or the number of investors in such transactions increases, it is
possible that merger arbitrage spreads will tighten, causing the profitability
of investing in such transactions to diminish, which will in turn decrease the
returns to the Fund from such investment activity.
Special
Risks Related to Preferred Shares
There
are special risks associated with the Fund investing in preferred shares,
including:
Deferral. Preferred
shares may include provisions that permit the issuer, at its discretion, to
defer distributions for a stated period without any adverse consequences to the
issuer. If the Fund owns a preferred security on which distributions
are being deferred by the issuer, the Fund may be required to report income for
tax purposes although it has not yet received such deferred
distributions.
Non-Cumulative
Dividends. Some preferred shares are non-cumulative, meaning
that the dividends do not accumulate and need not ever be paid. A
portion of the portfolio may include investments in non-cumulative preferred
shares, whereby the issuer does not have an obligation to make up any arrearages
to its shareholders. Should an issuer of non-cumulative preferred
shares held by the Fund determine not to pay dividends on such shares, the
Fund's return from those securities may be adversely affected. There
is no assurance that dividends or distributions on non-cumulative preferred
shares in which the Fund invests will be declared or otherwise made
payable.
Subordination. Preferred
securities are subordinated to bonds and other debt instruments in a company's
capital structure in terms of priority to corporate income and liquidation
payments, and therefore will be subject to greater credit risk than more senior
debt security instruments.
Liquidity. Preferred
securities may be substantially less liquid than many other securities, such as
common stocks or U.S. Government securities.
Limited
Voting
Rights. Generally,
preferred security holders (such as the Fund) have no voting rights with respect
to the issuing company unless preferred dividends have been in arrears for a
specified number of periods, at which time the preferred security holders may be
entitled to elect a number of Trustees to the issuer's
board. Generally, once all the arrearages have been paid, the
preferred security holders no longer have voting rights.
Special
Redemption
Rights. In
certain varying circumstances, an issuer of preferred shares may redeem the
securities prior to a specified date. For instance, for certain types
of preferred shares, a redemption may be triggered by a change in federal income
tax or securities laws. As with call provisions, a redemption by the
issuer may negatively impact the return of the security held by the
Fund.
Non-Diversified
Status. The Fund is classified as a "non-diversified"
investment company under the 1940 Act, which means the Fund is not limited by
the 1940 Act in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund has in the past
conducted and intends to conduct its operations so as to qualify as a "regulated
investment company," or RIC, for purposes of the Code, which will relieve it of
any liability for federal income tax to the extent its earnings are distributed
to shareholders. To qualify as a "regulated investment company,"
among other requirements, the Fund will limit its investments so that, with
certain exceptions, at the close of each quarter of the taxable year (a) not
more than 25% of the value of its total assets will be invested in the
securities (other than U.S. government securities or the securities of other
RICs) of (i) a single issuer, (ii) any two or more issuers that the Fund
controls and which are determined to be engaged in the same, similar or related
trades or businesses or (iii) one or more qualified publicly traded partnership
(as defined under "Taxation of the Fund") and (b) at least 50% of the value of
the Fund's assets will be represented by cash, securities of other regulated
investment companies, U.S. government securities and other securities, with such
other securities limited in respect of any one issuer to an amount not greater
than 5% of the value of the Fund's assets and not more than 10% of the
outstanding voting securities of such issuer.
As
a non-diversified investment company, the Fund may invest in the securities of
individual issuers to a greater degree than a diversified investment
company. As a result, the Fund may be more vulnerable to events
affecting a single issuer and therefore, subject to greater volatility than a
fund that is more broadly diversified. Accordingly, an investment in
the Fund may present greater risk to an investor than an investment in a
diversified company.
Industry
Concentration
Risk. The
Fund may invest up to 25% of its total assets in securities of a single
industry. Should the Fund choose to do so, the net asset value of the
Fund will be more susceptible to factors affecting those particular types of
companies, which, depending on the particular industry, may include, among
others: governmental regulation; inflation; cost increases in raw materials,
fuel and other operating expenses; technological innovations that may render
existing products and equipment obsolete; and increasing interest rates
resulting in high interest costs on borrowings needed for capital investment,
including costs associated with compliance with environmental and other
regulations. In such circumstances the Fund's investments may be
subject to greater risk and market fluctuation than a fund that had securities
representing a broader range of industries.
Foreign
Securities Risk. The Fund may invest without limit in the
securities of foreign issuers. 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. Dividend income the Fund receives from foreign securities
may not be eligible for the special tax treatment applicable to qualified
dividend income.
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 also may purchase ADRs or U.S. dollar-denominated securities of foreign
issuers. ADRs are receipts issued by U.S. banks or trust companies in
respect of securities of foreign issuers held on deposit for use in the U.S.
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. In addition, the underlying issuers of certain depositary
receipts, particularly unsponsored or unregistered depositary receipts, are
under no obligation to distribute shareholder communications to the holders of
such receipts, or to pass through to them any voting rights with respect to the
deposited securities.
Lower
Grade
Securities. The
Fund may invest without limit in nonconvertible preferred shares, convertible
bonds or other debt securities rated in the lower rating categories of
nationally recognized statistical rating organizations (i.e., rated "Ba" or
lower by Moody's or "BB" or lower by S&P or Fitch) or unrated securities of
comparable quality. These high yield securities, also sometimes
referred to as "junk bonds," generally pay a premium above the yields of U.S.
government securities or debt securities of investment grade issuers because
they are subject to greater risks than these securities. These risks,
which reflect their speculative character, include the following:
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greater
credit risk and risk of default;
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potentially
greater sensitivity to general economic or industry
conditions;
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potential
lack of attractive resale opportunities (illiquidity);
and
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additional
expenses to seek recovery from issuers who
default.
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In
addition, the prices of these lower grade securities are more sensitive to
negative developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade
securities. Lower grade securities tend to be less liquid than
investment grade securities. The market value of lower grade
securities may be more volatile than the market value of investment grade
securities and generally tends to reflect the market's perception of the
creditworthiness of the issuer and short-term market developments to a greater
extent than investment grade securities, which primarily reflect fluctuations in
general levels of interest rates.
Ratings
are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on the issuer's
historical financial condition and the rating agencies' analysis at the time of
rating. Consequently, the rating assigned to any particular security
is not necessarily a reflection of the issuer's current financial
condition.
As
a part of its investments in lower grade fixed-income securities, the Fund may
invest in the securities of issuers in default. The Fund will invest
in securities of issuers in default only when the Investment Adviser believes
that such issuers will honor their obligations and emerge from bankruptcy
protection and that the value of such issuers' securities will
appreciate. By investing in the securities of issuers in default, the
Fund bears the risk that these issuers will not continue to honor their
obligations or emerge from bankruptcy protection or that the value of these
securities will not otherwise appreciate.
For
a further description of lower grade securities and the risks associated
therewith, see "Investment Objective and Policies — Certain Investment Practices
— Lower Grade Securities." For a description of the ratings
categories of certain recognized statistical ratings agencies, see Appendix A to
this prospectus.
Special
Risks of
Derivative Transactions. Short sales and investments in
options, futures and swaps are often referred to as derivatives transactions.
The Fund expects that it will utilize these types of instruments primarily for
hedging and risk management purposes and that its investments in derivatives and
short sales for purposes unrelated to corporate transactions or reorganizations
will not exceed 5% of its total assets. There is no specific limit on the
proportion of its assets that the Fund may use to invest in derivatives and
conduct short sales in connection with its investments in corporate transactions
and reorganizations, although the Fund expects that it will not be required to
utilize more than 10% of the assets it has invested in a particular transaction
to hedge its gains in such transaction.
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:
|
·
|
dependence
on the Investment Adviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency
markets;
|
|
·
|
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;
|
|
·
|
the
fact that skills needed to use these strategies are different from those
needed to select portfolio
securities;
|
|
·
|
the
possible absence of a liquid secondary market for any particular
instrument at any time;
|
|
·
|
the
possible need to defer closing out certain hedged positions to avoid
adverse tax consequences;
|
|
·
|
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
|
|
·
|
the
creditworthiness of counterparties.
|
Futures
Transactions. The
Fund may invest without limit in futures contracts. Futures and
options on futures entail certain risks, including but not limited to the
following:
|
·
|
no
assurance that futures contracts or options on futures can be offset at
favorable prices;
|
|
·
|
possible
reduction of the return of the Fund due to the use of
hedging;
|
|
·
|
possible
reduction in value of both the securities hedged and the hedging
instrument;
|
|
·
|
possible
lack of liquidity due to daily limits or price
fluctuations;
|
|
·
|
imperfect
correlation between the contracts and the securities being hedged;
and
|
|
·
|
losses
from investing in futures transactions that are potentially unlimited and
the segregation requirements for such
transactions.
|
Forward
Currency
Exchange
Contracts. There
is no limit on the Fund's ability to invest in foreign currency exchange
contracts. The use of forward currency contracts may involve certain
risks, including the failure of the counterparty to perform its obligations
under the contract and that 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.
Counterparty
Risk. The
Fund will be subject to credit risk with respect to the counterparties to the
derivative contracts purchased by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in bankruptcy or
other reorganization proceeding. The Fund may obtain only a limited
recovery or may obtain no recovery in such circumstances.
Swaps. The
Fund may enter into one or more swap transactions to attempt to protect itself
from increasing distribution or interest expenses resulting from rising
short-term interest rates or any outstanding leverage. A decline in interest
rates may result in a decline in the value of the swaps which may result in a
decline in the net asset value of the Fund. A sudden and dramatic decline in
interest rates may result in a significant decline in the net asset value of the
Fund. Swaps and certain other derivatives are a relatively recent development in
the financial markets. Consequently, there are certain legal, tax and market
uncertainties that present risks in entering into such swaps and other
derivatives. There is currently little or no case law or litigation
characterizing swaps or certain other derivatives, interpreting their
provisions, or characterizing their tax treatment. In addition, additional
regulations and laws may apply to swaps or other derivatives that have not
heretofore been applied. Pending clarification of these uncertainties, the Fund
intends to utilize these instruments primarily for hedging and risk management
purposes.
For
a further description of such derivative investments, see "Investment Objective
and Policies — Additional Investment Policies" in the SAI.
Management
Risk. The
Fund is subject to management risk because it is an actively managed
portfolio. The Investment Adviser will apply investment techniques
and risk analyses in making investment decisions for the Fund, but there can be
no guarantee that these will produce the desired results.
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.
Anti-Takeover
Provisions. The
Fund's Governing Documents include provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
an open-end fund. See "Anti-Takeover Provisions of the Fund's
Governing Documents."
Status as a
Regulated Investment Company. The Fund has elected and has
qualified, and intends to remain qualified, for U.S. federal income tax purposes
as a regulated investment company under Subchapter M of the
Code. Qualification requires, among other things, compliance by the
Fund with certain distribution requirements. Statutory limitations on
distributions on the common shares if the Fund fails to satisfy the 1940 Act's
asset coverage requirements could jeopardize the Fund's ability to meet such
distribution requirements. The Fund presently intends, however, to
purchase or redeem preferred shares 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 U.S. federal income tax
considerations.
HOW THE FUND MANAGES RISK
Investment
Restrictions
The
Fund has adopted certain investment limitations, some of which are fundamental
policies of the Fund, designed to limit investment risk and maintain portfolio
diversification. Under the 1940 Act, a fundamental policy may not be
changed without the vote of a majority, as defined in the 1940 Act, of the
outstanding voting securities of the Fund (voting together as a single
class). In addition, pursuant to the Statement of Preferences of each
of the series of preferred shares, a majority, as defined in the 1940 Act, of
the outstanding preferred shares of the Fund (voting separately as a single
class) is also required to change a fundamental policy. The Fund may
become subject to guidelines that are more limiting than its current investment
restrictions if it decides to obtain and maintain ratings from Moody's and
S&P on its preferred shares.
Interest
Rate 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 a series of the variable rate preferred shares. 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 share dividends or distributions when due in
accordance with the Statement of Preferences of the relevant series of the
variable rate preferred shares 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 or
distribution payments on the variable rate preferred shares. 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 or
distribution payments on the variable rate preferred shares. 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
variable rate preferred shares. A sudden and dramatic decline in
interest rates may result in a significant decline in the asset
coverage. Under the Statement of Preferences for each series of the
preferred shares, if the Fund fails to maintain the required asset coverage on
the outstanding preferred shares or fails to comply with other covenants, the
Fund may, at its option (and in certain circumstances will be required to),
mandatorily redeem some or all of these shares. The Fund generally
may redeem the auction-rate preferred shares, in whole or in part, at its option
at any time (usually on a dividend or distribution payment date), other than
during a non-call period. 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 segregate 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 any auction-rate
preferred shares in a notional amount in excess of the outstanding amount of the
auction-rate preferred shares. 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 (who, with the Fund's 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, and the Sub-Administrator (as defined
below). Pursuant to an investment advisory agreement with the Fund,
the Investment Adviser, under the supervision of the Fund's Board, 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 trustees of the Fund who are its affiliates.
The
Investment Adviser
Gabelli
Funds, LLC serves as the Fund's Investment Adviser pursuant to an investment
advisory agreement with the Fund (the "Advisory Agreement"). The
Investment Adviser is a New York limited liability company with principal
offices located at One Corporate Center, Rye, New York
10580-1422. The Investment Adviser was organized in 1999 and is the
successor to Gabelli Funds, Inc., which was organized in 1980. As of
June 30, 2008, the Investment Adviser acts as registered investment adviser to
25 management investment companies with aggregate net assets of $15.9
billion. The Investment Adviser, together with other affiliated
investment advisers noted below had assets under management totaling
approximately $28.3 billion as of June 30, 2008. GAMCO Asset
Management 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 $11.6 billion under management as of June 30, 2008. Gabelli
Securities, Inc., an affiliate of the Investment Adviser, acts as investment
adviser for investment partnerships and entities having aggregate assets of
approximately $354 million as of June 30, 2008. Gabelli Fixed Income
LLC, an affiliate of the Investment Adviser, acts as investment adviser for
separate accounts having aggregate assets of approximately $17 million
under management as of June 30, 2008. Teton Advisors, Inc., an
affiliate of the Investment Adviser, acts as investment manager to the GAMCO
Westwood Funds having aggregate assets of approximately $434 million under management as
of June 30, 2008.
The
Investment Adviser is a wholly-owned subsidiary of GAMCO Investors, Inc., a New
York corporation, whose Class A Common Stock is traded on the NYSE 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 GGCP, Inc., which owns a majority of the capital stock of GAMCO
Investors, Inc.
Fees of the Investment
Adviser
Gabelli
Funds, LLC serves as the Fund’s investment adviser at an annual base rate of
0.50% of the Fund’s average weekly managed assets payable monthly in arrears.
Managed assets consist of all of the assets of the Fund without deduction for
borrowings, repurchase transactions and other leveraging techniques, the
liquidation value of any outstanding preferred shares or other liabilities
except for certain ordinary course expenses. In addition, the Investment Adviser
will be entitled to receive an annual performance fee as of the end of each
calendar year if the total return of the Fund on its common shares during the
calendar year in question exceeds the total return of the T-Bill Index
compounded quarterly on the same dates as the Fund’s quarterly ex-dividend dates
(or at the end of the quarter if no dividend is paid) during the same period. If
the Fund’s total return for the calendar year equals the total return of the
T-Bill Index for the same period plus 3.0 percentage points (300 basis points),
the Investment Adviser will receive a performance fee of 0.75% of the Fund’s
average weekly managed assets during the period. This performance fee will be
increased by 0.01 percentage point (one basis point) for each 0.04 percentage
points (four basis points) by which the Fund’s total return during the period
exceeds the T-Bill Index total return plus 3.0 percentage points (300 basis
points), up to a maximum performance fee of 1.50% if the excess performance over
the T-Bill Index is 6.0 percentage points (600 basis points) or greater and will
be decreased at the same rate for the amount by which the Fund’s total return
during the period is less than the T-Bill Index total return plus 3.0 percentage
points (300 basis points), until no performance fee is payable if the Fund’s
total return is less than or equal to the T-Bill Index total
return.
For
purposes of calculating the Fund’s performance fee, the Fund’s total return will
be calculated as the sum of the Fund’s change in net asset value per common
share from January 1 (or the date of the Fund’s commencement of investment
operations, in the case of the Fund’s first year of investment operations),
through December 31 of each year plus the amount of distributions per common
share in respect of such period (calculating the number of shares outstanding on
a daily average weighted basis assuming reinvestment of such distributions at
net asset value per share on the ex-dividend date and assuming solely for
purposes of the Fund’s performance fee that all issuances and repurchases of
shares are at net asset value). Increases and decreases in the investment
management
fee will be accrued as often as net asset value per common share is calculated
and accordingly will affect the total return on which the rate of the fee is
determined.
For
purposes of calculating the Fund’s performance fee, the T-Bill Index’s total
return will be calculated as the sum of the change in the discount price of the
three month Treasury bill from the first business day after January 1 of each
year (or the date of the Fund’s commencement of investment operations, in the
case of the Fund’s first year of investment operations) to the last business day
of each year plus the weekly yield to maturity interest payments thereon implied
by the discount price thereof and compounded quarterly on the same dates as the
Fund’s quarterly ex-dividend dates (or at the end of the quarter if no dividend
is paid).
The
following chart illustrates the variability of the Fund’s investment management
fees in various circumstances.
The
Gabelli Global Deal Fund
Total
Investment Advisory Fee Rate
(as
a percentage of average weekly managed assets)
|
T-Bill
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2%
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
3%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
4%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
2.00
|
|
5%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
2.00
|
|
6%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
2.00
|
|
7%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
2.00
|
|
8%
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.50
|
0.75
|
1.00
|
1.25
|
1.50
|
1.75
|
2.00
|
A
discussion regarding the basis for the Fund's Board approval of the investment
advisory agreement with the Investment Adviser is available in the Fund's annual
report for the year ended December 31, 2007.
Payment
of Expenses
The
Investment Adviser is obligated to pay expenses associated with providing the
services contemplated by the Advisory Agreement, including compensation of and
office space for its officers and employees connected with investment and
economic research, trading and investment management and administration of the
Fund (but excluding costs associated with the calculation of the net asset value
and allocated costs of the chief compliance officer function and officers of the
Fund that are employed by the Fund and are not employed by the Investment
Adviser although such officers may receive incentive-based variable compensation
from affiliates of the Investment Adviser), as well as the fees of all Trustees
of the Fund who are officers or employees of the Investment Adviser or its
affiliates.
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 the Independent Registered
Public Accounting Firm's services, stock exchange listing fees, costs of
printing proxies, share certificates and shareholder reports, charges of the
Fund's custodian, charges of the transfer agent and distribution disbursing
agent, SEC fees, fees and expenses of Trustees who are not officers or employees
of the Investment Adviser or its affiliates, accounting and printing costs, the
Fund's pro rata portion of membership fees in trade organizations, the Fund's
pro rata portion of the Chief Compliance Officer's compensation, fidelity bond
coverage for the Fund's officers and employees, Trustees and officers liability
policy, interest, brokerage costs, taxes, expenses of qualifying the Fund for
sale in various states, expenses of personnel performing shareholder servicing
functions, litigation and other extraordinary or non-recurring expenses and
other expenses properly payable by the Fund.
Selection
of Securities Brokers
The
Advisory Agreement 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 Advisory
Agreement, including a more complete description of the advisory and expense
arrangements, exculpatory and brokerage provisions, and information on the
brokerage
practices of the Fund. The Fund expects that a substantial portion of its
portfolio transactions may be executed through Gabelli & Company so long as
the Investment Adviser and the Board conclude that Gabelli & Company is able
to provide best execution at a favorable cost.
Portfolio
Management
Mario
J. Gabelli is currently and has been responsible for the day-to-day management
of the Fund since its formation. Mr. Gabelli has served as Chief
Investment Officer — Value Portfolios of Gabelli Funds, LLC and its predecessor
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 of the Fund. Over the past five years, Mr.
Gabelli has served as Chairman of the Board and Chief Executive Officer of GAMCO
Investors, Inc.; Chief Investment Officer — Value Portfolios of GAMCO Asset
Management Inc; and Chairman of the Board and Chief Executive Officer of LICT
Corporation, a multimedia and communications services company.
The
SAI provides additional information about the Portfolio Manager's compensation,
other accounts managed by the Portfolio Manager, and the Portfolio Manager's
ownership of securities of the Fund.
Non-Resident
Trustees
Mario
d'Urso, trustee of the Fund, resides outside the U.S. and all or a significant
portion of his assets are located outside the U.S. Mr. d'Urso does
not have an authorized agent in the U.S. to receive service of
process. As a result, it may not be possible for investors to effect
service of process within the U.S. or to enforce against Mr. d'Urso in U.S.
courts judgments predicated upon civil liability provisions of U.S. securities
laws. It may also not be possible to enforce against Mr. d'Urso in
foreign courts judgments of U.S. courts or liabilities in original actions
predicated upon civil liability provisions of the U.S.
Sub-Administrator
The
Investment Adviser has entered into a 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 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 0.0275% of the first $10 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, 0.0125% of the aggregate average net
assets exceeding $10 billion but less than $15 billion and 0.01% 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.
The
Fund has received the following information from the Investment
Adviser:
On
April 24, 2008, the Investment Adviser entered into an administrative settlement
with the SEC to resolve the SEC's inquiry regarding prior frequent trading
activity in shares of the GAMCO Global Growth Fund (the "Global Growth Fund") by
one investor who was banned from the Global Growth Fund in August 2002. In the
settlement, the SEC found that the Investment Adviser had violated Section
206(2) of the Investment Advisers Act, Section 17(d) of the 1940 Act and Rule
17d-1 thereunder, and had aided and abetted and caused violations of Section
12(d)(1)(B)(i) of the 1940 Act. Under the terms of the settlement, the
Investment Adviser, while neither admitting nor denying the SEC's findings and
allegations, agreed, among other things, to pay the previously reserved total of
$16 million (including a $5 million penalty), of which at least $11 million will
be distributed to shareholders of the Global Growth Fund in accordance with a
plan to be developed by an independent distribution consultant and approved by
the independent directors of the Global Growth Fund and the Staff, and to cease
and desist from future violations of the above referenced federal securities
laws. The settlement will not have a material adverse impact on the Investment
Adviser or its ability to fulfill its obligations under the Advisory Agreement.
On the same day, the SEC filed a civil action against the Executive Vice
President and Chief Operating Officer of the Investment Adviser, alleging
violations of certain federal securities laws arising from the same matter. The
officer is also an officer of the Global Growth Fund and other funds in the
Gabelli/GAMCO fund complex. The officer denies the allegations and is continuing
in his positions with the Investment Adviser and the funds. The Investment
Adviser currently expects that any resolution of the action against the officer
will not have a material adverse impact on the Investment Adviser or its ability
to fulfill its obligations under the Advisory Agreement.
In
August 2008, the Adviser, while neither admitting nor denying the SEC's findings
and allegations, made an offer to the staff of the SEC to settle a
previously disclosed matter concerning compliance with Section 19(a) and Rule
19a-1 of the 1940 Act by two closed-end funds managed by the Adviser.
These provisions require registered investment companies to provide written
statements to shareholders when a distribution is made in the nature of a
dividend from a source other than net investment income. While the two
closed-end funds sent annual statements and provided other materials containing
this information, the funds did not send the notices required by Rule 19a-1 to
shareholders with each distribution in 2002 and 2003. The Adviser believes
that all of the funds have been in compliance with Rule 19a-1 since that
time. The Adviser believes that these matters would have no effect on the
Fund or any material adverse effect on the Adviser or its ability to manage the
Fund. This offer of settlement is subject to final agreement regarding the
specific language of the SEC's administrative order and other settlement
documents and approval by the SEC.
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
therefore. For a more detailed discussion of the Fund's brokerage
allocation practices, see "Portfolio Transactions" in the SAI.
DIVIDENDS AND
DISTRIBUTIONS
The Fund
intends to distribute substantially all of its net capital gain each year, but
may determine to retain all or part of any net capital gain for reinvestment. In
such event, the Fund will pay federal income tax on such retained gain and the
Fund’s shareholders will receive a corresponding tax credit and increase in the
basis of their shares. In the event that the Fund’s net investment company
taxable income and net capital gains exceed the total of the Fund’s quarterly
distributions on common shares and the amount of distributions on any preferred
shares issued by the Fund, the Fund intends to pay such excess once a year. If,
for any calendar year, the total quarterly distributions on common shares and
the amount of distributions on any preferred shares issued by the Fund exceed
net investment company taxable income and net capital gain, the excess will
generally be treated as a tax free return of capital up to the amount of a
shareholder’s tax basis in the common shares. Any distributions which (based
upon the Fund’s full year performance) constitute tax free return of capital
will reduce a shareholder’s tax basis in the common shares, thereby increasing
such shareholder’s potential gain or reducing his or her potential loss on the
sale of the common shares. Any amounts distributed to a shareholder in excess of
the basis in the common shares will generally be taxable to the shareholder as
capital gain. See “Taxation.” Quarterly distribution notices provided by the
Fund to its shareholders will describe the portion of the quarterly distribution
which, in the Fund’s current good faith judgment, constitutes investment company
taxable income, capital gain, or a return of capital. The final determination of
the source of such distributions for federal income tax purposes will be made
shortly after year end based on the Fund’s actual net investment company taxable
income and net capital gain for the year and will be communicated to
shareholders promptly.
In
the event the Fund distributes amounts in excess of its current and accumulated
earnings and profits, such distributions will decrease the Fund’s total assets
and, therefore, have the likely effect of increasing the Fund’s expense ratio as
the Fund’s fixed expenses will become a larger percentage of the Fund’s average
net assets. In addition, in order to make such distributions, the Fund may have
to sell a portion of its investment portfolio at a time when it is
disadvantageous to do so.
The
Fund, along with other closed-end registered investment companies advised by the
Investment Adviser, is covered by 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 any distribution policy of the Fund
with respect to its common shares calls 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 common share at or about the time
of distribution or payment of a fixed dollar amount. The Fund’s current policy
is to make quarterly distributions to holders of its common shares. The
exemption also permits the Fund to make such distributions with respect to its
preferred shares, if any, in accordance with such shares’ terms.
AUTOMATIC DIVIDEND REINVESTMENT AND
VOLUNTARY CASH PURCHASE PLAN
Under
the Fund's Automatic Dividend Reinvestment and Voluntary Cash Purchase Plan (the
"Plan"), a shareholder whose common shares are registered in his or her own name
will have all distributions reinvested automatically by the transfer agent,
which is agent under the Plan, unless the shareholder elects to receive
cash. Distributions with respect to shares registered in the name of
a broker-dealer or other nominee (that is, in "street name") will be reinvested
by the broker or nominee in additional shares under the Plan, unless the service
is not provided by the broker or nominee or the shareholder elects to receive
distributions in cash. Investors who own common shares 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 the
transfer agent as dividend disbursing agent.
Under
the Plan, whenever the market price of the common shares 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 common shares, 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 shares. The valuation date is the dividend
or distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If the net asset value
of the common shares at the time of valuation exceeds the market price of the
common shares, 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, the Plan agent will buy the common shares for
such Plan in the open market, on the New York Stock Exchange or elsewhere, for
the participants' accounts, except that the Plan agent will endeavor to
terminate purchases in the open market and cause the Fund to issue shares at the
greater of net asset value or 95% of market value if, following the commencement
of such purchases, the market value of the common shares exceeds net asset
value.
Participants
in the Plan have the option of making additional cash payments to the Plan
agent, monthly, for investment in the shares as applicable. Such
payments may be made in any amount from $250 to $10,000. The Plan
agent 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. The Plan agent will charge each shareholder who
participates $1.00, 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 the Plan agent in a
manner that ensures that the Plan agent 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 the Plan agent at least 48 hours before such payment is to
be invested.
The
Plan agent maintains all shareholder accounts in the Plan and furnishes written
confirmations of all transactions in the account, including information needed
by shareholders for personal and tax records. Shares in the account
of each Plan participant will be held by the Plan agent in noncertificated form
in the name of the participant. A Plan participant may send its share
certificates to the Plan agent so that the shares represented by such
certificates will be held by the Plan agent in the participant's shareholder
account under the Plan.
In
the case of shareholders such as banks, brokers or nominees, which hold shares
for others who are the beneficial owners, the Plan agent will administer the
Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who participate in the
Plan.
Experience
under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate 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 the Plan agent on at least 90 days written
notice to the participants in such Plan. See "Taxation" for details
on the tax consequences to shareholders of automatic dividend
reinvestment. All correspondence concerning the Plan should be directed to the
transfer agent.
DESCRIPTION OF THE
SECURITIES
The
following is a brief description of the terms of the Fund's shares, notes
and subscription rights. This description does not purport to be
complete and is qualified by reference to the Fund's Agreement and Declaration
of Trust and its By-Laws. For complete terms of the shares, please
refer to the actual terms of such series, which are set forth in the Agreement
and Declaration of Trust. For complete terms of the notes, please refer to the
actual terms of such notes, which will be set forth in an Indenture relating to
such notes (the "Indenture.") For complete terms of the subscription rights,
please refer to the actual terms of such subscription rights which will be set
forth in subscription rights agreement relating to such subscription rights (the
"Subscription Rights Agreement").
Common
Shares
The
Fund is an unincorporated statutory trust organized under the laws of Delaware
pursuant to a Certificate of Trust dated as of October 17, 2006. The
Fund is authorized to issue an unlimited number of common shares of beneficial
interest, par value $0.001 per share. Each common share has one vote
and, when issued and paid for in accordance with the terms of this offering,
will be fully paid and non-assessable. Though the Fund expects to pay
distributions quarterly on the common shares, it is not obligated to do
so. All common shares are equal as to distributions, assets and
voting privileges and have no conversion, preemptive or other subscription
rights. The Fund will send annual and semi-annual reports, including
financial statements, to all holders of its shares.
Offerings
of shares require approval by the Fund's Board. Any additional
offering of common shares will be subject to the requirements of the
1940 Act, which provides that common shares may not be issued at a price below
the then current net asset value, exclusive of sales load, except in connection
with an offering to existing holders of common shares or with the consent of a
majority of the Fund's outstanding voting securities.
The
Fund's common shares are listed on the NYSE under the symbol "GDL."
The
Fund's net asset value per share will be reduced immediately following the
offering of common shares by the amount of the offering expenses paid by the
Fund. See "Use of Proceeds." Unlike open-end funds, closed-end funds
like the Fund do not continuously offer shares and do not provide daily
redemptions. Rather, if a shareholder determines to buy additional
common shares or sell shares already held, the shareholder may do so by trading
through a broker on the NYSE or otherwise.
Shares
of closed-end investment companies often trade on an exchange at prices lower
than net asset value. Because the market value of the common shares
may be influenced by such factors as dividend and distribution levels (which are
in turn affected by expenses), dividend and distribution stability, net asset
value, market liquidity, relative demand for and supply of such shares in the
market, unrealized gains, general market and economic conditions and other
factors beyond the control of the Fund, the Fund cannot assure you that common
shares will trade at a price equal to or higher than net asset value in the
future. The common shares are designed primarily for long-term
investors and you should not purchase the common shares if you intend to sell
them soon after purchase.
The
Fund's common shareholders will vote as a single class to elect the Fund's Board
and on additional matters with respect to which the 1940 Act, the Fund's
Declaration of Trust, By-Laws or resolutions adopted by the Trustees provide for
a vote of the Fund's common shareholders. See "Anti-Takeover
Provisions of the Fund's Governing Documents."
Book
Entry
Any
fixed rate preferred shares sold through this offering 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 common shares for all purposes. In accordance with the
procedures of DTC, however, purchasers of common shares will be deemed the
beneficial owners of shares purchased for purposes of distributions, voting and
liquidation rights. Purchasers of common shares may obtain registered
certificates by contacting the transfer agent.
Preferred
Shares
Currently,
an unlimited number of the Fund's shares have been classified by the Board as
preferred shares, par value $0.001 per share. The terms of such preferred shares
may be fixed by the Board and would materially limit and/or qualify the rights
of the holders of the Fund's common shares.
If
the Fund issues preferred shares, it will pay dividends to the holders of the
preferred shares at either a fixed rate or a rate that will be reset frequently
based on short-term interest rates, as described in a Prospectus Supplement
accompanying each preferred share offering.
Upon
a liquidation, each holder of the preferred shares will be entitled to receive
out of the assets of the Fund available for distribution to shareholders (after
payment of claims of the Fund's creditors but before any distributions with
respect to the Fund's common shares or any other shares of the Fund ranking
junior to the preferred shares as to liquidation payments) an amount per share
equal to such share's liquidation preference plus any accumulated but unpaid
distributions (whether or not earned or declared, excluding interest thereon) to
the date of distribution, and such shareholders shall be entitled to no further
participation in any distribution or payment in connection with such
liquidation. Each series of the preferred shares will rank on a parity with any
other series of preferred shares of the Fund as to the payment of distributions
and the distribution of assets upon liquidation, and will be junior to the
Fund's obligations with respect to any outstanding senior securities
representing debt. The preferred shares carry one vote per share on
all matters on which such shares are entitled to vote. The preferred shares
will, upon issuance, be fully paid and nonassessable and will have no
preemptive, exchange or conversion rights. The Board may by resolution classify
or reclassify any authorized but unissued capital shares of the Fund from time
to time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions or terms or
conditions of redemption. The Fund will not issue any class of shares senior to
the preferred shares.
Asset
Maintenance
Requirements. The
Fund must satisfy asset maintenance requirements under the 1940 Act with respect
to its preferred shares. Under the 1940 Act, such debt or preferred
shares may be issued only if immediately after such issuance the value of the
Fund's total assets (less ordinary course liabilities) is at least 300% of the
amount of any debt outstanding and at least 200% of the amount of any preferred
shares and debt outstanding.
The
Fund will be required under the preferred shares' Statement of Preferences (the
"Statement of Preferences") 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 debt or stock, including
any outstanding preferred shares. 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 calendar days, the Fund may, and in certain circumstances will be
required to, mandatorily redeem the number of preferred shares sufficient to
satisfy such asset coverage. See "— Redemption" below.
Distributions. In
connection with the offering of one or more series of preferred shares, an
accompanying Prospectus Supplement will specify whether dividends on such
preferred shares will be based on a fixed or variable rate. If such
Prospectus Supplement specifies that dividends will be paid at a fixed rate
("Fixed Rate Preferred Shares"), holders of such preferred shares will be
entitled to receive, when, as and if declared by the Board, out of funds legally
available therefor, cumulative cash distributions, at an annual rate set forth
in the applicable Prospectus Supplement, payable with such frequency as set
forth in the applicable Prospectus Supplement. Such distributions
will accumulate from the date on which such shares are issued.
In
the alternative, the Prospectus Supplement may state that the holders of one or
more series of the preferred shares are entitled to receive cash distributions
at annual rates stated as a percentage of liquidation preference, that will vary
from dividend period to dividend period ("Variable Rate Preferred Shares"). The
liquidation preference per share and the dividend rate for the initial dividend
period for any such series of preferred shares will be the rate set out in the
Prospectus Supplement for such series. For subsequent dividend periods, each
such series of preferred shares will pay distributions based on a rate set at an
auction, normally held weekly, but not in excess of a 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,
distributions 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 under "— Designation of Special Dividend Periods".
Distribution
Payments. Except
as described below, the dividend payment date for a series of Variable Rate
Preferred Shares 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.
If
a dividend payment date for a series of Variable Rate Preferred Shares is not a
business day because the NYSE is closed for business for more than three
consecutive business days due to an act of God, natural disaster, act of war,
civil or military disturbance, act of terrorism, sabotage, riots or a loss or
malfunction of utilities or communications services, or the dividend payable on
such date can not be paid for any such reason, then:
|
·
|
the
dividend payment date for the affected dividend period will be the next
business day on which the Fund and its paying agent, if any, are able to
cause the distributions to be paid using their reasonable best
efforts;
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|
·
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the
affected dividend period will end on the day it would have ended had such
event not occurred and the dividend payment date had remained the
scheduled date; and
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·
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the
next dividend period will begin and end on the dates on which it would
have begun and ended had such event not occurred and the dividend payment
date remained the scheduled date.
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Determination
of
Dividend
Rates. The
Fund computes the distributions per share for a series of Variable Rate
Preferred Shares 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 the liquidation preference per share of such series
to arrive at the distribution per share.
Maximum
Rate. The
dividend rate for a series of Variable Rate Preferred Shares that results from
an auction for such shares will not be greater than the applicable "maximum
rate." The maximum rate for any standard dividend period will be the greater of
the applicable percentage of the reference rate or the reference rate plus the
applicable spread. The reference rate will be the applicable LIBOR Rate (as
defined below) for a dividend period of fewer than 365 days or the Treasury
Index Rate (as defined below) for a dividend period of 365 days or more. The
applicable percentage and the applicable spread will be determined based on the
lower of the credit ratings assigned to such series of preferred shares by
Moody's and S&P on the auction date for such period (as set forth in the
table below). If Moody's and/or S&P do not make such rating available, the
rate will be determined by reference to equivalent ratings issued by a
substitute rating agency. In the case of a special dividend period, (1) the Fund
will communicate the maximum applicable rate in a notice of special rate period
for such dividend payment period, (2) the applicable percentage and applicable
spread will be determined on the date two business days before the first day of
such special dividend period and (3) the reference rate will be the applicable
LIBOR Rate for a dividend period of fewer than 365 days or the Treasury Index
Rate for a dividend period of 365 days or more.
The
"LIBOR Rate," as described in greater detail in the Statement of Preferences, is
the applicable London Inter-Bank Offered Rate for deposits in U.S. dollars for
the period most closely approximating the applicable dividend period for the
preferred shares.
The
"Treasury Index Rate," as described in greater detail in the Statement of
Preferences, is the average yield to maturity for certain U.S. Treasury
securities having substantially the same length to maturity as the applicable
dividend period for the preferred shares.
|
|
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|
|
|
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|
|
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Aaa
|
|
AAA
|
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150%
|
|
1.50
percentage points
|
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Aa3
to Aa1
|
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AA–
to AA+
|
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250%
|
|
2.50
percentage points
|
|
A3
to A1
|
|
A–
to A+
|
|
350%
|
|
3.50
percentage points
|
|
Baa1
or lower
|
|
BBB+
or lower
|
|
550%
|
|
5.50
percentage points
|
Assuming
the Fund maintains an "AAA" and "Aaa" rating on the preferred shares, the
practical effect of the different methods used to determine the maximum rate is
shown in the table below:
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|
|
Maximum
Applicable Rate Using the Applicable Percentage
|
|
Maximum
Applicable Rate Using the Applicable Spread
|
|
Method
Used to Determine the Maximum Applicable Rate
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1%
|
|
1.50%
|
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2.50%
|
|
Spread
|
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2%
|
|
3.00%
|
|
3.50%
|
|
Spread
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3%
|
|
4.50%
|
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4.50%
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Either
|
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4%
|
|
6.00%
|
|
5.50%
|
|
Percentage
|
|
5%
|
|
7.50%
|
|
6.50%
|
|
Percentage
|
|
6%
|
|
9.00%
|
|
7.50%
|
|
Percentage
|
There
is no minimum dividend rate in respect of any dividend period.
Effect of Failure
to Pay Distributions in a Timely Manner. If the Fund fails to
pay the paying agent the full amount of any distribution or redemption price, as
applicable, for a series of variable rate preferred shares in a timely manner,
the dividend rate for the dividend period following such a failure to pay (such
period referred to as the default period) and any subsequent dividend period for
which such default is continuing will be the default rate. In the event that 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 is 550% of the applicable LIBOR Rate for a dividend period of 364
days or fewer and 550% of the applicable Treasury Index Rate for a dividend
period of longer than 364 days.
Designation
of
Special
Dividend
Periods. The
Fund may instruct the auction agent to hold auctions more or less frequently
than weekly and may designate dividend periods longer or shorter than one week.
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 potential benefit of the Fund's leverage for holders
of its common shares. The Fund does not currently expect to hold auctions and
pay distributions less frequently than weekly or establish dividend periods
longer or shorter than one week. If the Fund designates a special dividend
period, changes in interest rates could affect the price received if preferred
shares are sold in the secondary market.
Any
designation of a special dividend period for a series of Variable Rate Preferred
Shares will be effective only if (i) notice thereof has been given as provided
for in the governing documents, (ii) any failure to pay in a timely manner to
the auction agent the full amount of any distribution on, or the redemption
price of, any preferred shares has been cured as provided for in the governing
documents, (iii) the auction immediately preceding the special dividend period
was not a failed auction, (iv) if the Fund has mailed a notice of redemption
with respect to any preferred shares, the Fund has deposited with the paying
agent all funds necessary for such redemption and (v) the Fund has confirmed
that as of the auction date next preceding the first day of such special
dividend period, it has assets with an aggregate discounted value at least equal
to the Basic Maintenance Amount, and the Fund has provided notice of such
designation and a Basic Maintenance Report to each rating agency then rating the
preferred shares at the request of the Fund.
The
dividend payment date for any such special dividend period will be set out in
the notice designating the special dividend period. In addition, for special
dividend periods of at least 91 days, dividend payment dates will occur on the
first business day of each calendar month within such dividend period and on the
business day following the last day of such dividend period.
Before
the Fund designates a special dividend period: (i) 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 (ii) 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.
Restrictions
on Dividends and Other Distributions for the Preferred Shares
So
long as any preferred shares are outstanding, the Fund may not pay any dividend
or distribution (other than a dividend or distribution paid in common shares or
in options, warrants or rights to subscribe for or purchase common shares) in
respect of the common shares or call for redemption, redeem, purchase or
otherwise acquire for consideration any common shares (except by conversion into
or exchange for shares of the Fund ranking junior to the preferred shares as to
the payment of dividends and the distribution of assets upon liquidation),
unless:
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·
|
the
Fund has declared and paid (or provided to the relevant dividend paying
agent) all cumulative distributions on the Fund's outstanding preferred
shares due on or prior to the date of such common share dividend or
distribution;
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|
·
|
the
Fund has redeemed the full number of preferred shares to be redeemed
pursuant to any mandatory redemption provision in the Fund's governing
documents; and
|
|
·
|
after
making the distribution, the Fund meets applicable asset coverage
requirements described under "— Asset Maintenance
Requirements."
|
No
full distribution will be declared or made on any series of the preferred shares
for any dividend period, or part thereof, unless full cumulative distributions
due through the most recent dividend payment dates therefor for all outstanding
series of preferred shares of the Fund ranking on a parity with such series as
to distributions have been or contemporaneously are declared and made. If full
cumulative distributions due have not been made on all outstanding preferred
shares of the Fund ranking on a parity with such series of preferred shares as
to the payment of distributions, any distributions being paid on the preferred
shares will be paid as nearly pro rata as possible in proportion to the
respective amounts of distributions accumulated but unmade on each such series
of preferred shares on the relevant dividend payment date. The Fund's obligation
to make distributions on the preferred shares will be subordinate to its
obligations to pay interest and principal, when due, on any of the Fund's senior
securities representing debt.
Redemption
Mandatory
Redemption Relating to Asset Coverage Requirements. The Fund may, at its
option, consistent with its Governing Documents and the 1940 Act, and in certain
circumstances will be required to, mandatorily redeem preferred shares in the
event that:
|
·
|
the
Fund fails to maintain the asset coverage requirements specified under the
1940 Act on a quarterly valuation date and such failure is not cured on or
before 60 days, in the case of the Fixed Rate Preferred Shares, or 10
business days, in the case of the Variable Rate Preferred Shares,
following such failure; or
|
|
·
|
the
Fund fails to maintain the asset coverage requirements as calculated in
accordance with the applicable rating agency guidelines (if any) 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 preferred shares subject to mandatory redemption will be
the liquidation preference, as stated in the Prospectus Supplement accompanying
the issuance of such preferred shares, plus an amount equal to any accumulated
but unpaid distributions (whether or not earned or declared) to the date fixed
for redemption, plus (in the case of Variable Rate Preferred Shares having a
dividend period of more than one year) any applicable redemption premium
determined by the Board and included in the Statement of
Preferences.
The
number of preferred shares that will be redeemed in the case of a mandatory
redemption will equal the minimum number of outstanding preferred shares, 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 preferred shares. In the event that
preferred shares 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 preferred shares 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 preferred shares are redeemed due to a failure to
satisfy applicable rating agency guidelines (if any), the Fund may, but is not
required to, redeem a sufficient number of preferred shares so that the Fund's
discounted portfolio value (as determined in accordance with the applicable
rating agency guidelines) after redemption exceeds the asset coverage
requirements of each applicable rating agency by up to 10% (that is, 110% rating
agency asset coverage). In addition, as discussed under "— Optional Redemption
of the Preferred Shares" below, the Fund generally may redeem Variable Rate
Preferred Shares subject to a variable rate, in whole or in part, at its option
at any time (usually on a dividend or distribution payment date), other than
during a non-call period.
If
the Fund does not have funds legally available for the redemption of, or is
otherwise unable to redeem, all the preferred shares 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 of the Fund's outstanding preferred shares are to be redeemed,
the Fund, at its discretion and subject to the limitations of its Governing
Documents and the 1940 Act, will select the one or more series of preferred
shares from which shares will be redeemed and the amount of preferred shares to
be redeemed from each such series. If less than all preferred shares of a series
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 the
preferred shares 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 Fixed Rate Preferred Shares. Fixed Rate
Preferred Shares will not be subject to optional redemption by the Fund until
the date, if any, specified in the applicable Prospectus Supplement, 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 such date
and thereafter, the Fund may at any time redeem such Fixed Rate Preferred Shares
in whole or in part for cash at a redemption price per share equal to the
initial liquidation preference per share plus accumulated and unpaid
distributions (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 Governing Documents and 1940
Act.
Optional
Redemption of Variable Rate Preferred Shares. The Fund
generally may redeem Variable Rate Preferred Shares, if issued, in whole or in
part, at its option at any time (usually on a dividend or distribution payment
date), other than during 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 such
preferred shares having a dividend period of one year or less, the redemption
price per share will equal the initial liquidation preference plus an amount
equal to any accumulated but unpaid distributions thereon (whether or not earned
or declared) to the redemption date, and in the case of such Preferred Shares
having a dividend period of more than one year, the redemption price per share
will equal the initial liquidation preference 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 Governing Documents and 1940 Act.
Redemption
Procedures. A
notice of redemption with respect to an optional redemption will be given to the
holders of record of preferred shares selected for redemption not less than 15
days (subject to Amex or NYSE requirements), in the case of Fixed Rate Preferred
Shares, and not less than seven days in the case of Variable Rate Preferred
Shares, nor, in both cases, more than 40 days prior to the date fixed for
redemption. Preferred shareholders 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 preferred shares 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 distributions to be included therein), (v) the place or places where
such shares are to be redeemed, (vi) that distributions on the shares to be
redeemed will cease to accumulate on such redemption date, (vii) the provision
of the Statement of Preferences, as applicable, 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 any preferred shares, whether subject to a variable or fixed rate,
will not have the right to redeem any of their shares at their
option.
Liquidation
Preference. In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Fund, the holders of preferred shares will be entitled to
receive a preferential liquidating distribution, which is expected to equal the
original purchase price per preferred share plus accumulated and unpaid
dividends, whether or not declared, before any distribution of assets is made to
holders of common shares. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of preferred shares will
not be entitled to any further participation in any distribution of assets by
the Fund. As
provided in the 1940 Act, and subject to compliance with the Fund's investment
limitations, the Fund may issue debt securities. In the event the
Fund were to issue such securities, the Fund's obligations to make distributions
and, upon liquidation of the Fund, liquidation payments in respect of its
preferred shares would be subordinate to the Fund's obligations to make any
principal and interest payments due and owing with respect to its outstanding
debt securities. Accordingly, the Fund's issuance of debt securities
would have the effect of creating special risks for the Fund's preferred
shareholders that would not be present in a capital structure that did not
include such securities.
Voting
Rights. The
1940 Act requires that the holders of any preferred shares, voting separately as
a single class, have the right to elect at least two Trustees at all times. The
remaining Trustees will be elected by holders of common shares and preferred
shares, voting together as a single class. In addition, subject to the prior
rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any preferred shares have the right to elect a
majority of the Trustees at any time two years' dividends on any preferred
shares are unpaid. The 1940 Act also requires that, in addition to any approval
by shareholders that might otherwise be required, the approval of the holders of
a majority of any outstanding preferred shares, voting separately as a class,
would be required to (i) adopt any plan of reorganization that would adversely
affect the preferred shares, and (ii) take 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 subclassification as a closed-end investment
company to an open-end company or changes in its fundamental investment
restrictions. As a result of these voting rights, the Fund's ability to take any
such actions may be impeded to the extent that there are any preferred shares
outstanding. The Board presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law, holders of
preferred shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of common shares as a single class.
The
affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so as to
affect materially and adversely such preferences, rights or powers, or to
increase or decrease the authorized number of preferred shares. The class vote
of holders of preferred shares described above will in each case be in addition
to any other vote required to authorize the action in question.
The
foregoing voting provisions will not apply to any preferred shares 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.
Book Entry. Fixed
Rate Preferred Shares will initially be held in the name of Cede & Co. as
nominee for DTC. The Fund will treat Cede & Co. as the holder of
record of preferred shares for all purposes. In accordance with the
procedures of DTC, however, purchasers of Fixed Rate Preferred Shares will be
deemed the beneficial owners of stock purchased for purposes of dividends,
voting and liquidation rights.
Variable
Rate Preferred Shares will initially be held by the auction agent as custodian
for Cede & Co., in whose name the Variable Rate Preferred Shares will be
registered. The Fund will treat Cede & Co. as the holder of
record of the Variable Rate Preferred Shares for all purposes.
Notes
General. Under
applicable state law and our Charter, we may borrow money without prior approval
of holders of common and preferred shares. We may issue debt securities,
including notes, or other evidence of indebtedness and may secure any such notes
or
borrowings by mortgaging, pledging or otherwise subjecting as security our
assets to the extent permitted by the 1940 Act or rating agency guidelines. Any
borrowings, including without limitation the notes, will rank senior to the
preferred shares and the common shares.
Under the 1940 Act, we may only issue
one class of senior securities representing indebtedness, which in the aggregate
must have asset coverage immediately after the time of issuance of at least
300%. So long as notes are outstanding, additional debt securities must rank on
a parity with notes with respect to the payment of interest and upon the
distribution of our assets.
A prospectus supplement relating to any
notes will include specific terms relating to the offering. The terms to be
stated in a prospectus supplement will include the following:
• the
form and title of the security;
• the
aggregate principal amount of the securities;
• the
interest rate of the securities;
• whether
the interest rate for the securities will be determined by auction or
remarketing;
• the
maturity dates on which the principal of the securities will be
payable;
• the
frequency with which auctions or remarketings, if any, will be
held;
• any
changes to or additional events of default or covenants;
• any
optional or mandatory redemption provisions;
• the
credit rating of the notes; and
• any
other terms of the securities.
Interest. The prospectus
supplement will describe the interest payment provisions relating to notes.
Interest on notes will be payable when due as described in the related
prospectus supplement. If we do not pay interest when due, it will trigger an
event of default and we will be restricted from declaring dividends and making
other distributions with respect to our common shares and preferred
shares.
Limitations. Under the
requirements of the 1940 Act, immediately after issuing any senior securities
representing indebtedness, we must have an asset coverage of at least 300%.
Asset coverage means the ratio which the value of our total assets, less all
liabilities and indebtedness not represented by senior securities, bears to the
aggregate amount of senior securities representing
indebtedness. Other types of borrowings also may result in our being
subject to similar covenants in credit agreements.
Events of Default and Acceleration
of Maturity of Notes.
Unless stated otherwise in the related
prospectus supplement, any one of the following events will constitute an "event
of default" for that series under the Indenture relating to the
notes:
• default
in the payment of any interest upon a series of notes when it becomes due and
payable and the continuance of such default for 30 days;
• default
in the payment of the principal of, or premium on, a series of notes at its
stated maturity;
• default
in the performance, or breach, of any covenant or warranty of ours in the
Indenture, and continuance of such default or breach for a period of 90 days
after written notice has been given to us by the trustee;
• certain
voluntary or involuntary proceedings involving us and relating to bankruptcy,
insolvency or other similar laws;
• if,
on the last business day of each of twenty-four consecutive calendar months, the
notes have a 1940 Act asset coverage of less than 100%; or
• any
other "event of default" provided with respect to a series, including a default
in the payment of any redemption price payable on the redemption
date.
Upon the occurrence and continuance of
an event of default, the holders of a majority in principal amount of a series
of outstanding notes or the trustee will be able to declare the principal amount
of that series of notes immediately due and payable upon written notice to us. A
default that relates only to one series of notes does not affect any other
series and the holders of such other series of notes will not be entitled to
receive notice of such a default under the Indenture. Upon an event of default
relating to bankruptcy, insolvency or other similar laws, acceleration of
maturity will occur automatically with respect to all series. At any time after
a declaration of acceleration with respect to a series of notes has been made,
and before a judgment or decree for payment of the money due has been obtained,
the holders of a majority in principal amount of the outstanding notes of that
series, by written notice to us and the trustee, may rescind and annul the
declaration of acceleration and its consequences if all events of default with
respect
to
that series of notes, other than the non-payment of the principal of that series
of notes which has become due solely by such declaration of acceleration, have
been cured or waived and other conditions have been met.
Liquidation Rights. In the
event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to us or to our creditors, as such, or to our
assets, or (b) any liquidation, dissolution or other winding up of us, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of ours, then (after any payments with respect to any
secured creditor of ours outstanding at such time) and in any such event the
holders of notes shall be entitled to receive payment in full of all amounts due
or to become due on or in respect of all notes (including any interest accruing
thereon after the commencement of any such case or proceeding), or provision
shall be made for such payment in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of the notes, before the holders of any of
our common or preferred shares are entitled to receive any payment on account of
any redemption proceeds, liquidation preference or dividends from such shares.
The holders of notes shall be entitled to receive, for application to the
payment thereof, any payment or distribution of any kind or character, whether
in cash, property or securities, including any such payment or distribution
which may be payable or deliverable by reason of the payment of any other
indebtedness of ours being subordinated to the payment of the notes, which may
be payable or deliverable in respect of the notes in any such case, proceeding,
dissolution, liquidation or other winding up event.
Unsecured creditors of ours may
include, without limitation, service providers including our Investment Adviser,
custodian, administrator, auction agent, broker-dealers and the trustee,
pursuant to the terms of various contracts with us. Secured creditors of ours
may include without limitation parties entering into any interest rate swap,
floor or cap transactions, or other similar transactions with us that create
liens, pledges, charges, security interests, security agreements or other
encumbrances on our assets.
A consolidation, reorganization or
merger of us with or into any other company, or a sale, lease or exchange of all
or substantially all of our assets in consideration for the issuance of equity
securities of another company shall not be deemed to be a liquidation,
dissolution or winding up of us.
Voting Rights. The notes have
no voting rights, except as mentioned below and to the extent required by law or
as otherwise provided in the Indenture relating to the acceleration of maturity
upon the occurrence and continuance of an event of default. In
connection with the notes or other borrowings (if any), the 1940 Act does in
certain circumstances grant to the note holders or lenders certain voting rights
in the event of default in the payment of interest on or repayment of
principal. In the event the Fund fails to maintain 100% asset
coverage of any notes outstanding, the holders of the notes will have the right
to elect a majority of the Fund's trustees.
Market. Our notes are not
likely to be listed on an exchange or automated quotation system. The details on
how to buy and sell such notes, along with the other terms of the notes, will be
described in a prospectus supplement. We cannot assure you that any
market will exist for our notes or if a market does exist, whether it will
provide holders with liquidity.
Book-Entry, Delivery and
Form. Unless otherwise stated in the related prospectus supplement, the
notes will be issued in book-entry form and will be represented by one or more
notes in registered global form. The global notes will be deposited with the
trustee as custodian for DTC and registered in the name of Cede & Co., as
nominee of DTC. DTC will maintain the notes in designated denominations through
its book-entry facilities.
Under the terms of the Indenture, we
and the trustee may treat the persons in whose names any notes, including the
global notes, are registered as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Therefore, so long as
DTC or its nominee is the registered owner of the global notes, DTC or such
nominee will be considered the sole holder of outstanding notes under the
Indenture. We or the trustee may give effect to any written certification, proxy
or other authorization furnished by DTC or its nominee.
A global note may not be transferred
except as a whole by DTC, its successors or their respective nominees. Interests
of beneficial owners in the global note may be transferred or exchanged for
definitive securities in accordance with the rules and procedures of DTC. In
addition, a global note may be exchangeable for notes in definitive form
if:
• DTC
notifies us that it is unwilling or unable to continue as a depository and we do
not appoint a successor within 60 days;
• we,
at our option, notify the trustee in writing that we elect to cause the issuance
of notes in definitive form under the Indenture; or
• an
event of default has occurred and is continuing.
In each instance, upon surrender by DTC
or its nominee of the global note, notes in definitive form will be issued to
each person that DTC or its nominee identifies as being the beneficial owner of
the related notes.
Under the Indenture, the holder of any
global note may grant proxies and otherwise authorize any person, including its
participants and persons who may hold interests through DTC participants, to
take any action which a holder is entitled to take under the
Indenture.
Trustee, Transfer Agent, Registrar, Paying Agent and Redemption
Agent. Information regarding the trustee under the Indenture, which may
also act as transfer agent, registrar, paying agent and redemption agent with
respect to our notes, will be set forth in the Prospectus
Supplement.
Subscription
Rights
General. We
may issue subscription rights to holders of our common shares to
purchase preferred shares. Subscription rights may be issued independently
or together with any other offered security and may or may not be transferable
by the person purchasing or receiving the subscription rights. In connection
with a subscription rights offering to holders of our common shares, we would
distribute certificates evidencing the subscription rights and a prospectus
supplement to our common shareholders as of the record date that we set
for determining the shareholders eligible to receive subscription
rights in such subscription rights offering.
The
applicable prospectus supplement would describe the following terms of
subscription rights in respect of which this prospectus is being
delivered:
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the
period of time the offering would remain open (which will be open a
minimum number of days such that all record holders would be eligible to
participate in the offering and will not be open longer than 120
days);
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the
title of such subscription rights;
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the
exercise price for such subscription rights (or method of calculation
thereof);
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the
number of such subscription rights issued in respect of each common
share;
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the
number of rights required to purchase a single preferred
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the
extent to which such subscription rights are transferable and the market
on which they may be traded if they are transferable;
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if
applicable, a discussion of the material U.S. federal income tax
considerations applicable to the issuance or exercise of such subscription
rights;
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the
date on which the right to exercise such subscription rights will
commence, and the date on which such right will expire (subject to any
extension);
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the
extent to which such subscription rights include an over-subscription
privilege with respect to unsubscribcd securities and the terms of such
over-subscription privilege;
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any
termination right we may have in connection with such subscription rights
offering; and
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any
other terms of such subscription rights, including exercise, settlement
and other procedures and limitations relating to the transfer and exercise
of such subscription rights.
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Exercise
of Subscription Rights. Each subscription right would entitle
the holder of the subscription right to purchase for cash such number of
preferred shares at such exercise price as in each case is set forth in, or be
determinable as set forth in, the prospectus supplement relating to the
subscription rights offered thereby, Subscription rights would be
exercisable at any time up to the close of business on the expiration date for
such subscription rights set forth in the prospectus supplement. After the close
of business on the expiration date, all unexercised subscription rights would
become void.
Subscription
rights would be exercisable as set forth in the prospectus supplement
relating to the subscription rights offered thereby. Upon expiration of the
rights offering and the receipt of payment and the subscription rights
certificate properly completed and duly executed at the corporate trust office
of the subscription rights agent or any other office indicated in the prospectus
supplement we would issue, as soon as practicable, the preferred shares
purchased as a result of such exercise. To the extent permissible under
applicable law, we may determine to offer any unsubscribed offered securities
directly to persons other than shareholders, to or through agents, underwriters
or dealers or through a combination of such methods, as set forth in the
applicable prospectus supplement.
TAXATION
The
following discussion is a brief summary of certain U.S. federal income tax
considerations affecting the Fund and its shareholders and note holders (as the
case may be). 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 shareholders (including shareholders owning
large positions in the Fund) or note holders, 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 from (a) dividends, interest
(including tax-exempt 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 (b) net income derived
from interests in certain publicly traded partnerships that are treated as
partnerships for U.S. federal income tax purposes and that derive less than 90%
of their gross income from the items described in (a) above (each a "Qualified
Publicly Traded Partnership"); and (ii) diversify its holdings so that, at the
end of each quarter of each taxable year (x) at least 50% of the 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 (y) not
more than 25% of the value of the Fund's total assets is invested in the
securities of (I) any one issuer (other than U.S. government securities and the
securities of other regulated investment companies), (II) 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 or (III) any one or more
Qualified Publicly Traded Partnerships.
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
shareholders, 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 and distributions paid and (ii) its net tax-exempt
interest income (the excess of its gross tax-exempt interest income over certain
disallowed deductions). The Fund intends to distribute at least
annually substantially all of such income. The Fund will be subject
to income tax at regular corporate income tax rates on investment company
taxable income and net capital gain that it does not distribute to its
shareholders.
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 ordinary 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 shareholders.
Taxation
of Shareholders
Distributions
paid to you by the Fund from its investment company taxable income which
includes the excess of net short-term capital gains over net long-term capital
losses (together referred to hereinafter as "ordinary income dividends") are
generally taxable to you as ordinary income to the extent of the Fund's earnings
and profits. Such distributions (if designated by the Fund) may, however,
qualify (provided holding periods and other requirements are met) (i) for the
dividends received deduction in the case of corporate shareholders to the extent
that the Fund's income consists of dividend income from U.S. corporations, and
(ii) for taxable years after December 31, 2002 through December 31, 2010), as
qualified dividend income eligible for the reduced maximum U.S. federal income
tax rate to individuals of generally 15% (currently 5% for individuals in lower
tax brackets) to the extent that the Fund receives qualified dividend
income. Qualified dividend income is, in general, dividend income
from taxable domestic corporations and certain foreign corporations (e.g.,
generally, foreign corporations incorporated in a possession of the United
States or in certain countries with a qualified comprehensive tax treaty with
the United States, or whose stock with respect to which such dividend is paid is
readily tradable on an established securities market in the United States).
There can be no assurance as to what portion of the Fund's ordinary income
dividends will constitute qualified dividend income. Distributions made to you
from net capital gain, which is the 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 shares. The
maximum U.S. federal income tax rate on net long-term capital gain of
individuals is generally 15% (5% for individuals in lower brackets) for such
gain realized before January 1, 2011. Distributions in excess of the
Fund's current and accumulated earnings and profits will first reduce the
adjusted tax basis of your shares and, after such adjusted tax basis is reduced
to zero, will constitute capital gains to you (assuming the shares are 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 qualified dividend income or capital gain dividends and other
distributions.
The
sale or other disposition of shares of the Fund will generally result in capital
gain or loss to you, and will be long-term capital gain or loss if the shares
have been held for more than one year at the time of sale and are a capital
asset in your hands. Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss to
the extent of any capital gain dividends received (including amounts credited as
an undistributed capital gain dividend) by you. A loss realized on a
sale or exchange of shares of the Fund will be disallowed if other substantially
identical shares are 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 shares are disposed of. In
such case, the basis of the shares 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.
Dividends
and other taxable distributions are taxable to you even though they are
reinvested in additional common shares of the Fund. If the Fund pays
you a dividend or makes a distribution in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend or distribution will be treated
for U.S. federal income tax purposes as being paid by the Fund and received by
you on December 31 of the year in which the dividend or distribution was
declared.
The
Fund is required in certain circumstances to backup withhold on taxable
dividends or distributions and certain other payments paid to non-corporate
holders of the Fund's shares 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 IRS.
Taxation
of Note Holders
Note
holders will be required to include payments of interest on the notes in their
gross income in accordance with their method of accounting for U.S. federal
income tax purposes.
Any
gain from the disposition of the notes will be treated as capital gain for note
holders who hold the notes as capital assets and as long-term capital gain if
the notes have been held for more than one year as of the date of
disposition. However, a portion of such gain may be required to be
treated as ordinary income under special rules of the Code governing the
treatment of market discount. A note holder who acquires a note at a
market discount (i.e., at a price less than the principal amount or the
“adjusted issue price” as determined for tax purposes, if relevant), such as a
subsequent purchaser of the notes, will be required to treat as ordinary income
a portion of any gain realized upon a disposition of the note equal to the
amount of market discount deemed to have been accrued as of the date of
disposition unless an election is made include such discount in income on a
current basis. A note holder who acquires a
note
at a market discount and does not elect to include such discount in income on a
current basis will be required to defer deduction of a portion of interest paid
or accrued on debt incurred or continued to purchase or carry the note until the
note holder disposes of the note. These rules may have an effect on
the price that can be obtained upon the sale of a note. Amounts
received upon a redemption of the notes will be subject to tax as ordinary
income to the extent of any accrued and unpaid interest on the notes as of the
date of redemption.
The
Fund is required in certain circumstances to backup withhold on interest
distributions paid to non-corporate holders of the Fund's notes 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
IRS.
Taxation of Holders of Subscription Rights
The value of a
subscription right will not be includible in the income of a shareholder at the
time the subscription right is issued.
The basis of a
subscription right issued to a shareholder will be zero, and the basis of the
share with respect to which the subscription right was issued (the old share)
will remain unchanged, unless either (a) the fair market value of the
subscription right on the date of distribution is at least 15% of the fair
market value of the old share, or (b) such shareholder affirmatively elects (in
the manner set out in Treasury regulations under the Code) to allocate to the
subscription right a portion of the basis of the old share. If either (a) or (b)
applies, such shareholder must allocate basis between the old share and the
subscription right in proportion to their fair market values on the date of
distribution.
The basis of a
subscription right purchased in the market will generally be its purchase
price.
The holding period of a
subscription right issued to a shareholder will include the holding period of
the old share.
No loss will be recognized
by a shareholder if a subscription right distributed to such shareholder expires
unexercised because the basis of the old share may be allocated to a
subscription right only if the subscription right is exercised. If a
subscription right that has been purchased in the market expires unexercised,
there will be a recognized loss equal to the basis of the subscription
right.
Any gain or loss on the
sale of a subscription right will be a capital gain or loss if the subscription
right is held as a capital asset (which in the case of subscription rights
issued to shareholders will depend on whether the old share is held as a capital
asset), and will be a long-term capital gain or loss if the holding period is
deemed to exceed one year.
No gain or loss will be
recognized by a shareholder upon the exercise of a subscription right, and the
basis of any preferred share acquired upon exercise (the new preferred share)
will equal the sum of the basis, if any, of the subscription right and the price
of the subscription right for the new preferred share. The holding period for
the new preferred share will begin on the date when the subscription right is
exercised.
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, its shareholders, and its note holders. 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, its shareholders, and its note holders (including
non-U.S. persons who owns securities (as the case may be)) can be found in the
Statement of Additional Information that is incorporated by reference into this
prospectus. Shareholders and note holders 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 FUND'S
GOVERNING DOCUMENTS
The
Fund presently has provisions in its Agreement and Declaration of Trust and
By-Laws (together, its "Governing Documents") which could have the effect of
limiting, in each case:
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the
ability of other entities or persons to acquire control of the
Fund;
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the
Fund's freedom to engage in certain transactions;
or
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the
ability of the Fund's trustees or shareholders to amend the Governing
Documents or effectuate changes in the Fund's
management.
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These
provisions of the Governing Documents of the Fund may be regarded as
"anti-takeover" provisions. The Board of the Fund is divided into
three classes, each having a term of no more than three years (except, to ensure
that the term of a class of the Fund's trustees expires each year, one class of
the Fund's trustees will serve an initial one-year term and three-year terms
thereafter and another class of its trustees will serve an initial two-year term
and three-year terms thereafter). Each year the term of one class of
trustees will expire. Accordingly, only those trustees in one class
may be changed in any one year, and it would require a minimum of two years to
change a majority of the Board. Such system of electing trustees may
have the effect of maintaining the continuity of management and, thus, make it
more difficult for the shareholders of the Fund to change the majority of
trustees. See "Management of the Fund — Trustees and Officers" in the
SAI. A Trustee of the Fund may be removed with or without cause by
two-thirds of the remaining Trustees and, without cause, by 66⅔% of the votes
entitled to be cast for the election of such Trustees.
In
addition, the affirmative vote of the holders of 75% of the outstanding voting
shares (in addition to any required class votes) applies to mergers into or a
sale of all or substantially all of the Fund's assets, liquidation, conversion
of the Fund into an open-end fund or interval fund and amendments to several
provisions of the Declaration of Trust, including the foregoing
provisions. In addition, 80% of the holders of the outstanding voting
securities of the Fund voting as a class is generally required in order to
authorize any of the following transactions:
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merger
or consolidation of the Fund with or into any other
entity;
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issuance
of any securities of the Fund to any person or entity for cash, other than
pursuant to the dividend and reinvestment plan or any offering if such
person or entity acquires no greater percentage of the securities offered
than the percentage beneficially owned by such person or entity
immediately prior to such offering or, in the case of a class or series
not then beneficially owned by such person or entity, the percentage of
common shares beneficially owned by such person or entity immediately
prior to such offering;
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sale,
lease or exchange of all or any substantial part of the assets of the Fund
to any entity or person (except assets having an aggregate fair market
value of less than $5,000,000);
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sale,
lease or exchange to the Fund, in exchange for securities of the Fund, of
any assets of any entity or person (except assets having an aggregate fair
market value of less than $5,000,000);
or
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the
purchase of the Fund's common shares by the Fund from any person or entity
other than pursuant to a tender offer equally available to other
shareholders in which such person or entity tenders no greater percentage
of common shares than are tendered by all other
shareholders;
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if
such person or entity is directly, or indirectly through affiliates, the
beneficial owner of more than 5% of the outstanding shares of the
Fund. However, such vote would not be required when, under certain
conditions, the Board approves the transaction. In addition,
shareholders have no authority to adopt, amend or repeal By-Laws. The
trustees have authority to adopt, amend and repeal By-Laws consistent with the
Declaration of Trust (including to require approval by the holders of a majority
of the outstanding shares for the election of trustees). Reference is
made to the Governing Documents of the Fund, on file with the Securities and
Exchange Commission, for the full text of these provisions.
The
provisions of the Governing Documents described above could have the effect of
depriving the owners of shares in the Fund of opportunities to sell their shares
at a premium over prevailing market prices, by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar
transaction. The overall effect of these provisions is to render more
difficult the accomplishment of a merger or the assumption of control by a
principal shareholder.
The
Governing Documents of the Fund are on file with the Securities and Exchange
Commission. For the full text of these provisions see the
SAI.
CLOSED-END FUND STRUCTURE
The
Fund is a non-diversified, closed-end management investment company (commonly
referred to as a closed-end fund). Closed-end funds differ from
open-end funds (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This
means that if you wish to sell your shares of a closed-end fund you must trade
them on the market like any other stock at the prevailing market price at that
time. In a mutual fund, if the shareholder wishes to sell shares of
the fund, the mutual fund will redeem or buy back the shares at "net asset
value." Also, mutual funds generally offer new shares on a continuous basis to
new investors, and closed-end funds generally do not. The continuous
inflows and outflows of assets in a mutual fund can make it difficult to manage
the fund's investments. By comparison, closed-end funds are generally
able to stay more fully invested in securities that are consistent with their
investment objectives, to have greater flexibility to make certain types of
investments and to use certain investment strategies such as financial leverage
and investments in illiquid securities.
Shares
of closed-end funds often trade at a discount to their net asset
value. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Fund's Board might
consider from time to time engaging in open-market repurchases, tender offers
for shares or other programs intended to reduce a discount. We cannot
guarantee or assure, however, that the Fund's Board will decide to engage in any
of these actions. Nor is there any guarantee or assurance that such
actions, if undertaken, would result in the shares trading at a price equal or
close to net asset value per share. The Board might also consider
converting the Fund to an open-end mutual fund, which would also require a
supermajority vote of the shareholders of the Fund and a separate vote of any
outstanding preferred shares. We cannot assure you that the Fund's
common shares will not trade at a discount.
REPURCHASE OF SHARES
The
Fund is a non-diversified, closed-end management investment company and as such
its shareholders do not, and will not, have the right to require the Fund to
repurchase their shares. The Fund, however, may repurchase its common
shares from time to time as and when it deems such a repurchase
advisable. The Board has authorized such repurchases to be made when
the Fund's common shares are trading at a discount from net asset value of 7.5%
or more (or such other percentage as the Board of the Fund may determine from
time to time). The Fund may also repurchase any preferred shares it
issues. Although the Board has authorized such repurchases, the Fund is not
required to repurchase its shares. The Board has not established a
limit on the number of shares that could be purchased during such
period. Pursuant to the 1940 Act, the Fund may repurchase its shares
on a securities exchange (provided that the Fund has informed its shareholders
within the preceding six months of its intention to repurchase such shares) or
pursuant to tenders and may also repurchase shares privately if the Fund meets
certain conditions regarding, among other things, distribution of net income for
the preceding fiscal year, status of the seller, price paid, brokerage
commissions, prior notice to shareholders of an intention to purchase shares and
purchasing in a manner and on a basis that does not discriminate unfairly
against the other shareholders through their interest in the Fund.
When
the Fund repurchases its common shares for a price below net asset value, or
preferred shares at a price below net asset value, the net asset value of the
common shares that remain outstanding shares will be enhanced, but this does not
necessarily mean that the market price of the outstanding common shares will be
affected, either positively or negatively. The repurchase of common
shares will reduce the total assets of the Fund available for investment and may
increase the Fund's expense ratio.
NET ASSET VALUE
For
purposes of determining the Fund's net asset value per share, portfolio
securities listed or traded on a nationally recognized securities exchange or
traded in the U.S. over-the-counter market for which market quotations are
readily available are valued at the last quoted sale price or a market's
official closing price as of the close of business on the day the securities are
being valued. If there were no sales that day, the security is valued
at the average of the closing bid and asked prices, or, if there were no asked
prices quoted on such day, the security is valued at the most recently available
price or, if the Board so determines, by such other method as the Board shall
determine in good faith, to reflect its fair market value. Portfolio
securities traded on more than one national securities exchange or market are
valued according to the broadest and most representative market, as determined
by the Investment Adviser.
Portfolio
securities primarily traded on foreign markets are generally valued at the
preceding closing values of such securities on the relevant market, but may be
fair valued pursuant to procedures established by the Board if market conditions
change significantly after the close of the foreign market but prior to the
close of business on the day the securities are being valued. Debt
instruments with remaining maturities of 60 days or less that are not credit
impaired are valued at amortized cost, unless the Board determines such amount
does not reflect the securities' fair value, in which case these securities will
be fair valued by or under the direction of the Board. Debt
instruments having a maturity greater than 60 days for which market quotations
are readily available are valued at the average of the latest bid and asked
prices. If there were no asked prices quoted on such day, the
security is valued using the closing bid price. Futures contracts are
valued at the closing settlement price of the exchange or board of trade on
which the applicable contract is traded.
Securities
and assets for which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Board. Fair valuation
methodologies and procedures may include, but are not limited to: analysis and
review of available financial and non-financial information about the company;
comparisons to the valuation and changes in valuation of similar securities,
including a comparison of foreign securities to the equivalent U.S. dollar value
ADR securities at the close of the U.S. exchange; and evaluation of any other
information that could be indicative of the value of the security.
The
Fund obtains valuations on the basis of prices provided by a pricing service
approved by the Board. All other investment assets, including
restricted and not readily marketable securities, are valued in good faith at
fair value under procedures established by and under the general supervision and
responsibility of the Fund's Board.
In
addition, whenever developments in one or more securities markets after the
close of the principal markets for one or more portfolio securities and before
the time as of which the Fund determines its net asset value would, if such
developments had been reflected in such principal markets, likely have more than
a minimal effect on the Fund's net asset value per share, the Fund may fair
value such portfolio securities based on available market information as of the
time the Fund determines its net asset value.
NYSE Closings. The
holidays (as observed) on which the NYSE is closed, and therefore days upon
which shareholders cannot purchase or sell shares, currently are: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the
preceding Friday or subsequent Monday when a holiday falls on a Saturday or
Sunday, respectively.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Bank
of New York Mellon, located at 135 Santilli Highway, Everett, Massachusetts
02149, 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 receives a monthly fee based upon, among other things, the average
value of the total assets of the Fund, plus certain charges for securities
transactions.
American
Stock Transfer & Trust Company, located at 59 Maiden Lane, New York, New
York 10038, serves as the Fund’s dividend disbursing agent, as agent under the
Fund’s Plan and as transfer agent and registrar for the common shares of the
Fund..
PLAN OF DISTRIBUTION
We
may sell our securities through underwriters or dealers, directly to one or more
purchasers, including existing holders of our common shares in a rights
offering, through agents, to or through underwriters or dealers, or through a
combination of any such methods of sale. The applicable Prospectus
Supplement will identify any underwriter or agent involved in the offer and sale
of our securities, any sales loads, discounts, commissions, fees or other
compensation paid to any underwriter, dealer or agent, the offering price, net
proceeds and use of proceeds and the terms of any sale. In the case of a
rights offering to existing holders of our common shares, the applicable
prospectus supplement will set forth the number of rights required to purchase a
single preferred share and the other terms of such rights offering.
The
distribution of our securities may be effected from time to time in one or more
transactions at a fixed price or prices, which may be changed, at prevailing
market prices at the time of sale, at prices related to such prevailing market
prices, or at negotiated prices, provided, however, that the offering price per
share in the case of common shares, must equal or exceed the net asset value per
share, exclusive of any underwriting commissions or discounts, of our common
shares.
We
may sell our securities directly to, and solicit offers from, institutional
investors or others who may be deemed to be underwriters as defined in the 1933
Act for any resales of the securities. In this case, no underwriters
or agents would be involved. We may use electronic media, including
the Internet, to sell offered securities directly.
In
connection with the sale of our securities, underwriters or agents may receive
compensation from us in the form of discounts, concessions or
commissions. Underwriters may sell our securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of our securities may be deemed to
be underwriters under the Securities Act of 1933, and any discounts and
commissions they receive from us and any profit realized by them on the resale
of our securities may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933. Any such underwriter or agent will
be identified and any such compensation received from us will be described in
the applicable Prospectus Supplement. The maximum commission or
discount to be received by any FINRA member or independent broker-dealer
will not exceed eight percent. We will not pay any compensation to
any underwriter or agent in the form of warrants, options, consulting or
structuring fees or similar arrangements.
If
a Prospectus Supplement so indicates, we may grant the underwriters an option to
purchase additional securities at the public offering price, less the
underwriting discounts and commissions, within 45 days from the date of the
Prospectus Supplement, to cover any overallotments.
To
facilitate an offering of securities in an underwritten transaction and in
accordance with industry practice, the underwriters may engage in transactions
that stabilize, maintain, or otherwise affect the market price of the
securities. Those transactions may include overallotment, entering
stabilizing bids, effecting syndicate covering transactions, and reclaiming
selling concessions allowed to an underwriter or a dealer.
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An
overallotment in connection with an offering creates a short position in
the securities for the underwriter's own
account.
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An
underwriter may place a stabilizing bid to purchase the shares for the
purpose of pegging, fixing, or maintaining the price of the
securities.
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Underwriters
may engage in syndicate covering transactions to cover overallotments or
to stabilize the price of the securities subject to the offering by
bidding for, and purchasing, the securities or any other securities in the
open market in order to reduce a short position created in connection with
the offering.
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The
managing underwriter may impose a penalty bid on a syndicate member to
reclaim a selling concession in connection with an offering when the
securities originally sold by the syndicate member are purchased in
syndicate covering transactions or
otherwise.
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Any
of these activities may stabilize or maintain the market price of the securities
above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any
time.
Any
underwriters to whom the offered securities are sold for offering and sale may
make a market in the offered securities, but the underwriters will not be
obligated to do so and may discontinue any market-making at any time without
notice. The offered securities may or may not be listed on a
securities exchange. We cannot assure you that there will be a liquid
trading market for the offered securities.
Any
fixed rate preferred shares sold pursuant to a Prospectus Supplement will likely
be listed on the NYSE.
Under
agreements into which we may enter, underwriters, dealers and agents who
participate in the distribution of our securities may be entitled to
indemnification by us against certain liabilities, including liabilities under
the Securities Act of 1933. Underwriters, dealers and agents may
engage in transactions with us, or perform services for us, in the ordinary
course of business.
If
so indicated in the applicable Prospectus Supplement, we will ourselves, or will
authorize underwriters or other persons acting as our agents to solicit offers
by certain institutions to purchase our securities from us pursuant to contracts
providing for payment and delivery on a future date. Institutions
with which such contacts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by us. The obligation of any purchaser under any such
contract will be subject to the condition that the purchase of the securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The underwriters and
such other agents will not have any responsibility in respect of the validity or
performance of such contracts. Such contracts will be subject only to
those conditions set forth in the Prospectus Supplement, and the Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
To
the extent permitted under the 1940 Act and the rules and regulations
promulgated thereunder, the underwriters may from time to time act as brokers or
dealers and receive fees in connection with the execution of our portfolio
transactions after the underwriters have ceased to be underwriters and, subject
to certain restrictions, each may act as a broker while it is an
underwriter.
A
Prospectus and accompanying Prospectus Supplement in electronic form may be made
available on the websites maintained by underwriters. The
underwriters may agree to allocate a number of securities for sale to their
online brokerage account holders. Such allocations of securities for
Internet distributions will be made on the same basis as other
allocations. In addition, securities may be sold by the underwriters
to securities dealers who resell securities to online brokerage account
holders.
In
order to comply with the securities laws of certain states, if applicable, our
securities offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers.
LEGAL MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
counsel to the Fund in connection with the offering of the Fund's
shares.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst
& Young LLP serves as the independent registered public accounting firm
of the Fund and audits the financial statements of the Fund. Ernst
& Young LLP is located at Two Commerce Square, 2001 Market Street, Suite
4000, Philadelphia, PA 19103.
ADDITIONAL INFORMATION
The
Fund is subject to the informational requirements of the Securities Exchange Act
of 1934, as amended, and the 1940 Act and in accordance therewith files reports
and other information with the Securities and Exchange
Commission. Reports, proxy statements and other information filed by
the Fund with the Securities and Exchange Commission pursuant to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act can be inspected and copied at the public reference facilities maintained by
the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The Securities and Exchange Commission maintains a web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Securities and Exchange Commission.
The
Fund's common shares are listed on the NYSE under the symbol
"GDL." Reports, proxy statements and other information concerning the
Fund and filed with the Securities and Exchange Commission by the Fund will be
available for inspection at the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, as the case may be.
This
prospectus constitutes part of a Registration Statement filed by the Fund with
the Securities and Exchange Commission under the Securities Act of 1933 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 preferred shares offered hereby. Any statements contained
herein concerning the provisions of any document are not necessarily complete,
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the Securities
and Exchange Commission. Each such statement is qualified in its
entirety by such reference. The complete Registration Statement may
be obtained from the Securities and Exchange Commission upon payment of the fee
prescribed by its rules and regulations or free of charge through the Security
and Exchange Commission's web site (http://www.sec.gov).
PRIVACY PRINCIPLES OF THE
FUND
The
Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following
information is provided to help you understand what personal information the
Fund collects, how the Fund protects that information and why, in certain cases,
the Fund may share information with select other parties.
Generally,
the Fund does not receive any non-public personal information relating to its
shareholders, although certain non-public personal information of its
shareholders may become available to the Fund. The Fund does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third party
administrator).
The
Fund restricts access to non-public personal information about its shareholders
to employees of the Fund's Investment Adviser and its affiliates with a
legitimate business need for the information. The Fund maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.
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 STATEMENT OF
ADDITIONAL INFORMATION
An
SAI dated as of August 4, 2008, has been filed with the SEC and is incorporated
by reference in this prospectus. An SAI may be obtained without
charge by writing to the Fund at its address at One Corporate Center, Rye, New
York 10580-1422 or by calling the Fund toll-free at (800) GABELLI
(422-3554). The Table of Contents of the SAI is as
follows:
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Page
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THE
FUND
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1
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INVESTMENT
OBJECTIVE AND POLICIES
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1
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INVESTMENT
RESTRICTIONS
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7
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MANAGEMENT
OF THE FUND
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8
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AUCTIONS
FOR AUCTION RATE PREFERRED SHARES
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15
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DIVIDENDS
AND DISTRIBUTIONS
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17
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PORTFOLIO
TRANSACTIONS
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18
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PORTFOLIO
TURNOVER
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19
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TAXATION
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19
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NET
ASSET VALUE
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24
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BENEFICIAL
OWNERS
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24
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GENERAL
INFORMATION
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25
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FINANCIAL
STATEMENTS
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26
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this prospectus in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Adviser or the underwriters.
Neither the delivery of this prospectus nor any sale made hereunder 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.
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Aaa
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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.
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Aa
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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.
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A
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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.
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Baa
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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.
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Ba
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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.
|
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.
The
Gabelli Global Deal Fund
Preferred
Shares of Beneficial Interest, Notes and Subscription Rights
PROSPECTUS
August
6, 2008
Filed
Pursuant to Rule 497
Registration
Statement No. 333-149864
PROSPECTUS
SUPPLEMENT
(To
Prospectus dated ____, 2008)
__________
Shares
[GRAPHIC
OMITTED]
Series
[ ] Preferred Shares
We
are offering for sale ________ shares of our Series __ Preferred Shares, par
value $0.001 per share. Our common shares are listed on the New York
Stock Exchange (the "NYSE") under the symbol "GDL.
"On ,
the last reported sale price of our common shares was
$ .
You
should review the information set forth under "Risk Factors and Special
Considerations" on page __ of the accompanying Prospectus before investing in
our preferred shares.
|
|
Per
Share
|
Total
(1)
|
|
Public
offering price
|
$____
|
$____
|
|
Underwriting
discounts and commissions
|
$____
|
$____
|
|
Proceeds,
before expenses, to us
|
$____
|
$____
|
_______________
(1)
The aggregate expenses of the offering are estimated to be $________, which
represents approximately $____ per share.
The Series __ Preferred Shares will be
ready for delivery on or about __________, ____.
You should read this Prospectus
Supplement and the accompanying Prospectus before deciding whether to invest in
our preferred shares and retain it for future reference. The
Prospectus Supplement and the accompanying Prospectus contain important
information about us. Material that has been incorporated by
reference and other information about us can be obtained from us by calling
800-GABELLI (422-3554) or from the Securities and Exchange Commission's ("SEC")
website (http://www.sec.gov).
Neither the SEC nor any state
securities commission has approved or disapproved these securities or determined
if this Prospectus Supplement is truthful or complete. Any
representation to the contrary is a criminal offense.
____________,
____
Filed
Pursuant to Rule 497
TABLE
OF CONTENTS
Prospectus
Supplement
|
|
|
Page
|
|
TERMS
OF THE SERIES ___ PREFERRED SHARES
|
|
P-3
|
|
USE
OF PROCEEDS
|
|
P-4
|
|
CAPITALIZATION
|
|
P-4
|
|
ASSET
COVERAGE RATIO
|
|
P-4
|
|
SPECIAL
CHARACTERISTICS AND RISKS OF THE PREFERRED SHARES
|
|
P-4
|
|
TAXATION
|
|
P-4
|
|
UNDERWRITING
|
|
P-4
|
|
LEGAL
MATTERS
|
|
P-4
|
TERMS
OF THE SERIES ___ PREFERRED SHARES
|
Dividend
Rate
|
The
dividend rate [for the initial dividend period]1
will be ___%.
|
|
|
|
|
Dividend
Payment Rate
|
[Dividends will be paid when, as and if declared
on __________, __________, __________, and __________, commencing
__________.]2 The
payment date for the initial dividend period will be __________.]1
|
|
|
|
|
[Regular
Dividend Period
|
Regular dividend periods will be ____ days.]1
|
|
|
|
|
[Regular
Auction Date
|
Auctions will be held on __________.]1
|
|
|
|
|
Liquidation
Preference
|
$______
per share
|
|
|
|
|
[Non-Call
Period
|
The shares may not be called for redemption at the
option of the Fund prior to __________.]2
|
|
|
|
|
[Stock
Exchange Listing]2
|
[
]
|
|
|
|
| |
|
| |
|
|
____________________
|
|
1 Applicable
only if the preferred shares being offered are auction rate preferred
shares.
2 Applicable
only if the preferred shares being offered are fixed rate preferred
shares.
USE
OF PROCEEDS
We
estimate the total net proceeds of the offering to be $_________ , based on the
public offering price of $_____ per share and after deduction of the
underwriting discounts and commissions and estimated offering expenses payable
by us.
The
Investment Adviser expects that it will initially invest the proceeds of the
offering in high-quality short-term debt securities and
instruments. The Investment Adviser anticipates that the investment
of the proceeds will be made in accordance with the Fund's investment objective
and policies as appropriate investment opportunities are identified, which is
expected to be substantially completed within three months; however, changes in
market conditions could result in the Fund's anticipated investment period
extending to as long as six months.
CAPITALIZATION
[To
be provided.]
ASSET
COVERAGE RATIO
[To
be provided.]
SPECIAL
CHARACTERISTICS AND RISKS OF THE PREFERRED SHARES
[To
be provided.]
TAXATION
Please
refer to the "Taxation" sections in the Fund Prospectus and Fund Statement of
Additional Information for a description of the consequences of investing in the
preferred shares of the Fund.
UNDERWRITING
[To
be provided.]
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, counsel to the Fund in connection with the offering of the
Series __ Preferred Shares. Certain legal matters in connection with this
offering will be passed on for the underwriters by
__________________________.
Filed
Pursuant to Rule 497
Registration
Statement
No. 333-[ ]
PROSPECTUS
SUPPLEMENT
(To
Prospectus dated __________, 2008)
[GRAPHIC
OMITTED]
Notes
[Specify Title]
We
are offering for sale our notes at a principal amount per note of
$________. Our common shares are listed on the New York Stock
Exchange (the "NYSE") under the symbol "GDL. "On
, the
last reported sale price of our common shares was
$ .
You
should review the information set forth under "Risk Factors and Special
Considerations" on page __ of the accompanying Prospectus before investing in
our notes.
|
|
|
|
|
Public
offering price
|
$____
|
$____
|
|
Underwriting
discounts and commissions
|
$____
|
$____
|
|
Proceeds,
before expenses, to us
|
$____
|
$____
|
________________
|
(1)
|
The
aggregate expenses of the offering are estimated to be $________, which
represents approximately $____ per
note.
|
The
notes will be ready for delivery on or about __________, ____.
You
should read this Prospectus Supplement and the accompanying Prospectus before
deciding whether to invest in our notes and retain it for future
reference. The Prospectus Supplement and the accompanying Prospectus
contain important information about us. Material that has been
incorporated by reference and other information about us can be obtained from us
by calling 800-GABELLI (422-3554) or from the Securities and Exchange
Commission's ("SEC") website (http://www.sec.gov).
Neither
the SEC nor any state securities commission has approved or disapproved these
securities or determined if this Prospectus Supplement is truthful or
complete. Any representation to the contrary is a criminal
offense.
____________,
____
TABLE
OF CONTENTS
Prospectus
Supplement
| |
Page |
| |
|
|
TERMS
OF THE NOTES
|
R-3
|
|
USE
OF PROCEEDS
|
R-4
|
|
CAPITALIZATION
|
R-4
|
|
ASSET
COVERAGE RATIO
|
R-4
|
|
SPECIAL
CHARACTERISTICS AND RISKS OF THE NOTES
|
R-4
|
|
TAXATION
|
R-4
|
|
UNDERWRITING
|
R-4
|
|
LEGAL
MATTERS
|
R-4
|
TERMS
OF THE NOTES
|
Principal
Amount
|
The
principal amount of the notes is $______ in the aggregate and $______ per
note.
|
|
Maturity
|
The
principal amount of the notes will become due and payable on _______,
___.
|
|
Interest
Rate
|
The
interest rate will be ___%.
|
|
Frequency
of payment
|
Interest
will be paid __________commencing __________.
|
|
Prepayment
Protections
|
|
|
Rating
|
It
is a condition of issuance that the notes be rated ["AAA" by S&P and
"Aaa" by Moody's].
|
USE
OF PROCEEDS
We
estimate the total net proceeds of the offering to be $_________ , based on the
public offering price of $_____ per note and after deduction of the underwriting
discounts and commissions and estimated offering expenses payable by
us.
The
Investment Adviser expects that it will initially invest the proceeds of the
offering in high-quality short-term income securities and
instruments. The Investment Adviser anticipates that the investment
of the proceeds will be
made in accordance with the Fund's investment objective and policies as
appropriate investment opportunities are identified, which is expected to be
substantially completed within three months; however, changes in market
conditions could result in the Fund's anticipated investment period extending to
as long as six months.
CAPITALIZATION
ASSET
COVERAGE RATIO
SPECIAL
CHARACTERISTICS AND RISKS OF THE NOTES
TERMS
OF THE NOTES
[To
be provided.]
TAXATION
[To
be provided.]
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, counsel to the Fund in connection with the offering of the
notes. Certain legal matters in connection with this offering will be passed on
for the underwriters by __________________________.
Dated
August 4, 2008
THE
GABELLI GLOBAL DEAL FUND
STATEMENT
OF ADDITIONAL INFORMATION
THE
INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY
BE CHANGED. THE FUND 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.
The
Gabelli Global Deal Fund, or the “Fund,” is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940 (the “1940 Act”). The Fund’s investment objective is to achieve absolute
returns in various market conditions without excessive risk of capital. Absolute
returns are defined as positive total returns, regardless of the direction of
securities markets. The Fund will seek to achieve its objective by investing
primarily in merger arbitrage transactions and, to a lesser extent, in corporate
reorganizations involving stubs, spin-offs and liquidations. Gabelli Funds, LLC
serves as “Investment Adviser” to the Fund. An investment in the Fund is not
appropriate for all investors. We cannot assure you that the Fund will achieve
its objective.
This
Statement of Additional Information (the “SAI”) does not constitute a
prospectus, but should be read in conjunction with the Fund’s prospectus dated
August 6, 2008 and as it may be supplemented (the “Prospectus”). This SAI does
not include all information that a prospective investor should consider before
investing in the Fund’s common shares, and investors should obtain and read this
prospectus prior to purchasing such shares. This SAI incorporates by reference
the entire Prospectus. You may request a free copy of this prospectus by calling
(800) GABELLI (422-3554) or by writing to the Fund. A copy of the Fund’s
Registration Statement, including this prospectus, 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 or via its web site
(http://www.sec.gov) at no charge.
This
Statement of Additional Information is dated August 4, 2008.
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
|
THE
FUND
|
1
|
|
INVESTMENT
OBJECTIVE AND POLICIES
|
1
|
|
INVESTMENT
RESTRICTIONS
|
7
|
|
MANAGEMENT
OF THE FUND
|
8
|
|
AUCTIONS
FOR AUCTION RATE PREFERRED SHARES
|
15
|
|
DIVIDENDS
AND DISTRIBUTIONS
|
17
|
|
PORTFOLIO
TRANSACTIONS
|
18
|
|
PORTFOLIO
TURNOVER
|
19
|
|
TAXATION
|
19
|
|
NET
ASSET VALUE
|
24
|
|
BENEFICIAL
OWNERS
|
24
|
|
GENERAL
INFORMATION
|
25
|
|
FINANCIAL
STATEMENTS
|
26
|
THE
FUND
The
Gabelli Global Deal Fund is a non-diversified, closed-end management investment
company organized under the laws of the State of Delaware. The Fund's
investment operations commenced on
January 31,
2007. The Fund's common shares are listed on the New York Stock
Exchange (the "NYSE") under the symbol "GDL."
INVESTMENT
OBJECTIVE AND POLICIES
Investment
Objective
The
Fund’s investment objective is to achieve absolute returns in various market
conditions without excessive risk of capital. Absolute returns are defined as
positive total returns, regardless of the direction of securities markets. The
Fund will seek to achieve its objective by investing primarily in merger
arbitrage transactions and, to a lesser extent, in corporate reorganizations
involving stubs, spin-offs and liquidations. Gabelli Funds, LLC serves as
“Investment Adviser” to the Fund. An investment in the Fund is not appropriate
for all investors. We cannot assure you that the Fund will achieve its
objective.
Additional
Investment Policies
Derivative
Instruments
Options. The Fund
may, from time to time, subject to guidelines of the Board of Trustees (the
“Board”) and the limitations set forth in the Prospectus and this SAI, 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
over-the-counter (“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, 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 option on the same instrument as the call option written where the
exercise price of the call option held is (i) equal to or less than the exercise
price of the call option written or (ii) greater than the exercise price of the
call option written if the difference is maintained by the Fund in cash, U.S.
government securities or other high-grade short-term obligations in a segregated
account with its custodian. A put option is “covered” if the Fund maintains cash
or other liquid securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put option on the same
instrument as the put option written where the exercise price of the put option
held is equal to or greater than the exercise price of the put option
written.
If
the Fund has written an option, it may terminate its obligation by effecting a
closing purchase transaction. This is accomplished by purchasing an option of
the same series as the option previously written. However, once 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 or in a private transaction. 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.
To
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to the following additional risks. If a put or call option
purchased by the Fund is not sold when it has remaining value, and if the market
price of the underlying security remains equal to or greater than the exercise
price (in the case of a put), or remains less than or equal to the exercise
price (in the case of a call), the Fund will lose its entire investment in the
option.
Where
a put or call option on a particular security is purchased to hedge against
price movements in that or a related security, the price of the put or call
option may move more or less than the price of the security. If restrictions on
exercise are imposed, the Fund may be unable to exercise an option it has
purchased. If the Fund is unable to close out an option that it has purchased on
a security, it will have to exercise the option in order to realize any profit
or the option may expire worthless.
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 option, or less than, in the case of a put option, 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-à-vis the U.S. dollar) historically have a high
degree of positive correlation.
Futures Contracts and Options on
Futures. The Fund may purchase and sell financial futures
contracts and options thereon which are traded on a commodities exchange or
board of trade for certain hedging and risk management purposes. 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. These
futures contracts and related options may be on debt securities, financial
indices, securities indices, U.S. government securities and foreign
currencies.
A
“sale” of a futures contract (or a “short” futures position) means the
assumption of a contractual obligation to deliver the securities underlying the
contract at a specified price at a specified future time. A “purchase” of a
futures contract (or a “long” futures position) means the assumption of a
contractual obligation to acquire the securities underlying the contract at a
specified price at a specified future time. Certain futures contracts, including
stock and bond index futures, are settled on a net cash payment basis rather
than by the sale and delivery of the securities underlying the futures
contracts.
No
consideration will be paid or received by the Fund upon the purchase or sale of
a futures contract. Initially, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10% of
the contract amount (this amount is subject to change by the exchange or board
of trade on which the contract is traded and brokers or members of such board of
trade may charge a higher amount). This amount is known as the “initial margin”
and is in the nature of a performance bond or good faith deposit on the
contract. Subsequent payments, known as “variation margin,” to and from the
broker will be made daily as the price of the index or security underlying the
futures contract fluctuates. At any time prior to the expiration of the futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate its existing position in the
contract.
An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at a specified exercise
price at any time prior to the expiration of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer’s futures margin account attributable to that contract, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call option, or is less than, in the case of a put option, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on a futures contract is limited to the premium
paid for the option (plus transaction costs). Because the value of the option
purchased is fixed at the point of sale, there are no daily cash payments by the
purchaser to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected in
the net assets of the Fund.
Futures
and options on futures entail certain risks, including but not limited to the
following: no assurance that futures contracts or options on futures can be
offset at favorable prices, possible reduction of the yield of the Fund due to
the use of hedging, possible reduction in value of both the securities hedged
and the hedging instrument, possible lack of liquidity due to daily limits on
price fluctuations, imperfect correlation between the contracts and the
securities being hedged, losses from investing in futures transactions that are
potentially unlimited and the segregation requirements described
below.
In
the event the Fund sells a put option or enters into long futures contracts,
under current interpretations of the 1940 Act, an amount of cash, U.S.
government securities or other liquid securities equal to the market value of
the contract must be deposited and maintained in a segregated account with the
Fund’s custodian (the “Custodian”) to collateralize the positions, in order for
the Fund to avoid being treated as having issued a senior security in the amount
of its obligations. For short positions in futures contracts and sales of call
options, the Fund may establish a segregated account (not with a futures
commission merchant or broker) with cash, U.S. government securities or other
high grade debt securities that, when added to amounts deposited with a futures
commission merchant or a broker as margin, equal the market value of the
instruments or currency underlying the futures contracts or call options,
respectively (but are no less than the stock price of the call option or the
market price at which the short positions were established).
Interest Rate Futures Contracts and
Options Thereon. The Fund may purchase or sell interest rate
futures contracts to take advantage of or to protect the Fund against
fluctuations in interest rates affecting the value of debt securities which the
Fund holds or intends to acquire. For example, if interest rates are expected to
increase, the Fund might sell futures contracts on debt securities, the values
of which historically have a high degree of positive correlation to the values
of the Fund’s portfolio securities. Such a sale would have an effect similar to
selling an equivalent value of the Fund’s portfolio securities. If interest
rates increase, the value of the Fund’s portfolio securities will decline, but
the value of the futures contracts to the Fund will increase at approximately an
equivalent rate thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. The Fund could accomplish similar results by
selling debt securities with longer maturities and investing in debt securities
with shorter maturities when interest rates are expected to increase. However,
since the futures market may be more liquid than the cash market, the use of
futures contracts as a risk management technique allows the Fund to maintain a
defensive position without having to sell its portfolio securities.
Similarly,
the Fund may purchase interest rate futures contracts when it is expected that
interest rates may decline. The purchase of futures contracts for this purpose
constitutes a hedge against increases in the price of debt securities (caused by
declining interest rates) which the Fund intends to acquire. Since fluctuations
in the value of appropriately selected futures contracts should approximate that
of the debt securities that will be purchased, the Fund can take advantage of
the anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund can make its intended purchase of the debt
securities in the cash market and currently liquidate its futures position. To
the extent the Fund enters into futures contracts for this purpose, it will
maintain in a segregated asset account with the Fund’s Custodian, assets
sufficient to cover the Fund’s obligations with respect to such futures
contracts, which will consist of cash or other liquid securities from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial margin
deposited by the Fund with its Custodian with respect to such futures
contracts.
The
purchase of a call option on a futures contract is similar in some respects to
the purchase of a call option on an individual security. Depending on the
pricing of the option compared to either the price of the futures contract upon
which it is based or the price of the underlying debt securities, it may or may
not be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when the Fund is not
fully invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The
purchase of a put option on a futures contract is similar to the purchase of
protective put options on portfolio securities. The Fund will purchase a put
option on a futures contract to hedge the Fund’s portfolio against the risk of
rising interest rates and a 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 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.
Forward Currency Exchange
Contracts. The Fund may enter into forward foreign currency
exchange contracts to protect the value of its portfolio against uncertainty in
the level of future currency exchange rates between a particular foreign
currency and the U.S. dollar or between foreign currencies in which its
securities are or may be denominated. 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. Forward currency contracts (i) are traded
in a market conducted directly between currency traders (typically, commercial
banks or other financial institutions) and their customers, (ii) generally have
no deposit requirements and (iii) are typically consummated without payment of
any commissions. The Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions. To assure that its
forward currency contracts are not used to achieve investment leverage, the Fund
will segregate liquid assets consisting of cash, U.S. government securities or
other liquid securities with its Custodian, or a designated subcustodian, in an
amount at all times equal to or exceeding its commitment with respect to the
contracts.
It
is anticipated that the dealings of the Fund in forward foreign currency
exchange will be limited to hedging, involving either specific transactions or
portfolio positions and other risk management purposes.
Transaction
hedging is the purchase or sale of one forward foreign currency for another
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities or its
payment of dividends and distributions. Position hedging is the purchase or sale
of one forward foreign currency for another currency with respect to portfolio
security positions denominated or quoted in the foreign currency to offset the
effect of an anticipated substantial appreciation or depreciation, respectively,
in the value of the currency relative to the U.S. dollar. In this situation, the
Fund also may, for example, enter into a forward contract to sell or purchase a
different foreign currency for a fixed U.S. dollar amount where it is believed
that the U.S. dollar value of the currency to be sold or bought pursuant to the
forward contract will fall or rise, as the case may be, whenever there is a
decline or increase, respectively, in the U.S. dollar value of the currency in
which its portfolio securities are denominated (this practice being referred to
as a “cross-hedge”).
In
hedging a specific transaction, the Fund may enter into a forward contract with
respect to either the currency in which the transaction is denominated or
another currency deemed appropriate by the Investment Adviser. The amount the
Fund may invest in forward currency contracts is limited to the amount of its
aggregate investments in foreign currencies. The use of forward currency
contracts may involve certain risks, including the failure of the counterparty
to perform its obligations under the contract, and such use may not serve as a
complete hedge because of an imperfect correlation between movements in the
prices of the contracts and the prices of the currencies hedged or used for
cover. The Fund will only enter into forward currency contracts with parties
which the Investment Adviser believes to be creditworthy
institutions.
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 United States, 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, securities of foreign issuers (“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 United States 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 United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States and (v) less 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.
Warrants and
Rights. The Fund may invest without limit in warrants or
rights (including 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.
The Fund and the Investment Adviser
Are Not Registered as Commodity Pool Operators. The Fund and
the Investment Adviser have claimed an exclusion from the definition of the term
“commodity pool operator” under the Commodity Exchange Act relating to
registered investment companies. Accordingly, the Fund and its investments in
derivative instruments described in the Prospectus and this SAI are not limited
by or subject to regulation under the Commodity Exchange Act or otherwise
regulated by the Commodity Futures Trading Commission.
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.
Loans
of Portfolio Securities. Consistent with applicable regulatory
requirements and the Fund’s investment restrictions, 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, cash
equivalents or other liquid securities 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 shares are 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 20% of the value of
the Fund’s total assets. The Fund’s ability to lend portfolio securities may be
limited by rating agency guidelines (if any).
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 Investment Adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. The Board 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 counterparty 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.
When Issued, Delayed Delivery
Securities and Forward Commitments. The Fund may enter into
forward commitments for the purchase or sale of securities, including on a “when
issued” or “delayed delivery” basis, in excess of customary settlement periods
for the type of security involved. In some cases, a forward commitment may be
conditioned upon the occurrence of a subsequent event, such as approval and
consummation of a merger, corporate reorganization or debt restructuring (i.e.,
a when, as and if issued security). When such transactions are negotiated, the
price is fixed at the time of the commitment, with payment and delivery taking
place in the future, generally a month or more after the date of the commitment.
While it will only enter into a forward commitment with the intention of
actually acquiring the security, the Fund may sell the security before the
settlement date if it is deemed advisable by the Investment
Adviser.
Securities
purchased under a forward commitment are subject to market fluctuation, and no
interest (or dividends) accrues to the Fund prior to the settlement date. The
Fund will segregate with its Custodian cash or other liquid securities in an
aggregate amount at least equal to the amount of its outstanding forward
commitments.
INVESTMENT
RESTRICTIONS
The
Fund operates under the following restrictions that constitute fundamental
policies that, except as otherwise noted, cannot be changed without the
affirmative vote of the holders of a majority (as defined under the 1940 Act) of
the outstanding voting securities of the Fund voting together as a single
class. In addition, pursuant to the Statements of Preferences, the
affirmative vote of the holders of a majority (as defined under the 1940 Act) of
the outstanding preferred shares of the Fund voting as a separate class is also
required to change a fundamental policy. Except as otherwise noted,
all percentage limitations set forth below apply immediately after a purchase or
initial investment and any subsequent change in any applicable percentage
resulting from market fluctuations does not require any action. The
Fund may not:
|
(1)
|
invest
more than 25% of its total assets, taken at market value at the time of
each investment, in the securities of issuers in any particular
industry. This restriction does not apply to investments in
U.S. government securities;
|
|
(2)
|
purchase
commodities or commodity contracts if such purchase would result in
regulation of the Fund as a commodity pool
operator;
|
|
(3)
|
purchase
or sell real estate, provided the Fund may invest in securities and other
instruments secured by real estate or interests therein or issued by
companies that invest in real estate or interests
therein;
|
|
(4)
|
make
loans of money or other property, except that (i) the Fund may acquire
debt obligations of any type (including through extensions of credit),
enter into repurchase agreements and lend portfolio assets and (ii) the
Fund may, with respect to up to 20% of the Fund’s total assets, lend money
or other property to other investment companies advised by the Investment
Adviser pursuant to a common lending program to the extent permitted by
applicable law;
|
|
(5)
|
borrow
money, except to the extent permitted by applicable
law;
|
|
(6)
|
issue
senior securities, except to the extent permitted by applicable law;
or
|
|
(7)
|
underwrite
securities of other issuers, except insofar as the Fund may be deemed an
underwriter under applicable law in selling portfolio securities;
provided, however, this restriction shall not apply to securities of any
investment company organized by the Fund that are to be distributed pro
rata as a dividend to its
shareholders.
|
MANAGEMENT
OF THE FUND
Trustees
and Officers
Overall
responsibility for management and supervision of the Fund rests with its
Board. The Board approves all significant agreements between the Fund
and the companies that furnish the Fund with services, including agreements with
the Investment Adviser, the Fund's custodian and the Fund's transfer
agent. The day-to-day operations of the Fund are delegated to the
Investment Adviser.
The
names and business addresses of the Trustees 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
trustees, their positions with certain other organizations and
companies.
Name
(and Age), Position with the Fund and Business Address(1)
|
Term
of Office and Length of Time
Served(2)
|
Principal
Occupation During Past Five Years(s)
|
Other
Directorships
Held
by Trustee
|
Number
of Portfolios in Fund Complex Overseen by Trustee
|
|
|
|
|
|
|
|
INTERESTED
TRUSTEES (3)
|
|
|
|
|
|
Mario
J. Gabelli (66)
Trustee
and Chief Investment Officer
|
Since
November 2006**
|
Chairman
and Chief Executive Officer of GAMCO Investors, Inc.; Chief Investment
Officer - Value
Portfolios of Gabelli Funds, LLC and GAMCO Asset Management Inc.;
Director/Trustee or Chief Investment officer of other registered
investment companies the Gabelli/GAMCO Funds complex; Chairman and Chief
Executive Officer of GGCP, Inc.
|
Director
of Morgan Group Holdings, Inc. (holding company); Chairman of the Board of
LICT Corporation (multimedia and communication services)
|
26
|
Name
(and Age), Position with the Fund and Business Address(1)
|
Term
of Office and Length of Time
Served(2)
|
Principal
Occupation During Past Five Years(s)
|
Other
Directorships
Held
by Trustee
|
Number
of Portfolios in Fund Complex Overseen by Trustee
|
|
|
|
|
|
|
|
Edward
T. Tokar (60)
Trustee
|
Since
November 2006***
|
Senior
Managing Director of Beacon Trust Company since 2004; Chief Executive
Officer of Allied Capital Management LLC (1997 – 2004), Vice President
- Investments of
Honeywell International Inc. (1977 – 2004)
|
Trustee
of LEVCO Series Trust; Trustee of DB Hedge Strategies Fund LLC; Director
of the Topiary Benefit Plan Investor Fund LLC (financial
services)
|
2
|
|
|
|
|
|
|
|
NON-INTERESTED TRUSTEES:
|
|
|
|
|
|
Anthony
J. Colavita (72)
Trustee
|
Since
November 2006***
|
Partner
in the law firm of Anthony J. Colavita, P.C.
|
None
|
37
|
|
|
|
|
|
|
|
James
P. Conn (70)
Trustee
|
Since
November 2006*
|
Former
Managing Director and Chief Investment Officer of Financial Security
Assurance Holdings Ltd. (insurance holding company) (1992 –
1998)
|
None
|
18
|
|
|
|
|
|
|
|
Clarence
A. Davis (67)
Trustee
|
Since
November 2006*
|
Chief
Executive Officer, Nestor Inc.; Former Chief Operating Officer (2000-2005)
and Chief Financial Officer (1999-2000) of the American Institute of
Certified Public Accountants
|
Director
of Oneida Ltd. (kitchenware)
|
2
|
|
|
|
|
|
|
|
Mario
d'Urso (68)
Trustee
|
Since
November 2006**
|
Chairman
of Mittel Capital Markets S.p.A. since 2001
|
None
|
4
|
|
|
|
|
|
|
|
Arthur
V. Ferrara (77)
Trustee
|
Since
November 2006*
|
Former
Chairman & Chief Executive Officer, Guardian Life Insurance Company Of
America (1992-1995)
|
None
|
8
|
|
|
|
|
|
|
|
Michael
J. Melarkey (59)
Trustee
|
Since
November 2006**
|
Partner
in the law firm of Avansino, Melarkey, Knobel &
Mulligan
|
Director
of Southwest Gas Corporation (natural gas utility)
|
4
|
|
|
|
|
|
|
|
Salvatore
J. Zizza (63)
Trustee
|
Since
November 2006***
|
Chairman
of Zizza & Co., Ltd. (consulting)
|
Director
of Hollis-Eden Pharmaceuticals (biotechnology) and Earl Scheib, Inc.
(automotive services)
|
28
|
Officers
Name
(and Age), Position with the Fund and Business Address
(1)
|
Term
of Office and
Length
of Time Served
|
Principal
Occupation During
Past
Five Years
|
|
Bruce
N. Alpert (56)
President
|
Since
November 2006
|
Executive
Vice President and Chief Operating Officer of Gabelli Funds LLC, since
1988; Director and President of Teton Advisors, Inc. since 1998; Officer
of all of the registered investment companies in the Gabelli/GAMCO fund
complex
|
|
|
|
|
|
Carter
W. Austin (42)
Vice
President
|
Since
November 2006
|
Vice
President of the Fund since 2006; Vice President of the Gabelli Dividend
& Income Trust since 2003; Vice President of The Gabelli Healthcare
& WellnessRX
Trust since 2007; Vice President of The Gabelli Global Gold, Natural
Resources & Income Trust since 2005; Vice President of the Gabelli
Equity Trust Inc. since 2000 and Vice President of Gabelli Funds, LLC
since 1996
|
|
|
|
|
|
Peter
D. Goldstein (55)
Chief
Compliance Officer
|
Since
November 2006
|
Director
of Regulatory Affairs at GAMCO Investors, Inc. since 2004; Chief
Compliance Officer of all the registered investment companies in the
Gabelli/GAMCO fund complex; Vice President of Goldman Sachs Asset
Management (2000 -
2004)
|
|
|
|
|
|
Sheila
J. Moore (61)
Assistant
Vice President and Ombudsman
|
Since
November 2006
|
Assistant
Vice President of The Gabelli Global Deal Fund since 2006, Adjunct
professor in Economics and Finance, Woodbury University, Burbank, CA prior
to 2006
|
|
|
|
|
|
Agnes
Mullady (50)
Treasurer
Secretary
|
Since
November 2006
|
Vice
President of Gabelli Funds, LLC since 2007; Officer of all registered
investment companies in the Gabelli/GAMCO fund complex; Senior Vice
President of U.S. Trust Company, N.A. and Treasurer and Chief Financial
Officer of Excelsior Funds from 2004- 2005; Chief Financial Officer of
AMIC Distribution Partners from 2002-2004
|
|
|
|
|
|
David
Schachter (55)
Vice
President
|
Since
November 2006
|
Vice
President of The Gabelli Utility Trust since 1999; The Gabelli Global
Utility & Income Trust since 2004; The Gabelli Healthcare &
WellnessRX
Trust since 2007 and Vice President of Gabelli & Company, Inc. since
1999
|
|
(1)
|
Address:
One Corporate Center, Rye, New York 10580-1422, unless otherwise
noted.
|
|
(2)
|
The
Fund's Board 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:
|
|
(3)
|
"Interested
person" of the Fund, as defined in the 1940 Act. Mr. Mario
Gabelli is an "interested person" of the Fund as a result of his
employment as an officer of the Investment Adviser. Mr. Gabelli
is also a registered representative of an affiliated
broker-dealer. Mr. Tokar is an "interested person" of the Fund
as a result of his son's employment by an affiliate of the Investment
Adviser.
|
|
*
|
Term
expires at the Fund's 2011 Annual Meeting of Shareholders or until their
successors are duly elected and
qualified.
|
|
**
|
Term
expires at the Fund's 2009 Annual Meeting of Shareholders or until their
successors are duly elected and
qualified.
|
|
***
|
Term
expires at the Fund's 2010 Annual Meeting of Shareholders or until their
successors are duly elected and
qualified.
|
|
|
Dollar
Range of Equity
Securities
in the Fund*
|
Aggregate
Dollar Range of Equity Securities in all Registered Investment Companies
in the Gabelli/GAMCO Fund Complex*
|
|
|
|
|
|
INTERESTED
TRUSTEES
|
|
|
|
Mario
J. Gabelli
|
E
|
E
|
|
Edward
T. Tokar
|
D
|
E
|
|
NON-INTERESTED
TRUSTEES
|
|
|
|
Anthony
J. Colavita*
|
C
|
E
|
|
James
P. Conn
|
E
|
E
|
|
Clarence
A. Davis
|
A
|
A
|
|
Mario
d'Urso
|
A
|
E
|
|
Arthur
V. Ferrara
|
C
|
E
|
|
Michael
J. Melarkey
|
E
|
E
|
|
Salvatore
J. Zizza
|
|
|
|
|
*The
letters in the above table correspond to the following dollar
ranges:
|
As
of the date of the SAI, Mario J. Gabelli may be deemed to beneficially own over
$100,000 of the common shares of the Fund, which are held by GAMCO Investors
Inc.
Mr.
Colavita owns less than 1% of the common stock of The LGL Group, Inc., having a
value of $9,071 as of December 31, 2007. The LGL Group, Inc. and LICT
Corporation may be deemed to be controlled by Mario J. Gabelli and in that event
would be deemed to be under common control with the Fund’s Investment
Adviser.
The
Trustees serving on the Fund's Nominating Committee are Anthony J. Colavita
(Chairman) 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 shareholders if a vacancy were to
exist. Such recommendations should be forwarded to the Secretary of
the Fund. The Fund does not have a standing compensation committee.
The Nominating Committee did not meet in 2007.
Anthony
J. Colavita, Clarence A. Davis, and Salvatore J. Zizza (Chair), who are not
"interested persons" of the Fund as defined in the 1940 Act, serve on the Fund's
Audit Committee. The Audit Committee is generally responsible for
reviewing and evaluating issues related to the accounting and financial
reporting policies and internal controls of the Fund and, as appropriate, 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 and the Fund's Independent Registered Public
Accounting Firm. The Audit Committee met twice in 2007.
The
Trust also has a Proxy Voting Committee, which, if so determined by the Board,
is authorized to exercise voting power and/or dispositive power over specific
securities held in the Fund's portfolio for such period as the Board may
determine. The Trustees serving on the Proxy Voting Committee are
Messrs. Edward T. Tokar (Chairman), James P. Conn and Arthur V. Ferrara. The
Proxy Voting Committee did not meet in 2007.
Remuneration
of Trustees and Officers
The
Fund pays each Trustee who is not affiliated with the Investment Adviser or its
affiliates a fee of $12,000 per year plus $1,500 per board meeting attended in
person ($1,000 if attended telephonically) and $500 per committee meeting
attended, together with each Trustee's actual out-of-pocket expenses relating to
attendance at such meetings.
The
following table shows the estimated compensation that the Trustees earned in
their capacity as Trustees during the Fund’s year ending December 31, 2007. The
table also shows, for the year ended December 31, 2007, the compensation
Trustees earned in their capacity as trustees for other funds in the Gabelli
Fund Complex.
COMPENSATION
TABLE
Name
of Person and Position
|
|
Aggregate
Compensation From the Fund
|
|
|
Total
Compensation From the
Fund
and Fund Complex
Paid
to Trustees*
|
|
|
INTERESTED
TRUSTEES
|
|
|
|
|
|
|
|
Mario
J. Gabelli
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Edward
T. Tokar
|
|
$ |
7,750 |
|
|
$ |
27,250 |
|
|
NON-INTERESTED
TRUSTEES
|
|
|
|
|
|
|
|
|
|
Anthony
J. Colavita
|
|
$ |
10,250 |
|
|
$ |
225,000 |
|
|
James
P. Conn
|
|
$ |
8,250 |
|
|
$ |
104,750 |
|
|
Clarence
A. Davis
|
|
$ |
8,250 |
|
|
$ |
11,997 |
|
|
Mario
d'Urso
|
|
$ |
7,750 |
|
|
$ |
40,250 |
|
|
Anthony
V. Ferrara
|
|
$ |
7,917 |
|
|
$ |
35,250 |
|
|
Michael
J. Melarkey
|
|
$ |
6,750 |
|
|
$ |
37,250 |
|
|
Salvatore
J. Zizza
|
|
$ |
12,281 |
|
|
$ |
166,250 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
*
|
Represents
the total compensation paid to such persons during the calendar year ended
December 31, 2007 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 total does not
include, among other things, out of pocket Trustee
expenses.
|
Indemnification
of Officers and Trustees; Limitations on Liability
The
Agreement and Declaration of Trust of the Fund provides that the Fund will
indemnify its trustees and officers and may indemnify its employees or agents
against liabilities and expenses incurred in connection with litigation in which
they may be involved because of their positions with the Fund to the fullest
extent permitted by law. However, nothing in the Agreement and
Declaration of Trust of the Fund protects or indemnifies a trustee, officer,
employee or agent of the Fund against any liability to which such person would
otherwise be subject in the event of such person's willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her position.
Investment
Advisory and Administrative Arrangements
Gabelli
Funds, LLC serves as the Fund's Investment Adviser pursuant to an investment
advisory agreement with the Fund (the "Advisory Agreement"). The
Investment Adviser is a New York limited liability company with principal
offices located at One Corporate Center, Rye, New York
10580-1422. The Investment Adviser was organized in 1999 and is the
successor to Gabelli Funds, Inc., which was organized in 1980. As of
June 30, 2008, the Investment Adviser acts as registered investment adviser
to 25 management investment companies with aggregate net assets of $15.9
billion. The Investment Adviser, together with other affiliated
investment advisers noted below had assets under management totaling
approximately $28.3 billion as of June 30, 2008. GAMCO Asset
Management 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 $11.6 billion under management as of June 30,
2008. Gabelli Securities, Inc., an affiliate of the Investment
Adviser, acts as investment adviser for investment partnerships and entities
having aggregate assets of approximately $354 million as of June 30,
2008. Gabelli Fixed Income LLC, an affiliate of the Investment
Adviser, acts as investment adviser for separate accounts having aggregate
assets of approximately $17 million under management as of June 30,
2008. Teton Advisors, Inc., an affiliate of the Investment Adviser,
acts as investment manager to the GAMCO Westwood Funds having aggregate assets
of approximately $434
million under management as of June 30, 2008.
Affiliates
of the Investment Adviser may, in the ordinary course of their business, acquire
for their own account or for the accounts of their advisory clients, significant
(and possibly controlling) positions in the securities of companies that may
also be suitable for investment by the Fund. The securities in which
the Fund might invest may thereby be limited to some extent. For
instance, many companies in the past several years have adopted so-called
"poison pill" or other defensive measures designed to discourage or prevent the
completion of non-negotiated offers for control of the company. Such
defensive measures may have the effect of limiting the shares of the company
which might otherwise be acquired by the Fund if the affiliates of the
Investment Adviser or their advisory accounts have or acquire a significant
position in the same securities. However, the Investment Adviser does
not believe that the investment activities of its affiliates will have a
material adverse effect upon the Fund in seeking to achieve its
investment
objectives. Securities purchased or sold pursuant to contemporaneous
orders entered on behalf of the investment company accounts of the Investment
Adviser or the advisory accounts managed by its affiliates for their
unaffiliated clients are allocated pursuant to principles believed to be fair
and not disadvantageous to any such accounts. In addition, all such
orders are accorded priority of execution over orders entered on behalf of
accounts in which the Investment Adviser or its affiliates have a substantial
pecuniary interest. The Investment Adviser may on occasion give
advice or take action with respect to other clients that differs from the
actions taken with respect to the Fund. The Fund may invest in the
securities of companies which are investment management clients of GAMCO Asset
Management Inc. In addition, portfolio companies or their officers or
directors may be minority shareholders of the Investment Adviser or its
affiliates.
The
Investment Adviser is a wholly-owned subsidiary of GAMCO Investors, Inc., a New
York corporation, whose Class A Common Stock is traded on the New York Stock
Exchange under the symbol "GDL." 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 and voting power of GGCP, Inc., which owns a majority of
the capital stock and voting power of GAMCO Investors, 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. In addition, under the Advisory Agreement, the Investment
Adviser oversees the administration of all aspects of the Fund's business and
affairs and provides, or arranges for others to provide, at the Investment
Adviser's expense, certain enumerated services, including maintaining the Fund's
books and records, preparing reports to the Fund's shareholders and supervising
the calculation of the net asset value of its shares. All expenses of
computing the net asset value of the Fund, including any equipment or services
obtained solely for the purpose of pricing shares or valuing its investment
portfolio, will be an expense of the Fund under its Advisory
Agreement.
Under
the terms of the Advisory Agreement, Gabelli Funds, LLC serves as the Fund’s
investment adviser at an annual base rate of 0.50% of the Fund’s average weekly
managed assets payable monthly in arrears. Managed assets consist of all of the
assets of the Fund without deduction for borrowings, repurchase transactions and
other leveraging techniques, the liquidation value of any outstanding preferred
shares or other liabilities except for certain ordinary course expenses. In
addition, the Investment Adviser will be entitled to receive an annual
performance fee as of the end of each calendar year if the total return of the
Fund on its common shares during the calendar year in question exceeds the total
return of the T-Bill Index compounded quarterly on the same dates as the Fund’s
quarterly ex-dividend dates (or at the end of the quarter if no dividend is
paid) during the same period. If the Fund’s total return for the calendar year
equals the total return of the T-Bill Index for the same period plus 3.0
percentage points (300 basis points), the Investment Adviser will receive a
performance fee of 0.75% of the Fund’s average weekly managed assets during the
period. This performance fee will be increased by 0.01 percentage point (one
basis point) for each 0.04 percentage points (four basis points) by which the
Fund’s total return during the period exceeds the T-Bill Index total return plus
3.0 percentage points (300 basis points), up to a maximum performance fee of
1.50% if the excess performance over the T-Bill Index is 6.0 percentage points
(600 basis points) or greater and will be decreased at the same rate for the
amount by which the Fund’s total return during the period is less than the
T-Bill Index total return plus 3.0 percentage points (300 basis points), until
no performance fee is payable if the Fund’s total return is less than or equal
to the T-Bill Index total return.
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 from year to year if approved annually (i) by the Fund's Board or by the
holders of a majority of its outstanding voting securities and (ii) by a
majority of the trustees 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 most recently approved by a majority of the Fund’s Board,
including a majority of the Trustees who are not interested persons as that term
is defined in the 1940 Act, at an in person meeting of the Board held on
November 8, 2007.
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.
Portfolio
Manager Information
Other
Accounts Managed
The
information below lists the number of accounts for which each portfolio manager
was primarily responsible for the day-to-day management as of the fiscal year
ended December 31, 2007.
Name
of Portfolio Manager or Team Member
|
|
Total
# of Accounts Managed
|
|
#
of Accounts Managed with Advisory Fee Based on
Performance
|
Total
Assets with Advisory Fee Based on Performance
|
|
Mario
J. Gabelli
|
Registered
Investment Companies:
|
23
|
$15.5
billion
|
6
|
$5.2
billion
|
|
|
Other
Pooled Investment Vehicles:
|
12
|
$269.6
million
|
11
|
$188.6
million
|
|
|
Other
Accounts:
|
1991
|
$10.6
billion
|
6
|
$1.6
billion
|
|
|
|
|
|
|
|
________________
Potential
Conflicts of Interest
Actual
or apparent conflicts of interest may arise when a portfolio manager for a fund
also has day-to-day management responsibilities with respect to one or more
other funds or accounts. These potential conflicts include:
Allocation of
Limited Time and Attention. A portfolio manager who is responsible for
managing multiple funds or other accounts may devote unequal time and attention
to the management of those funds or accounts. As a result, the portfolio manager
may not be able to formulate as complete a strategy or identify equally
attractive investment opportunities for each of those accounts as might be the
case if he or she were to devote substantially more attention to the management
of a single fund.
Allocation of
Limited Investment Opportunities. If a portfolio manager identifies an
investment opportunity that may be suitable for multiple funds or other
accounts, a fund may not be able to take full advantage of that opportunity
because the opportunity may be allocated among several of these funds or
accounts.
Pursuit of
Differing Strategies. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds or accounts
for which he or she exercises investment responsibility, or may decide that
certain of the funds or accounts should take differing positions with respect to
a particular security. In these cases, the portfolio manager may place separate
transactions for one or more funds or accounts which may affect the market price
of the security or the execution of the transaction, or both, to the detriment
of one or more other funds or accounts.
Selection of
Broker/Dealers. Portfolio managers may be able to select or influence the
selection of the brokers and dealers that are used to execute securities
transactions for the funds or accounts that they supervise. In addition to
providing execution of trades, some brokers and dealers provide portfolio
managers with brokerage and research services which may result in the payment of
higher brokerage fees than might otherwise be available. These services may be
more beneficial to certain funds or accounts than to others. Although the
payment of brokerage commissions is subject to the requirement that the
portfolio manager determine in good faith that the commissions are reasonable in
relation to the value of the brokerage and research services provided to the
fund, a portfolio manager's decision as to the selection of brokers and dealers
could yield disproportionate costs and benefits among the funds or other
accounts that he or she manages. In addition, with respect to certain types of
accounts (such as pooled investment vehicles and other accounts managed for
organizations and individuals) the Investment Adviser may be limited by the
client concerning the selection of brokers or may be instructed to direct trades
to particular brokers. In these cases, the Investment Adviser or its affiliates
may place separate, non-simultaneous transactions in the same security for a
fund and another account that may temporarily affect the market price of the
security or the execution of the transaction, or both, to the detriment of the
fund or the other accounts.
Variation in
Compensation. A conflict of interest may arise where the
financial or other benefits available to the portfolio manager differ among the
funds or accounts that he or she manages. If the structure of the
Investment Adviser's management fee or the portfolio manager's compensation
differs among funds or accounts (such as where certain funds or accounts pay
higher management fees or performance-based management fees), the portfolio
manager may be motivated to favor certain funds or accounts over
others. The portfolio manager also may be motivated to favor funds or
accounts in which he or she has an investment interest, or in which the
Investment Adviser or its affiliates have investment interests. Similarly, the
desire to maintain assets under management
or
to enhance a portfolio manager's performance record or to derive other rewards,
financial or otherwise, could influence the portfolio manager in affording
preferential treatment to those funds or other accounts that could most
significantly benefit the portfolio manager.
The
Investment Adviser and the Fund have adopted compliance policies and procedures
that are designed to address the various conflicts of interest that may arise
for the Investment Adviser and its staff members. However, there is
no guarantee that such policies and procedures will be able to detect and
prevent every situation in which an actual or potential conflict may arise. In
Ms. Marcin's case, her compensation is not affected by changes in assets of the
Fund.
Compensation
Structure
Compensation
Structure. Mr. Gabelli receives incentive-based variable
compensation based on a percentage of net revenues received by the Investment
Adviser for managing the Fund. Net revenues are determined by deducting from
gross investment management fees the firm’s expenses (other than Mr. Gabelli’s
compensation) allocable to the Fund. Because the Fund has a fulcrum fee
arrangement, Mr. Gabelli’s compensation as portfolio manager of the Fund will
depend on the Fund’s level of assets and its performance relative to the T-Bill
Index. Additionally, he receives similar incentive-based variable compensation
for managing other accounts within the firm (most of which are not subject to
performance or fulcrum fee arrangements). This method of compensation is based
on the premise that superior long-term performance in managing a portfolio
should be rewarded with higher compensation as a result of growth of assets
through appreciation and net investment activity. Five closed-end registered
investment companies managed by Mr. Gabelli have arrangements whereby the
Investment Adviser will only receive its investment advisory fee attributable to
the liquidation value of outstanding preferred shares (and Mr. Gabelli would
only receive his percentage of such advisory fee) if certain performance levels
are met. Mr. Gabelli manages other accounts with performance fees. Compensation
for managing these accounts has two components. One component of his
compensation is based on a percentage of net revenues received by the Investment
Adviser for managing the account. The second component is based on absolute
performance of the account, with respect to which a percentage of such
performance fee is paid to Mr. Gabelli. As an executive officer of the
Investment Adviser’s parent company, GAMCO Investors, Inc., Mr. Gabelli also
receives ten percent of the net operating profits of the parent company. Mr.
Gabelli receives no base salary, no annual bonus, and no stock
options.
Compensation
for managing other accounts is based on a percentage of net revenues received by
the Investment Adviser for managing the account. Compensation for managing the
pooled investment vehicles and other accounts that have a performance-based fee
will have two components. One component of the fee is based on a percentage of
net revenues received by the Investment Adviser for managing the account or
pooled investment vehicle. The second component of the fee is based on absolute
performance from which a percentage of such fee is paid to the portfolio
manager.
Ownership
of Shares in the Fund
As
of December 31, 2007, Mario J. Gabelli was deemed to beneficially own
$21,042,861 of equity securities of the Fund, which is a reflection of 1,318,475
common shares multiplied by the December 31, 2007 closing price of
$15.96.
AUCTIONS
FOR AUCTION RATE PREFERRED SHARES
Summary
of Auction Procedures
The
following is a brief summary of the auction procedures for auction rate
preferred shares. 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 Governing Documents, including the provisions of the Statement of
Preferences establishing any series of auction rate preferred
shares.
The
auctions determine the dividend rate for auction rate preferred shares, but each
dividend rate will not be higher than the maximum rate. If you own
auction rate preferred shares, you may instruct your broker-dealer to enter one
of three kinds of orders in the auction with respect to your
stock: sell, bid and hold.
|
·
|
If
you enter a sell order, you indicate that you want to sell auction rate
preferred shares at their liquidation preference 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 auction rate preferred shares
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
auction rate preferred shares, no matter what the next dividend period's
rate will be.
|
You
may enter different types of orders for different portions of your auction rate
preferred shares. You may also enter an order to buy additional
auction rate preferred shares. All orders must be for whole
shares. All orders you submit are irrevocable. There is a fixed
number of 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 auction rate preferred shares and
general economic conditions including current interest rates. If you
own auction rate preferred shares 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 auction rate preferred shares, 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 auction rate preferred shares, or want to buy more shares,
you may instruct a broker-dealer to enter a bid order to buy shares in an
auction at the liquidation preference 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 auction rate preferred
shares 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 auction rate preferred shares. A
broker-dealer's failure to submit orders for auction rate preferred shares 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 auction rate preferred shares will pay
to each broker-dealer, from funds provided by the Fund, a service charge equal
to, in the case shares 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) ¼ of 1%, times (iii) the liquidation preference per share, times (iv)
the aggregate number of 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 auction rate preferred shares placed by the broker-dealer at the
auction agreed to by the Fund and the broker-dealers.
If
the number of 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 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 auction rate preferred shares available for
purchase in the auction.
If
the number of 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 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 auction rate preferred shares offered for sale
than there are buyers for those shares).
If
broker-dealers submit or are deemed to submit hold orders for all outstanding
auction rate preferred shares, 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 Statement of
Preferences establishing the auction rate preferred shares.
The
auction procedures include a pro rata allocation of
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 shares of 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 DTC. Purchasers will pay
for their auction rate preferred shares through broker-dealers in same-day funds
to DTC against delivery to the broker-dealers. DTC will make payment to the
sellers' broker-dealers in accordance with its normal procedures, which require
broker-dealers to make payment against delivery in same-day funds. As used in
this prospectus, a business day is a day on which the NYSE is open for trading,
and which is not a Saturday, Sunday or any other day on which banks in New York
City are authorized or obligated by law to close.
The
first auction for a series of auction rate preferred shares will be held on the
date specified in the Prospectus Supplement for such series, which will be the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special dividend periods, auctions
for such series auction rate preferred shares normally will be held within the
frequency
specified
in the Prospectus Supplement for such series, and each subsequent dividend
period for such series auction rate preferred shares normally will begin on the
following 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 shares of 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 sell all 500 shares if auction rate is less than
5.1%
|
Bid
order at 5.1% rate for all 500 shares
|
| |
Current
Holder B
|
Owns
300 shares, wants to hold
|
Hold
order will take the auction rate
|
| |
Current
Holder C
|
Owns
200 shares, wants to sell all 200 shares if auction rate is less than
4.9%
|
Bid
order at 4.9% rate for all 200 shares
|
| |
Potential
Holder D
|
Wants
to buy 200 shares
|
Places
order to buy at or above 5.0%
|
| |
Potential
Holder E
|
Wants
to buy 300 shares
|
Places
order to buy at or above 4.99%
|
| |
Potential
Holder F
|
Wants
to buy 200 shares
|
Places
order to buy at or above 5.1%
|
The
lowest dividend rate that will result in all 1,000 Series E Auction Rate
Preferred shares continuing to be held is 5.0% (the offer by D). Therefore, the
dividend rate will be 5.0%. Current holders B and C will continue to own their
shares. Current holder A will sell its shares because A's dividend rate bid was
higher than the dividend rate: Potential holder D will buy 200 shares and
potential holder E will buy 300 shares because their bid rates were at or below
the dividend rate. Potential holder F will not buy any shares because its bid
rate was above the dividend rate.
Secondary
Market Trading and Transfer of Auction Rate Preferred Shares
The
underwriters shall not be required to make a market in the auction rate
preferred shares. 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 auction rate preferred shares will develop or, if it does
develop, that it will provide owners with liquidity of
investment. The auction rate preferred shares will not be registered
on any stock exchange. Investors who purchase auction rate preferred
shares 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 auction rate preferred shares
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 auction rate preferred shares in the name of a broker-dealer, a sale or
transfer of your auction rate preferred shares to that broker dealer, or to
another customer of that broker-dealer, will not be considered a sale or
transfer or 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.
DIVIDENDS
AND DISTRIBUTIONS
For
the fiscal year ended December 31, 2007, the Fund made distributions of $1.20
per common share, none of which constituted a return of capital. For
the fiscal year ending December 31, 2008, the Fund has made distributions of
$1.60 per common share. Based on current earnings, the Fund expects a
portion of the distributions paid in 2008 to be deemed a non-taxable return of
capital. The composition of each distribution is estimated based on
earnings as of the record date for the distribution. The actual
composition of each distribution may change based on the Fund's investment
activity through the end of the calendar year.
The Fund
intends to distribute substantially all of its net capital gain each year, but
may determine to retain all or part of any net capital gain for reinvestment. In
such event, the Fund will pay federal income tax on such retained gain and the
Fund’s shareholders will receive a corresponding tax credit and increase in the
basis of their shares. In the event that the Fund’s net investment company
taxable income and net capital gains exceed the total of the Fund’s quarterly
distributions on common shares and the amount of distributions on any preferred
shares issued by the Fund, the Fund intends to pay such excess once a year. If,
for any calendar year, the total quarterly distributions on common shares and
the amount of distributions on any preferred shares issued by the Fund exceed
net investment company taxable income and net capital gain, the excess will
generally be treated as a tax free return of capital up to the amount of a
shareholder’s tax basis in the common shares. Any distributions which (based
upon the Fund’s full year performance) constitute tax free return of capital
will reduce a shareholder’s tax basis in the common shares, thereby increasing
such shareholder’s potential gain or reducing his or her potential loss on the
sale of the common shares. Any amounts distributed to a shareholder in excess of
the basis in the common shares will generally be taxable to the shareholder as
capital gain. See “Taxation.” Quarterly distribution notices provided by the
Fund to its shareholders will describe the portion of the quarterly distribution
which, in the Fund’s current good faith judgment, constitutes investment company
taxable income, capital gain, or a return of capital. The final determination of
the source of such distributions for federal income tax purposes will be made
shortly after year end based on the Fund’s actual net investment company taxable
income and net capital gain for the year and will be communicated to
shareholders promptly.
In
the event the Fund distributes amounts in excess of its investment company
taxable 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 as the Fund's fixed expenses will become a larger percentage of
the Fund's average net assets. 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 may not dictate such
action.
The
Fund, along with other closed-end registered investment companies advised by the
Investment Adviser, is covered by 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 any distribution policy of the Fund
with respect to its common shares calls 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 or
market price per common share over a specified period of time at or about the
time of distribution or the payment of a fixed dollar amount. The
exemption also permits the Fund to make such distributions with respect to its
preferred shares, if any, in accordance with such shares'
terms.
PORTFOLIO
TRANSACTIONS
Subject
to policies established by the Board 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 thereunder, and other regulatory
requirements, the Fund's Board 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. Since the Fund's
inception, the Fund has paid a total of $1,126,377 in brokerage
commissions. Since the Fund's inception, the Fund has paid a total of
$856,982 in brokerage commission to Gabelli & Company, Inc. and its
broker-dealer affiliates. For the Fund’s 2007 fiscal year, the amount
paid to Gabelli & Company, Inc. and its broker-dealer affiliates represented
76.08% of the number of aggregate brokerage commissions paid by the Fund, and
50.98% of the aggregate dollar amount of transactions involving the payment of
commissions. 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, or other services (e.g., wire
services) 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 for the
other accounts managed by the Investment Adviser and its affiliates, investments
of the kind made by the Fund may also be made for those other
accounts. When the same securities are purchased for or sold by the
Fund and any of such other accounts, it is the policy of the Investment Adviser
and its affiliates to allocate such purchases and sales in the manner deemed
fair and equitable to all of the accounts, including the Fund.
PORTFOLIO
TURNOVER
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 indirectly by its shareholders. A higher rate
of portfolio turnover may also result in taxable gains being passed to
shareholders sooner than would otherwise be the case.
TAXATION
The
following discussion is a brief summary of certain U.S. federal income tax
considerations affecting the Fund and its shareholders and note holders (as the
case may be). No attempt is made to present a detailed explanation of
all U.S. federal, state, local and foreign tax concerns affecting the Fund and
its shareholders (including shareholders owning a large position in the Fund) or
note holders, 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 U.S. federal, state, local and
foreign taxes. The discussion reflects applicable tax laws of the
United States as of the date of this SAI; these tax laws may be changed or
become subject to new interpretations by the courts or the Internal Revenue
Service (the "IRS") retroactively or prospectively.
Taxation
of the Fund
The
Fund has elected to be treated and has qualified, and intends to continue to
qualify, as a regulated investment company (a "RIC") 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 from (a) dividends, interest
(including tax-exempt 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 (b) net income derived
from interests in certain publicly traded partnerships that are treated as
partnerships for U.S. federal income tax purposes and that derive less than 90%
of their gross income from the items described in (a) above (each a "Qualified
Publicly Traded Partnership"); and (ii) diversify its holdings so that, at the
end of each quarter of each taxable year (x) at least 50% of the 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 (y) not
more than 25% of the value of the Fund's total assets is invested in the
securities of (I) any one issuer (other than U.S. government securities and the
securities of other RICs), (II) 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 or (III) any one or more Qualified Publicly Traded
Partnerships.
As
a RIC, the Fund generally is not subject to U.S. federal income tax on income
and gains that it distributes each taxable year to shareholders, 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 gain over net long-term capital loss and other
taxable income, other than any net long-term capital gain, reduced by deductible
expenses) determined without regard to the deduction for dividends and
distributions paid and (ii) its net tax-exempt interest income (the excess of
its gross tax-exempt interest income 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 this 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 gain in excess of its capital loss (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 gain 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 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.
A
distribution will be treated as paid during the calendar year if it is paid
during the calendar year or declared by the Fund in October, November or
December of the year, payable to shareholders of record on a date during such 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 by the Fund's shareholders on December 31 of the year the distributions
are declared, rather than when the distributions are actually
received.
If
the Fund were unable to satisfy the 90% distribution requirement or otherwise
were to fail to qualify as a RIC in any year, it would be taxed in the same
manner as an ordinary corporation and distributions to the Fund's shareholders
would not be deductible by the Fund in computing its taxable
income. To qualify again to be taxed as a RIC in a subsequent year,
the Fund would be required to distribute to its shareholders 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 two
taxable years, then the Fund would be required to elect to recognize and pay tax
on any net built-in gain (the excess of aggregate gain, including items of
income, over aggregate loss that would have been realized if the Fund had been
liquidated) or, alternatively, be subject to taxation on such built-in gain
recognized for a period of ten years, in order to qualify as a RIC in a
subsequent year.
Gain
or loss on the sales of securities by the Fund will generally 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 securities 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 ordinary income and loss.
The
premium received by the Fund for writing a call option is not included in income
at the time of receipt. If the option expires, the premium is short-term capital
gain to the Fund. If the Fund enters into a closing transaction, the difference
between the amount paid to close out its position and the premium received is
short-term capital gain or loss. If a call option written by the Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of the security and any
resulting gain or loss will be long-term or short-term, depending upon the
holding period of the security. Because the Fund does not have control over the
exercise of the call options it writes, such exercises or other required sales
of the underlying securities may cause the Fund to realize capital gains or
losses at inopportune times.
With
respect to a put or call option that is purchased by the Fund, if the option is
sold, any resulting gain or loss will be a capital gain or loss, and will be
short-term or long-term, depending upon the holding period for the option. If
the option expires, the resulting loss is a capital loss and is short-term or
long-term, depending upon the holding period for the option. If the option is
exercised, the cost of the option, in the case of a call option, is added to the
basis of the purchased security and, in the case of a put option, reduces the
amount realized on the underlying security in determining gain or
loss.
The
Fund’s investment in so-called “section 1256 contracts,” such as regulated
futures contracts, most foreign currency forward contracts traded in the
interbank market and options on most stock indices, are subject to special tax
rules. All section 1256 contracts held by the Fund at the end of its taxable
year are required to be marked to their market value, and any unrealized gain or
loss on those positions will be included in the Fund’s income as if each
position had been sold for its fair market value at the end of the taxable year.
The resulting gain or loss will be combined with any gain or loss realized by
the Fund from positions in section 1256 contracts closed during the taxable
year. Provided such positions were held as capital assets and were not part of a
“hedging transaction” nor part of a “straddle,” 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
Investments
by the Fund in certain "passive foreign investment companies" ("PFICs") could
subject the Fund to U.S. federal income tax (including interest charges) on
certain distributions or dispositions with respect to those investments which
cannot be eliminated by making distributions to
shareholders. Elections may be available to the Fund to mitigate the
effect of this tax provided that the PFIC complies with certain reporting
requirements, but such elections generally accelerate the recognition of income
without the receipt of cash. Dividends paid by PFICs will not qualify
for the reduced tax rates discussed below under "Taxation of
Shareholders."
The
Fund may invest in debt obligations purchased at a discount with the result that
the Fund may be required to accrue income for U.S. 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 certain U.S. 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 investment company taxable income as is required in
order to avoid Fund-level U.S. federal income tax on all of its income, or might
prevent the Fund from distributing enough ordinary income and capital gain net
income to avoid the imposition of the excise tax. To avoid this
result, the Fund may be required to borrow money or dispose of securities to be
able to make distributions to its shareholders.
If
the Fund does not meet the asset coverage requirements of the 1940 Act and the
Statements of Preferences, the Fund will be required to suspend distributions to
the holders of the common shares until the asset coverage is
restored. Such a suspension of distributions might prevent the Fund
from distributing 90% of its investment company taxable 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 imposition of the excise tax.
Certain
of the Fund's investment practices are subject to special and complex U.S.
federal income tax provisions that may, among other things, (i) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, (ii)
convert lower taxed long-term capital gains and qualified dividend income into
higher taxed short-term capital gains or ordinary income, (iii) convert ordinary
loss or a deduction into capital loss (the deductibility of which is more
limited), (iv) cause the Fund to recognize income or gain without a
corresponding receipt of cash, (v) adversely affect the time as to when a
purchase or sale of stock or securities is deemed to occur, (vi) adversely alter
the characterization of certain complex financial transactions and (vii) produce
income that will not qualify as good income for purposes of the 90% annual gross
income requirement described above. The Fund will monitor its
transactions and may make certain tax elections to mitigate the effect of these
rules and prevent disqualification of the Fund as a RIC.
Because
the Fund may invest in foreign securities, its income from such securities may
be subject to non-U.S. taxes. The Fund intends to invest less than
50% of its total assets in foreign securities. As long as the Fund
continues to invest less than 50% of its assets in foreign securities it will
not be eligible to elect to "pass-through" to shareholders of the Fund the
ability to use the foreign tax deduction or foreign tax credit for foreign taxes
paid with respect to qualifying taxes.
Taxation
of Shareholders
The
Fund will determine either to distribute or to retain for reinvestment all or
part of its net capital gain. If any such gain is 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 gain in a
notice to its shareholders, each of whom (i) will be required to include in
income for tax purposes as long-term capital gain its share of such
undistributed amounts, (ii) will be entitled to credit its proportionate share
of the tax paid by the Fund against its U.S. 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 gain included in such shareholder's gross
income.
Distributions
paid by the Fund from its investment company taxable income, which includes net
short-term capital gain, generally are taxable as ordinary income to the extent
of the Fund's earnings and profits. Such distributions (if designated by the
Fund) may, however, qualify (provided holding period and other requirements are
met by both the Fund and the shareholder) (i) for the dividends received
deduction available to corporations, but only to the extent that the Fund's
income consists of dividend income from U.S. corporations and (ii) in the case
of individual shareholders as qualified dividend income eligible to be taxed at
a maximum rate to individuals of generally 15% (currently 5% for individuals in
lower tax brackets). These special rules relating to the taxation of
ordinary income dividends paid by RICs to individual taxpayers generally apply
to taxable years beginning on or before December 31,
2010. Thereafter, the Fund's dividends, other than capital gains
dividends, will be fully taxable at ordinary income rates unless further
Congressional action is taken. There can be no assurance as to what
portion of the Fund's distributions will qualify for favorable treatment as
qualified dividend income. Qualified dividend income is, in general, dividend
income from taxable domestic corporations and certain qualified foreign
corporations (e.g., generally, foreign corporations incorporated in a possession
of the United States or in certain countries with a qualifying comprehensive tax
treaty with the United States, or whose stock with respect to which such
dividend is paid is readily tradable on an established securities market in the
United States). A qualified foreign corporation does not include a
foreign corporation which for the taxable year of the corporation in which the
dividend was paid, or the preceding taxable year, is a "passive foreign
investment company," as defined in the Code. If the Fund lends
portfolio securities, the amount received by the Fund that is the equivalent of
the dividends paid by the issuer on the securities loaned will not be eligible
for qualified dividend income treatment. Distributions of net capital
gain designated as capital gain distributions, if any, are taxable to
shareholders at rates applicable to long-term capital gain, whether paid in cash
or in shares, and regardless of how long the shareholder has held the Fund's
shares. Capital gain distributions are not eligible for the dividends received
deduction. The maximum tax rate on net long-term capital gain of individuals is
reduced generally from 20% to 15% (currently 5% for individuals in lower
brackets) for such gain realized before January 1, 2011. Unrecaptured
Section 1250 gain distributions, if any, will be subject to a 25%
tax. Distributions in excess of
the
Fund's current and accumulated 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,
investment company taxable income (other than qualified dividend income) will
currently be taxed at a maximum rate of 35%, while net capital gain generally
will be taxed at a maximum rate of 15%. For corporate taxpayers, both
investment company taxable income and net capital gain are taxed at a maximum
rate of 35%.
The
IRS currently requires that a registered investment company that has two or more
classes of stock allocate to each such class proportionate amounts of each type
of its income (such as ordinary income, capital gains, dividends qualifying for
the dividends received deduction ("DRD") and qualified dividend income) based
upon the percentage of total dividends paid out of current or accumulated
earnings and profits to each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends, dividends qualifying for
the DRD and dividends that constitute qualified dividend income, if any, between
its common shares and preferred shares in proportion to the total dividends paid
out of current or accumulated earnings and profits to each class with respect to
such tax year. Distributions in excess of the Fund's current and accumulated
earnings and profits, if any, however, will not be allocated proportionately
among the common shares and Preferred Shares. Since the Fund's current and
accumulated earnings and profits will first be used to pay dividends on its
preferred shares, distributions in excess of such earnings and profits, if any,
will be made disproportionately to holders of common shares.
Shareholders
may be entitled to offset their capital gain distributions (but not
distributions eligible for qualified dividend income treatment) with capital
loss. There are a number of statutory provisions affecting when
capital loss may be offset against capital gain, and limiting the use of loss
from certain investments and activities. Accordingly, shareholders
with capital loss are urged to consult their tax advisers.
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, exchange or other disposition of shares, a shareholder will generally
realize a taxable gain or loss equal to the difference between the amount of
cash and the fair market value of other property received and the shareholder's
adjusted tax 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 by substantially identical shares
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 shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder (or amounts credited to the shareholder as an undistributed
capital gain) with respect to such shares.
Ordinary
income distributions and capital gain distributions also may be subject to state
and local taxes. Shareholders are urged to consult their own tax
advisers regarding specific questions about 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 distributions (but not capital gain distributions) paid to shareholders
who are non-resident aliens or foreign entities (a "foreign investor") will
generally be subject to a 30% U.S. 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. In order to obtain such a reduced rate of withholding, a foreign investor
will be required to provide an Internal Revenue Service ("IRS") Form
W-8BEN certifying its entitlement to benefits under a treaty. In
general, U.S. federal withholding tax will not apply to any gain or income
realized by a foreign investor in respect of any distributions of net long-term
capital gains over net short-term capital losses, or upon the sale or other
disposition of shares of the Fund.
Different
tax consequences may result if the foreign investor is engaged in a trade or
business in the United States or, in the case of an individual, is present in
the United States for 183 or more days during a taxable year and certain other
conditions are met. Foreign investors are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding
tax.
The
Fund may be required to withhold U.S. federal income tax on all taxable
distributions and redemption proceeds payable to non-corporate shareholders who
fail to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be refunded or credited
against such shareholder's U.S. federal income tax liability, if any, provided
that the required information is furnished to the IRS.
Taxation
of Note Holders
Note
holders will be required to include payments of interest on the notes in their
gross income in accordance with their method of accounting for U.S. federal
income tax purposes.
Any
gain from the disposition of the notes will be treated as capital gain for note
holders who hold the notes as capital assets and as long-term capital gain if
the notes have been held for more than one year as of the date of
disposition. However, a portion of such gain may be required to be
treated as ordinary income under special rules of the Code governing the
treatment of market discount. A note holder who acquires a note at a
market discount (i.e., at a price less than the principal amount or the
“adjusted issue price” as determined for tax purposes, if relevant), such as a
subsequent purchaser of the notes, will be required to treat as ordinary income
a portion of any gain realized upon a disposition of the note equal to the
amount of market discount deemed to have been accrued as of the date of
disposition unless an election is made include such discount in income on a
current basis. A note holder who acquires a note at a market discount
and does not elect to include such discount in income on a current basis will be
required to defer deduction of a portion of interest paid or accrued on debt
incurred or continued to purchase or carry the note until the note holder
disposes of the note. These rules may have an effect on the price
that can be obtained upon the sale of a note. Amounts received upon a
redemption of the notes will be subject to tax as ordinary income to the extent
of any accrued and unpaid interest on the notes as of the date of
redemption.
The
Fund is required in certain circumstances to backup withhold on interest
distributions paid to non-corporate holders of the Fund's notes 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
IRS.
If
you are a foreign investor, the payment of interest on the notes generally will
be considered “portfolio interest” and thus generally will be exempt from U.S.
withholding tax. This exemption will apply to you provided that (1) interest
paid on the notes is not effectively connected with your conduct of a trade or
business in the United States, (2) you are not a bank whose receipt of interest
on the notes is described in Section 881(c)(3)(A) of the Code, (3) you do not
actually or constructively own 10 percent or more of the combined voting power
of all classes of the Fund’s stock entitled to vote, (4) you are not a
controlled foreign corporation that is related, directly or indirectly, to the
Fund through stock ownership, and (5) you satisfy the certification requirements
described below.
To
satisfy the certification requirements, either (1) the holder of any notes must
certify, under penalties of perjury, that such holder is a non-U.S. person and
must provide such owner’s name, address and taxpayer identification number, if
any, on IRS Form W-8BEN, or (2) a securities clearing organization, bank or
other financial institution that holds customer securities in the ordinary
course of its trade or business and holds the notes on behalf of the holder
thereof must certify, under penalties of perjury, that it has received a valid
and properly executed IRS Form W-8BEN from the beneficial holder and comply with
certain other requirements. Special certification rules apply for notes held by
a foreign partnership and other intermediaries.
Interest
on notes received by a foreign investor that is not excluded from U.S. federal
withholding tax under the portfolio interest exemption as described above
generally will be subject to 30% U.S. withholding tax, unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty
law. In order to obtain such a reduced rate of withholding, a foreign
investor will be required to provide an IRS Form W-8BEN certifying its
entitlement to benefits under a treaty.
Any
capital gain that a foreign investor realizes on a sale, exchange or other
disposition of notes generally will be exempt from United States federal income
tax, including withholding tax.
Different
tax consequences may result if the foreign investor is engaged in a trade or
business in the United States or, in the case of an individual , is present in
the United States for 183 or more days during a taxable year and certain other
conditions are met. Foreign investors are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding
tax.
Taxation
of Holders of Subscription Rights
The
value of a subscription right will not be includible in the income of a
shareholder at the time the subscription right is issued.
The
basis of a subscription right issued to a shareholder will be zero, and the
basis of the share with respect to which the subscription right was issued (the
old share) will remain unchanged, unless either (a) the fair market value of the
subscription right on the date of distribution is at least 15% of the fair
market value of the old share, or (b) such shareholder affirmatively elects (in
the manner set out in Treasury regulations under the Code) to allocate to the
subscription right a portion of the basis of the old share. If either (a) or (b)
applies, such shareholder must allocate basis between the old share and the
subscription right in proportion to their fair market values on the date of
distribution.
The
basis of a subscription right purchased in the market will generally be its
purchase price.
The
holding period of a subscription right issued to a shareholder will include the
holding period of the old share.
No
loss will be recognized by a shareholder if a subscription right distributed to
such shareholder expires unexercised because the basis of the old share may be
allocated to a subscription right only if the subscription right is exercised.
If a subscription right that has been purchased in the market expires
unexercised, there will be a recognized loss equal to the basis of the
subscription right.
Any
gain or loss on the sale of a subscription right will be a capital gain or loss
if the subscription right is held as a capital asset (which in the case of
subscription rights issued to shareholders will depend on whether the old share
is held as a capital asset), and will be a long-term capital gain or loss if the
holding period is deemed to exceed one year.
No
gain or loss will be recognized by a shareholder upon the exercise of a
subscription right, and the basis of any preferred share acquired upon exercise
(the new preferred share) will equal the sum of the basis, if any, of the
subscription right and the price of the subscription right for the new preferred
share. The holding period for the new preferred share will begin on the date
when the subscription right is exercised.
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 common shares should consult their own tax advisers
regarding the purchase, ownership and disposition of common shares.
NET
ASSET VALUE
Portfolio
Valuation. The net asset value of the Fund's common shares
will be computed based on the market value of the assets it holds and will
generally be determined daily as of the close of regular trading on the
NYSE.
Portfolio
securities listed or traded on a nationally recognized securities exchange or
traded in the U.S. over-the-counter market for which market quotations are
readily available are valued at the last quoted sale price or a market's
official closing price as of the close of business on the day the securities are
being valued. If there were no sales that day, the security is valued
at the average of the closing bid and asked prices, or, if there were no asked
prices quoted on such day, the security is valued at the most recently available
price or, if the Board so determines, by such other method as the Board shall
determine in good faith, to reflect its fair market value. Portfolio
securities traded on more than one national securities exchange or market are
valued according to the broadest and most representative market, as determined
by the Adviser.
Portfolio
securities primarily traded on foreign markets are generally valued at the
preceding closing values of such securities on their respective exchanges or if
after the close, market conditions change significantly, certain foreign
securities may be fair valued pursuant to procedures established by the
Board. Debt instruments with remaining maturities of 60 days or less
that are not credit impaired are valued at amortized cost, unless the Board
determines such does not reflect fair value, in which case these securities will
be valued at their fair value as determined by the Board. Debt
instruments having a maturity greater than 60 days for which market quotations
are readily available are valued at the average of the latest bid and asked
prices. If there were no asked prices quoted on such day, the
security is valued using the closing bid price. Futures contracts are
valued at the closing settlement price of the exchange or board of trade on
which the applicable contract is traded.
Securities
and assets for which market quotations are not readily available are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Board. Fair valuation
methodologies and procedures may include, but are not limited
to: analysis and review of available financial and non-financial
information about the company; comparisons to the valuation and changes in
valuation of similar securities, including a comparison of foreign securities to
the equivalent U.S. dollar value ADR securities at the close of the U.S.
exchange; and evaluation of any other information that could be indicative of
the value of the security.
The
Funds obtain valuations on the basis of prices provided by a pricing service
approved by the Board. All other investment assets, including
restricted and not readily marketable securities, are valued in good faith at
fair value under procedures established by and under the general supervision and
responsibility of the Trust's Board.
In
addition, whenever developments in one or more securities markets after the
close of the principal markets for one or more portfolio securities and before
the time as of which the Funds determine their net asset value would, if such
developments had been reflected in such principal markets, likely have more than
a minimal effect on a Fund's net asset value per share, such Fund may fair value
such portfolio securities based on available market information as of the time
each Fund determines its net asset value.
BENEFICIAL
OWNERS
As
of December 31, 2007, GAMCO Investors, Inc. was the beneficial owner
of 1,318,475 common shares, representing 6.19% of the Fund's outstanding common
shares. Mario Gabelli may be deemed to have ownership of such
shares.
As
of December 31, 2007, the Trustees and Officers of the Fund as a group
beneficially owned approximately 6.35% of the outstanding shares of the Fund's
common shares.
GENERAL
INFORMATION
Book-Entry-Only
Issuance
DTC
will act as securities depository for the shares of fixed rate preferred shares
and/or auction market-rate preferred shares 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, and 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 distributions 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.
Proxy
Voting Procedures
The
Fund has adopted the proxy voting procedures of the Investment Adviser and has
directed the Investment Adviser to vote all proxies relating to the Fund's
voting securities in accordance with such procedures. The proxy
voting procedures are attached hereto as Appendix A, and any information
regarding how the Registrant voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 will be available (i)
without charge, upon request, by calling 1-800-422-3554, or on the Registrant's
website at http://www.gabelli.com, and (ii) on the Commission's website at
http://www.sec.gov.
Code
of Ethics
The
Fund and the Investment Adviser have adopted a code of ethics. This
code of ethics sets forth restrictions on the trading activities of
trustees/directors, officers and employees of the Fund, the Investment Adviser
and their affiliates. For example, such persons may not purchase any
security for which the Fund has a purchase or sale order pending, or for which
such trade is under consideration. In addition, those
trustees/directors, officers and employees that are principally involved in
investment decisions for client accounts are prohibited from purchasing or
selling for their own account for a period of seven days a security that has
been traded for a client's account, unless such trade is executed on more
favorable terms for the client's account and it is determined that such trade
will not adversely affect the client's account. Short-term trading by
such trustee/directors, officers and employees for their own accounts in
securities held by a Fund client's account is also restricted. The
above examples are subject to certain exceptions and they do not represent all
of the trading restrictions and policies set forth by the code of
ethics. The code of ethics is on file with the Securities and
Exchange Commission and can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C., and information
on the operation of the Public 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, and copies of the code of
ethics may 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 Section, Washington, D.C.
20549-0102.
Code
of Conduct for Chief Executive and Senior Financial Officers
The
Fund and the Investment Adviser have adopted a code of conduct. This
code of conduct sets forth policies to guide the chief executive and senior
financial officers in the performance of their duties. The code of
conduct is on file with the Securities and Exchange Commission and can be
reviewed and copied at the Securities and Exchange Commission's Public Reference
Room in Washington, D.C., and information on the operation of the Public
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, and copies of the code of ethics may 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 Section, Washington, D.C. 20549-0102.
FINANCIAL
STATEMENTS
The
audited financial statements included in the Annual Report to the Fund's
Shareholders for the year ended December 31, 2007, together with the report
of Ernst & Young LLP, the Fund's independent registered public
accounting firm, thereon, are 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. The unaudited financial statements
included in the Semi-Annual Report to the Fund's Shareholders for the six months
ended June 30, 2008 are incorporated herein by reference from the fund's
Semi-Annual Report to Shareholders. All other portions of the Semi-Annual
Report 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 Once Corporate
Center, Rye, New York 10580-1422 or by calling the Fund toll-free at 800-GABELLI
(422-3554).
APPENDIX
A
GAMCO
INVESTORS, INC. and AFFILIATES
The
Voting of Proxies on Behalf of Clients
Rules 204(4)-2 and 204-2 under the
Investment Advisers Act of 1940 and Rule 30b1-4 under the Investment Company Act
of 1940 require investment advisers to adopt written policies and procedures
governing the voting of proxies on behalf of their clients.
These
procedures will be used by GAMCO Asset Management Inc., Gabelli Funds, LLC,
Gabelli Securities, Inc., and Teton Advisors, Inc. (collectively, the
“Advisers”) to determine how to vote proxies relating to portfolio securities
held by their clients, including the procedures that the Advisers use when a
vote presents a conflict between the interests of the shareholders of an
investment company managed by one of the Advisers, on the one hand, and those of
the Advisers; the principal underwriter; or any affiliated person of the
investment company, the Advisers, or the principal underwriter. These
procedures will not apply where the Advisers do not have voting discretion or
where the Advisers have agreed to with a client to vote the client’s proxies in
accordance with specific guidelines or procedures supplied by the client (to the
extent permitted by ERISA).
I. Proxy
Voting Committee
The
Proxy Voting Committee was originally formed in April 1989 for the purpose of
formulating guidelines and reviewing proxy statements within the parameters set
by the substantive proxy voting guidelines originally published in 1988 and
updated periodically, a copy of which are appended as Exhibit A. The
Committee will include representatives of Research, Administration, Legal, and
the Advisers. Additional or replacement members of the Committee will
be nominated by the Chairman and voted upon by the entire
Committee.
Meetings
are held on an as needed basis to form views on the manner in which
the Advisers should vote proxies on behalf of their clients.
In
general, the Director of Proxy Voting Services, using the Proxy Guidelines,
recommendations of Institutional Shareholder Corporate Governance Service
(“ISS”), other third-party services and the analysts of Gabelli & Company,
Inc., will determine how to vote on each issue. For non-controversial matters,
the Director of Proxy Voting Services may vote the proxy if the vote is (1)
consistent with the recommendations of the issuer's Board of Trustees and not
contrary to the Proxy Guidelines; (2) consistent with the recommendations of the
issuer's Board of Trustees and is a non-controversial issue not covered by the
Proxy Guidelines; or (3) the vote is contrary to the recommendations of the
Board of Trustees but is consistent with the Proxy Guidelines. In those
instances, the Director of Proxy Voting Services or the Chairman of the
Committee may sign and date the proxy statement indicating how each issue will
be voted.
All
matters identified by the Chairman of the Committee, the Director of Proxy
Voting Services or the Legal Department as controversial, taking into account
the recommendations of ISS or other third party services and the analysts of
Gabelli & Company, Inc., will be presented to the Proxy Voting
Committee. If the Chairman of the Committee, the Director of Proxy
Voting Services or the Legal Department has identified the matter as one that
(1) is controversial; (2) would benefit from deliberation by the Proxy Voting
Committee; or (3) may give rise to a conflict of interest between the Advisers
and their clients, the Chairman of the Committee will initially determine what
vote to recommend that the Advisers should cast and the matter will go before
the Committee.
A.
Conflicts
of Interest
The
Advisers have implemented these proxy voting procedures in order to prevent
conflicts of interest from influencing their proxy voting
decisions. By following the Proxy Guidelines, as well as the
recommendations of ISS, other third-party services and the analysts of Gabelli
& Company, the Advisers are able to avoid, wherever possible, the influence
of potential conflicts of interest. Nevertheless, circumstances may
arise in which one or more of the Advisers are faced with a conflict of interest
or the appearance of a conflict of interest in connection with its
vote. In general, a conflict of interest may arise when an Adviser
knowingly does business with an issuer, and may appear to have a material
conflict between its own interests and the interests of the shareholders of an
investment company managed by one of the Advisers regarding how the proxy is to
be voted. A conflict also may exist when an Adviser has actual
knowledge of a material business arrangement between an issuer and an affiliate
of the Adviser.
In
practical terms, a conflict of interest may arise, for example, when a proxy is
voted for a company that is a client of one of the Advisers, such as GAMCO Asset
Management Inc. A conflict also may arise when a client of one of the
Advisers has made a shareholder proposal in a proxy to be voted upon by one or
more of the Advisers. The Director of Proxy Voting Services, together
with the Legal Department, will scrutinize all proxies for these or other
situations that may give rise to a conflict of interest with respect to the
voting of proxies.
B. Operation of Proxy Voting
Committee
For
matters submitted to the Committee, each member of the Committee will receive,
prior to the meeting, a copy of the proxy statement, any relevant third party
research, a summary of any views provided by the Chief Investment Officer and
any recommendations by Gabelli & Company, Inc. analysts. The Chief
Investment Officer or the Gabelli & Company, Inc. analysts may be invited to
present their viewpoints. If the Director of Proxy Voting Services or the Legal
Department believe that the matter before the committee is one with respect to
which a conflict of interest may exist between the Advisers and their clients,
counsel will provide an opinion to the Committee concerning the
conflict. If the matter is one in which the interests of the clients
of one or more of Advisers may diverge, counsel will so advise and the Committee
may make different recommendations as to different clients. For any matters
where the recommendation may trigger appraisal rights, counsel will provide an
opinion concerning the likely risks and merits of such an appraisal
action.
Each matter submitted to the Committee
will be determined by the vote of a majority of the members present at the
meeting. Should the vote concerning one or more recommendations be tied in a
vote of the Committee, the Chairman of the Committee will cast the deciding
vote. The Committee will notify the proxy department of its decisions and the
proxies will be voted accordingly.
Although
the Proxy Guidelines express the normal preferences for the voting of any shares
not covered by a contrary investment guideline provided by the client, the
Committee is not bound by the preferences set forth in the Proxy Guidelines and
will review each matter on its own merits. Written minutes of all Proxy Voting
Committee meetings will be maintained. The Advisers subscribe to ISS, which
supplies current information on companies, matters being voted on, regulations,
trends in proxy voting and information on corporate governance
issues.
If
the vote cast either by the analyst or as a result of the deliberations of the
Proxy Voting Committee runs contrary to the recommendation of the Board of
Trustees of the issuer, the matter will be referred to legal counsel to
determine whether an amendment to the most recently filed Schedule 13D is
appropriate.
II. Social
Issues and Other Client Guidelines
If
a client has provided special instructions relating to the voting of proxies,
they should be noted in the client’s account file and forwarded to the proxy
department. This is the responsibility of the investment professional or sales
assistant for the client. In accordance with Department of Labor guidelines, the
Advisers’ policy is to vote on behalf of ERISA accounts in the best interest of
the plan participants with regard to social issues that carry an economic
impact. Where an account is not governed by ERISA, the Advisers will vote shares
held on behalf of the client in a manner consistent with any individual
investment/voting guidelines provided by the client. Otherwise the Advisers will
abstain with respect to those shares.
III. Client
Retention of Voting Rights
If
a client chooses to retain the right to vote proxies or if there is any change
in voting authority, the following should be notified by the investment
professional or sales assistant for the client.
- Operations
- Legal Department
- Proxy Department
- Investment professional assigned to
the account
In the event that the Board of
Directors/Trustees (or a Committee thereof) of one or more of the investment
companies managed by one of the Advisers has retained direct voting control over
any security, the Proxy Voting Department will provide each Board Member (or
Committee member) with a copy of the proxy statement together with any other
relevant information including recommendations of ISS or other third-party
services.
IV. Voting
Records
The
Proxy Voting Department will retain a record of matters voted upon by the
Advisers for their clients. The Advisers will supply information on
how an account voted its proxies upon request.
A letter is sent to the custodians for
all clients for which the Advisers have voting responsibility instructing them
to forward all proxy materials to:
Gabelli Funds, LLC
Attn: Proxy Voting
Department
One Corporate Center
Rye, New York 10580-1433
The
sales assistant sends the letters to the custodians along with the trading/DTC
instructions. Proxy voting records will be retained in compliance
with Rule 204-2 under the Investment Advisers Act.
V. Voting
Procedures
1. Custodian
banks, outside brokerage firms and clearing firms are responsible for forwarding
proxies directly to the Advisers.
Proxies
are received in one of two forms:
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·
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Shareholder
Vote Authorization Forms (“VAFs”) - Issued by Broadridge Financial
Solutions, Inc. (“Broadridge”) VAFs must be voted through the issuing
institution causing a time lag. Broadridge is an outside
service contracted by the various institutions to issue proxy
materials.
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·
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Proxy
cards which may be voted directly.
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2. Upon
receipt of the proxy, the number of shares each form represents is logged into
the proxy system according to security.
3. In
the case of a discrepancy such as an incorrect number of shares, an improperly
signed or dated card, wrong class of security, etc., the issuing custodian is
notified by phone. A corrected proxy is requested. Any
arrangements are made to insure that a proper proxy is received in time to be
voted (overnight delivery, fax, etc.). When securities are out on
loan on record date, the custodian is requested to supply written
verification.
4. Upon
receipt of instructions from the proxy committee (see Administrative), the votes
are cast and recorded for each account on an individual basis.
Records
have been maintained on the Proxy Edge system. The system is backed
up regularly.
Proxy
Edge records include:
Security Name and Cusip
Number
Date and Type of Meeting (Annual,
Special, Contest)
Client Name
Adviser or Fund Account
Number
Directors’ Recommendation
How GAMCO voted for the client on each
issue
5. VAFs
are kept alphabetically by security. Records for the current proxy
season are located in the Proxy Voting Department office. In
preparation for the upcoming season, files are transferred to an offsite storage
facility during January/February.
6. Shareholder
Vote Authorization Forms issued by Broadridge are always sent directly to a
specific individual at Broadridge.
7. If
a proxy card or VAF is received too late to be voted in the conventional matter,
every attempt is made to vote on one of the following manners:
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VAFs
can be faxed to Broadridge up until the time of the
meeting. This is followed up by mailing the original
form.
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|
·
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When
a solicitor has been retained, the solicitor is called. At the
solicitor’s direction, the proxy is
faxed.
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8. In
the case of a proxy contest, records are maintained for each opposing
entity.
9. Voting
in Person
a)
At times it may be necessary to vote the shares in person. In this
case, a “legal proxy” is obtained in the following manner:
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·
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Banks
and brokerage firms using the services at
Broadridge:
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The
back of the VAF is stamped indicating that we wish to vote in
person. The forms are then sent overnight to
Broadridge. Broadridge issues individual legal proxies and sends them
back via overnight (or the Adviser can pay messenger charges). A
lead-time of at least two weeks prior to the meeting is needed to do
this. Alternatively, the procedures detailed below for banks not
using Broadridge may be implemented.
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·
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Banks
and brokerage firms issuing proxies
directly:
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The
bank is called and/or faxed and a legal proxy is requested.
All
legal proxies should appoint:
“Representative
of Gabelli Funds, LLC with full power of substitution.”
b) The
legal proxies are given to the person attending the meeting along with the
following supplemental material:
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·
|
A
limited Power of Attorney appointing the attendee an Adviser
representative.
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|
·
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A
list of all shares being voted by custodian only. Client names
and account numbers are not included. This list must be
presented, along with the proxies, to the Inspectors of Elections and/or
tabulator at least one-half hour prior to the scheduled start of the
meeting. The tabulator must “qualify” the votes (i.e. determine
if the vote have previously been cast, if the votes have been rescinded,
etc. vote have previously been cast,
etc.).
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|
·
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A
sample ERISA and Individual
contract.
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|
·
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A
sample of the annual authorization to vote proxies
form.
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|
·
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A
copy of our most recent Schedule 13D filing (if
applicable).
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Appendix
A
Proxy
Guidelines
PROXY
VOTING GUIDELINES
GENERAL
POLICY STATEMENT
It
is the policy of GAMCO
Investors, Inc. to vote in the best economic interests of our
clients. As we state in our Magna Carta of Shareholders Rights,
established in May 1988, we are neither for nor against
management. We are for shareholders.
At
our first proxy committee meeting in 1989, it was decided that each proxy
statement should be evaluated on its own merits within the framework first
established by our Magna Carta of Shareholders Rights. The attached
guidelines serve to enhance that broad framework.
We
do not consider any issue routine. We take into consideration all of
our research on the company, its directors, and their short and long-term goals
for the company. In cases where issues that we generally do not
approve of are combined with other issues, the negative aspects of the issues
will be factored into the evaluation of the overall proposals but will not
necessitate a vote in opposition to the overall proposals.
BOARD
OF DIRECTORS
The
advisers do not consider the election of the Board of Directors a routine
issue. Each slate of directors is evaluated on a case-by-case
basis.
Factors
taken into consideration include:
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·
|
Historical
responsiveness to shareholders
|
This may include such areas
as:
-Paying greenmail
-Failure to adopt shareholder
resolutions receiving a majority of shareholder votes
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·
|
Nominating
committee in place
|
|
·
|
Number
of outside directors on the board
|
SELECTION
OF AUDITORS
In
general, we support the Board of Directors’ recommendation for
auditors.
BLANK
CHECK PREFERRED SHARES
We
oppose the issuance of blank check preferred shares.
Blank
check preferred shares allow the company to issue stock and establish dividends,
voting rights, etc. without further shareholder approval.
CLASSIFIED
BOARD
A
classified board is one where the directors are divided into classes with
overlapping terms. A different class is elected at each annual
meeting.
While
a classified board promotes continuity of directors facilitating long range
planning, we feel directors should be accountable to shareholders on an annual
basis. We will look at this proposal on a case-by-case basis taking
into consideration the board’s historical responsiveness to the rights of
shareholders.
Where
a classified board is in place we will generally not support attempts to change
to an annually elected board.
When
an annually elected board is in place, we generally will not support attempts to
classify the board.
INCREASE
AUTHORIZED COMMON STOCK
The
request to increase the amount of outstanding shares is considered on a
case-by-case basis.
Factors
taken into consideration include:
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·
|
Future
use of additional shares
|
-Stock split
-Stock option or other executive
compensation plan
-Finance growth of company/strengthen
balance sheet
-Aid in restructuring
-Improve credit rating
-Implement a poison pill or other
takeover defense
|
·
|
Amount
of stock currently authorized but not yet issued or reserved for stock
option plans
|
|
·
|
Amount
of additional stock to be authorized and its dilutive
effect
|
We
will support this proposal if a detailed and verifiable plan for the use of the
additional shares is contained in the proxy statement.
CONFIDENTIAL
BALLOT
We
support the idea that a shareholder’s identity and vote should be treated with
confidentiality.
However,
we look at this issue on a case-by-case basis.
In
order to promote confidentiality in the voting process, we endorse the use of
independent Inspectors of Election.
CUMULATIVE
VOTING
In
general, we support cumulative voting.
Cumulative
voting is a process by which a shareholder may multiply the number of directors
being elected by the number of shares held on record date and cast the total
number for one candidate or allocate the voting among two or more
candidates.
Where
cumulative voting is in place, we will vote against any proposal to rescind this
shareholder right.
Cumulative
voting may result in a minority block of stock gaining representation on the
board. When a proposal is made to institute cumulative voting, the
proposal will be reviewed on a case-by-case basis. While we feel that
each board member should represent all shareholders, cumulative voting provides
minority shareholders an opportunity to have their views
represented.
DIRECTOR
LIABILITY AND INDEMNIFICATION
We
support efforts to attract the best possible directors by limiting the liability
and increasing the indemnification of directors, except in the case of insider
dealing.
EQUAL
ACCESS TO THE PROXY
The
SEC’s rules provide for shareholder resolutions. However, the
resolutions are limited in scope and there is a 500 word limit on proponents’
written arguments. Management has no such
limitations. While we support equal access to the proxy, we would
look at such variables as length of time required to respond, percentage of
ownership, etc.
FAIR
PRICE PROVISIONS
Charter
provisions requiring a bidder to pay all shareholders a fair price are intended
to prevent two-tier tender offers that may be abusive. Typically,
these provisions do not apply to board-approved transactions.
We
support fair price provisions because we feel all shareholders should be
entitled to receive the same benefits.
Reviewed
on a case-by-case basis.
GOLDEN
PARACHUTES
Golden
parachutes are severance payments to top executives who are terminated or
demoted after a takeover.
We
support any proposal that would assure management of its own welfare so that
they may continue to make decisions in the best interest of the company and
shareholders even if the decision results in them losing their
job. We do not, however, support excessive golden
parachutes. Therefore, each proposal will be decided on a case-by-
case basis.
Note:
Congress has imposed a tax on any parachute that is more than three times the
executive’s average annual compensation.
ANTI-GREENMAIL
PROPOSALS
We
do not support greenmail. An offer extended to one shareholder should
be extended to all shareholders equally across the board.
LIMIT
SHAREHOLDERS’ RIGHTS TO CALL SPECIAL MEETINGS
We
support the right of shareholders to call a special meeting.
CONSIDERATION
OF NONFINANCIAL EFFECTS OF A MERGER
This
proposal releases the directors from only looking at the financial effects of a
merger and allows them the opportunity to consider the merger’s effects on
employees, the community, and consumers.
As
a fiduciary, we are obligated to vote in the best economic interests of our
clients. In general, this proposal does not allow us to do
that. Therefore, we generally cannot support this
proposal.
Reviewed
on a case-by-case basis.
MERGERS,
BUYOUTS, SPIN-OFFS, RESTRUCTURINGS
Each
of the above is considered on a case-by-case basis. According to the
Department of Labor, we are not required to vote for a proposal simply because
the offering price is at a premium to the current market price. We
may take into consideration the long term interests of the
shareholders.
MILITARY
ISSUES
Shareholder
proposals regarding military production must be evaluated on a purely economic
set of criteria for our ERISA clients. As
such, decisions will be made on a case-by-case basis.
In
voting on this proposal for our non-ERISA clients, we will vote
according to the client’s direction when applicable. Where no
direction has been given, we will vote in the best economic interests of our
clients. It is not our duty to impose our social judgment on
others.
NORTHERN
IRELAND
Shareholder
proposals requesting the signing of the MacBride principles for the purpose of
countering the discrimination of Catholics in hiring practices must be evaluated
on a purely economic set of criteria for our ERISA clients. As
such, decisions will be made on a case-by-case basis.
In
voting on this proposal for our non-ERISA clients, we will vote
according to client direction when applicable. Where no direction has
been given, we will vote in the best economic interests of our
clients. It is not our duty to impose our social judgment on
others.
OPT
OUT OF STATE ANTI-TAKEOVER LAW
This
shareholder proposal requests that a company opt out of the coverage of the
state’s takeover statutes. Example: Delaware law requires that a
buyer must acquire at least 85% of the company’s stock before the buyer can
exercise control unless the board approves.
We
consider this on a case-by-case basis. Our decision will be based on
the following:
|
·
|
Management
history of responsiveness to
shareholders
|
|
·
|
Other
mitigating factors
|
POISON
PILL
In
general, we do not endorse poison pills.
In
certain cases where management has a history of being responsive to the needs of
shareholders and the stock is very liquid, we will reconsider this
position.
REINCORPORATION
Generally,
we support reincorporation for well-defined business reasons. We
oppose reincorporation if proposed solely for the purpose of reincorporating in
a state with more stringent anti-takeover statutes that may negatively impact
the value of the stock.
STOCK
OPTION PLANS
Stock
option plans are an excellent way to attract, hold and motivate directors and
employees. However, each stock option plan must be evaluated on its
own merits, taking into consideration the following:
|
·
|
Dilution
of voting power or earnings per share by more than
10%
|
|
·
|
Kind
of stock to be awarded, to whom, when and how
much
|
|
·
|
Amount
of stock already authorized but not yet issued under existing stock option
plans
|
SUPERMAJORITY
VOTE REQUIREMENTS
Supermajority
vote requirements in a company’s charter or bylaws require a level of voting
approval in excess of a simple majority of the outstanding shares. In
general, we oppose supermajority-voting requirements. Supermajority
requirements often exceed the average level of shareholder
participation. We support proposals’ approvals by a simple majority
of the shares voting.
LIMIT
SHAREHOLDERS RIGHT TO ACT BY WRITTEN CONSENT
Written
consent allows shareholders to initiate and carry on a shareholder action
without having to wait until the next annual meeting or to call a special
meeting. It permits action to be taken by the written consent of the
same percentage of the shares that would be required to effect proposed action
at a shareholder meeting.
Reviewed
on a case-by-case basis.